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Real Estate Litigation Review: Key cases from 2015

Real Estate Litigation Review: Key cases from 2015

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2015 saw some significant real estate and commercial disputes hitting the courts, clarifying key principles and making new laws which impact on property owners, occupiers and advisers. Martin McKeague highlights the key cases from the last year and offers his practical advice.

Hough v Greathall – When must a landlord prove an intention to redevelop?

When a landlord opposes the grant of a renewal lease, the date by which the […]

When a landlord opposes the grant of a renewal lease, the date by which the landlord must prove its intention and ability to redevelop can be critical. In Hough v Greathall the Court of Appeal answered this important question.

The tenant argued, before the Court of Appeal, that the wording of section 25 of the Landlord and Tenant Act 1954 meant that the date on which a landlord’s intention to redevelop must be proved, with all attendant evidence on planning, design, financial and scheduling feasibility, was brought forward from the date of trial (as per received wisdom on the point) to the date of service of the landlord’s lease termination notice. If the tenant was correct, as well as placing significant pressure on landlords prior to service of any notice and introducing potential works-scheduling issues, this would raise practical difficulties in cases where it was not the person serving notice, but rather a purchaser/developer, who would ultimately carry out the works.

The court confirmed that the date for proving intention is the date of trial. However there is sense in a landlord providing a tenant with the evidence in support of its intention to re-develop at an early stage where this possible. In those circumstances, the tenant will run a significant costs risk if it disputes the intention to re-develop. This may, therefore, act as a powerful incentive to agree an early settlement.

Please see our earlier briefing for further detail

Arnold v Britton – Correct approach to contractual interpretation

In the context of a lease service charge dispute, but in a case with far-reaching […]

In the context of a lease service charge dispute, but in a case with far-reaching impact for commercial contracts generally, the Supreme Court confirmed the correct approach to contractual interpretation.

Arnold v Britton concerned the service charge provisions in 25 holiday chalet leases. In accordance with the ordinary natural meaning of the wording of the relevant clause, both the High Court and the Court of Appeal had previously agreed with the landlord that the provisions obliged the tenants to pay a fixed yearly service charge amount which rises at the rate of 10% per annum, irrespective of the cost to the landlord of providing services. That meant, however, that service charges payable per year would top over £½ million by the end of the leases – and these were just modest chalets, the use of which is restricted to half of each year only. In light of the disastrous economic consequences of this interpretation, the tenants appealed. The Supreme Court dismissed the appeal and clarified the correct approach to contractual interpretation.

The property industry and commercial litigation commentators alike had awaited this decision with interest. The main question was whether commercial efficacy would become enshrined in service charge and other commercial contract clauses. The Supreme Court’s answer was that, whilst consideration of commercial common sense can, in the right circumstances, be taken into account, it is not a criterion of contractual interpretation that should undermine the importance of the clear language of a clause. In short, ‘contract is king’.

Please see our more detailed briefing for further information and advice.

Safin v Badrig – Relief from forfeiture and complying with conditions

In Safin v Badrig the The Court of Appeal found that deadlines for complying with […]

In Safin v Badrig the The Court of Appeal found that deadlines for complying with conditions for relief from forfeiture are not necessarily set in stone.

The landlord’s forfeiture claim had been settled by a consent order which provided for relief on condition that rent arrears were paid by a certain date, time being of the essence. Payment was not made on time but the tenant’s estate did make a court application, prior to the consent order deadline, for an extension of time for compliance. It then also made payment shortly thereafter. The Court of Appeal considered the situation where a consent order records the settlement of a substantive dispute on certain terms, but then those terms are not complied with.

Focusing on: the court’s discretion to vary or extend consent orders where that enables a case to be dealt with justly and at proportionate cost in all the circumstances; the fact that an application for an extension was made promptly and that payment was made shortly thereafter; and the fact that forfeiture is a draconian measure, the court dismissed the landlord’s appeal and allowed relief from forfeiture.

The case is an important reminder that some court deadlines – certainly in the context of relief from forfeiture cases – are not necessarily set in stone.

In our more detailed briefing, Housing Litigation expert Karl Anders, looks in more detail at the context and the court’s approach.

Spielplatz v Pearsons – Fixture or chattel

In Spielplatz v Pearsons, the Court of Appeal asked whether a chalet was a fixture […]

In Spielplatz v Pearsons, the Court of Appeal asked whether a chalet was a fixture or chattel and considered the basic ‘annexation’ test.

The chalet was a single-storey wooden chalet in a naturist resort which was initially used by the defendants only at weekends. However they later began to live in it permanently. When the freehold resort owner served notice to quit, the question arose whether the chalet formed part of the plot of land. If so, the tenancy would include both the soil and the chalet (and not just the land itself) and that would provide the defendants with protection under the Housing Act 1988.

Considering the ‘annexation’ test, the Court of Appeal asked whether the structure could be removed from the land without being demolished. If it could not, then the structure could not have been intended to remain a chattel and must have been intended to form part of the land. Based on expert evidence that the chalet could not be removed without dismantling, the Court of Appeal concluded that the chalet was indeed part of the land (and was therefore a fixture, not merely a chattel) and the defendant tenants therefore had an assured tenancy of the plot.

See our earlier briefing.

Magnic v Ul-Hassan and Freifield v West Kensington Court – More on relief from forfeiture

In both of these cases the tenants were in clear, serious, deliberate and repeated breach, […]

In both of these cases the tenants were in clear, serious, deliberate and repeated breach, yet the Court of Appeal allowed relief from forfeiture. Why? We explain the correct approach.

In Magnic the tenant deliberately committed breaches of its lease, a planning permission, a consent order and a conditional consent order, all to operate a takeaway business from the premises. In Freifeld the tenant sublet the premises to a restaurant without the landlord’s consent, breaching both the alienation and the user covenants in the lease. In both cases, however, the Court of Appeal granted relief from forfeiture when the landlords attempted to recover possession. Why?

These cases reiterate the court has a wide discretion whether to grant relief from forfeiture. Forfeiture is such a serious step that relief on fulfilling certain conditions will generally be granted where possible, even in some circumstances where there has been deliberate or repeated breaches. The cases explain the correct approach as to whether relief should be allowed and provide a reminder of the factors that the court will consider. In summary:

The court’s discretion whether to grant relief is wide and the courts have refused to lay down rigid guidelines as to the exercise of that discretion.
The starting point for the exercise of the court’s discretion should be that the purpose of the right of forfeiture is to provide the landlord with some security for the performance of the tenant’s covenants – it is not intended to operate as an additional penalty for breach.
In most cases relief will be granted on the breach being remedied and on terms as to costs.
The court can take into account:
- the tenant’s conduct (including whether the breach was wilful or deliberate)
- the nature and gravity of the breach and its relationship to the value of the property
- the respective advantage to the landlord and disadvantage to the tenant if the lease remains forfeit.

See our earlier briefings: Forfeiture and Relief: Clarification of court’s discretion and Relief from Forfeiture: Another recent case.

SSRL Realisations v Lazari – Unlawful assignment and forfeiture

In SSRL V Lazari the Court of Appeal emphasised the importance of alienation provisions in […]

In SSRL V Lazari the Court of Appeal emphasised the importance of alienation provisions in a lease and indicated that financial prejudice may not necessarily provide a free pass for administrators.

As part of a pre-pack sale of the ailing tenant company, administrators allowed a proposed assignee into occupation of premises, pending consent from the landlord to the assignment. This occupation was (as is typical in such cases) in breach of the terms of the lease. The landlord objected to the proposed assignment. The assignee was a ‘newco’; no authorised guarantee agreement was offered to guarantee the payment of rent; and the lease contained various conditions upon which the landlord could insist before granting consent, none of which were met.

The landlord therefore served notice to forfeit the lease due to the tenant’s insolvency and the unauthorised occupation. The landlord then applied to court to terminate the lease and recover possession.

The High Court and the Court of Appeal held that the purpose of the administration would not be impeded by allowing the landlord to pursue its proprietary rights, and thereby to recover possession. Although the administrators had sought to argue that they would be able to achieve a premium by assigning the lease, the court concluded that the administrators were unable to unlock any of that value due to the landlord’s lawful exercise of its rights and financial prejudice suffered by administrators may not necessarily be enough to prevent forfeiture.

This case reiterates that careful consideration must always be given to the terms of the lease, in particular the alienation provisions.

For further detail and analysis, please see our earlier briefing.

Re Fivestar Properties – Ownership of land following dissolution and disclaimer

What happens to property when the owning company is dissolved and the Crown disclaims any […]

What happens to property when the owning company is dissolved and the Crown disclaims any interest? The High Court considered the question in Re Fivestar Properties.

When a company is dissolved, any property still owned by it passes to the Crown pursuant to section 1012(1) of the Companies Act 2006. Such property is known as bona vacantia. The Crown then has various options as to how it treats bona vacantia property and, where the property may carry with it liabilities, the Crown may disclaim any interest.

In Re Fivestar Properties a bank provided a loan Fivestar. The loan was secured over a commercial property, which Fivestar leased to a tenant. When Fivestar failed to repay the loan, it was discovered that the tenant had, in fact, paid the rent to another company. Administrators were appointed to recover those rent monies and then to dissolve Fivestar. The administrators’ final report stated that there were no further assets to be realised, and appeared to ignore the fact that the freehold to the commercial property was still vested in Fivestar. Following dissolution, the property vested in the Crown. The tenant sought to renew the lease and served notice on the Crown accordingly, but the Crown disclaimed any interest.

The tenant and the bank were left in a difficult position. Fivestar no longer existed to grant a new lease and the Crown had disclaimed any interest and therefore declined to do so. The tenant wanted to renew and the bank wanted to enforce its charge and sell the property with the benefit of a new lease. The bank applied to restore Fivestar to the Register of Companies. The High Court had to consider:

What interest in the property still existed after the Crown’s disclaimer? If there was an interest, in whom did it vest?
What was the effect of the restoration to the companies register?
Should Fivestar be restored and then immediately wound up?

The court found that all land is ultimately owned by the Crown and so, even though the disclaimer extinguished Crown’s title under section 1012 of the Companies Act, nevertheless the property vested in the Crown (albeit to a different part of the Crown Estate). The court also held that, on restoration, the freehold estate was retrospectively re-created and re-vested in Fivestar, as if the company had never been dissolved and as if the property had never been disclaimed. It was therefore just to make a restoration order, to be followed by a winding up order, to enable the property to be dealt with accordingly and more readily realised for the benefit of the bank.

Scenarios such as occurred in the Fivestar case ought to be avoided if possible. Therefore, from a practical point of view it is always best for any secured creditor to liaise closely with administrators to ensure that a company is not dissolved until all its assets have been discovered and dealt with appropriately.

For further practical advice, see our more detailed briefing.

Purewal v Countywide – Duties of an LPA receiver

Do receivers owe a duty of care to a bankrupt mortgagor? The Court of Appeal clarified […]

Do receivers owe a duty of care to a bankrupt mortgagor? The Court of Appeal clarified the legal position in Purewal v Countrywide.

The claimant had a loan over a buy-to-let residential property that was secured by way of a first legal charge. When the claimant fell into arrears, the lender appointed a Law of Property Act 1925 (LPA) receiver (or, a fixed charge receiver) over the property, to manage and realise any income from the asset.

The receiver advised the claimant to cancel his building insurance policy as the receiver would take out a policy. The claimant was subsequently declared bankrupt. During the period of bankruptcy the property suffered a leak and, although the claimant informed the receiver, the receiver failed to remedy the leak or claim on the insurance. The claimant was eventually discharged from the bankruptcy and undertook the repairs at his own expense, even though the trustee in bankruptcy’s transfer of the property back to the claimant had not been completed and the property was not therefore vested in him.

The claimant then issued a claim against the receiver for breach of duty for its failure to submit an insurance claim. The key question for the court was whether the receiver owed a duty of care to the claimant at the time he incurred the loss and expense of repairing the leak.

The Court of Appeal confirmed that an LPA receiver owes a duty of care to a person with an interest in the equity of redemption (that is the person who, on full repayment of the secured debt, has the right to recover the assets which are subject to the mortgage). As the property was still vested in the trustee in bankruptcy at the time of the repairs, the LPA receiver’s duty at the relevant time was to the trustee, and not to the claimant.

As an ancillary point, it is worth noting that the Court of Appeal would have dismissed the claim in any event, because it found that there was no causation. As there was insufficient evidence that the lender would have agreed for the receivers to use any monies on repairing the damage as opposed to reducing the mortgage debt, it could not be said that the receiver’s failure to submit an insurance claim had caused the claimant’s loss.

The full judgement can be seen at: [2015] EWCA Civ 1122.

Southern Pacific Mortgages – Disability discrimination in a property context

In Southern Pacific Mortgages v V the court considered whether a lender discriminated against a […]

In Southern Pacific Mortgages v V the court considered whether a lender discriminated against a borrower suffering from depression when it refused to convert a mortgage into an interest-only loan.

The borrower had lost her job and become depressed. The borrower’s insurance policy paid her mortgage for some time on the basis that she was disabled by reason of depression. When her insurance ran out, she asked her lender to convert her mortgage to an interest-only loan. When the lender refused, the borrower alleged that the refusal was an unlawful failure to make reasonable adjustments to enable a disabled person to access provision of the mortgage service, pursuant to disability discrimination and human rights legislation.

The County Court held that the lender had not discriminated. Whilst the failure to switch to an interest-only loan made it difficult for the disabled borrower to service the mortgage repayments, it did not affect her ability to sell the house and redeem the mortgage overall. In addition, the court considered various guidance issued to lenders on responsible lending and interest-only mortgages. The guidance provided that it was not good practice to lend on an interest-only basis except in certain circumstances, which did not apply in this case. Switching to an interest-only mortgage here would not therefore be a reasonable adjustment for the lender to make, and as such disability discrimination had not been made out.

The case is a helpful reminder of the obligations on service providers not to discriminate and it is an interesting application of disability discrimination and human rights laws in a property context. The full judgment can be seen here.

Regency Villas v Diamond Resorts – An enduring right to recreation?

An easement is a lasting right which endures despite changes in ownership of land. The High […]

An easement is a lasting right which endures despite changes in ownership of land. The High Court has recently considered whether a right to recreation can take effect as an easement.

In the case of Regency Villas Title v Diamond Resorts (Europe) the High Court considered the possibility that an easement could exist to use leisure facilities including a golf course, swimming pool and tennis court. Unlike a personal right, an easement is a proprietary interest that, subject to having been validly registered, endures with the benefitted land and binds successors in title of the owners of the land over which the right is exercised. The court held that, provided the intention to grant an easement is evident when considered in the context of the surrounding circumstances, there is nothing to prevent an easement such as this.

This case provides the first authority on whether the use of recreational, leisure or sporting facilities can take effect as an easement. In fact, the case goes further and highlights that any right which demonstrates the following characteristics is capable of taking effect as an easement:

There must be dominant land (to enjoy the benefit of the easement) and servient land (over which the easement is exercised);
The right must accommodate or benefit the dominant land;
The dominant and servient land must be owned by different people; and
The right must be capable of forming the subject matter of a grant.
- (That is, the right must be expressed in language which is not too wide and vague and the right must be granted expressly or can be assumed to have been granted impliedly or by prescription. A right to do a positive act on the servient land can clearly be the subject matter of a grant, but rights to receive something, such as light or air, are more difficult. There is conflicting opinion as to whether these more negative rights should exist only as restrictive covenants, as opposed to easements which can be granted).

For further information and advice, see A right to recreation?

Property Alliance Group v RBS – The importance and application of legal advice privilege

An important High Court decision has clarified the circumstances in which factual communications and documents […]

An important High Court decision has clarified the circumstances in which factual communications and documents between lawyers and their clients are protected by legal advice privilege.

Privilege is a hugely valuable legal right which entitles a client to withhold documents (including electronic communications) from a court or third party without any adverse inferences being drawn. There are important public policy justifications underpinning privilege, such as the need for clients to be able to candidly disclose matters to their lawyers; to enable lawyers to obtain, investigate, record and freely communicate to their clients; and, in the context of regulatory investigations, so that regulators can deal with experienced lawyers, which in turn will advance public interest. For legal advice privilege to apply:

The document or communication in question must be confidential;
The document must pass between a qualified lawyer and his or her client;
The document must have been created for the purpose of giving or receiving legal advice in the relevant legal context; and
Privilege must not have been lost or waived, even inadvertently.

When the LIBOR manipulation scandal broke and RBS became the subject of several regulatory investigations, it established a steering group to oversee the various investigations and any related litigation, and to liaise with external legal advisors. The Property Alliance Group (PAG) brought a claim against RBS and sought disclosure of two types of factual documents prepared by RBS’ lawyers for the steering group: confidential tables which informed and updated the steering group on the progress of, and issues arising from, the investigations; and confidential notes (effectively minutes) of steering group meetings organised and attended by the lawyers. PAG argued that the lawyers were performing an administrative function and that the documents in question were largely factual and should be disclosed, but with any legal advice redacted. RBS countered that the documents were privileged – and the High Court agreed.

The court held that both types of documents were part of the “continuum of communication and meetings between the solicitor and client… Where information is passed… aimed at keeping both informed so that advice may be sought and given as required”. All of the requisite factors were present and the documents were therefore protected by legal advice privilege. The judge emphasised that factual documents will not attract privilege simply because they were prepared by a lawyer who was present at a meeting – the key consideration will be whether the documents were created in connection with the provision of legal advice.

For top tips on the protection of privilege generally, explained by Walker Morris’ partner Gwendoline Davies, please see our more detailed briefing.

M&S v BNP Paribas – Break clause apportionment and implying contractual terms

In an important decision of interest to landlords, tenants and anyone concerned with commercial contracts, […]

In an important decision of interest to landlords, tenants and anyone concerned with commercial contracts, the Supreme Court has confirmed the correct approach to the implication of contractual terms and has established that, without an express apportionment provision, post-break ‘overpayments’ will not be refundable.

Prior to this case it was accepted law that a tenant would only be entitled to a refund of rent paid in advance if there was an express term to that effect in the lease. At first instance, however, despite the absence of an express apportionment provision in the lease placing any obligation on the landlord to return paid sums relating to the post-break period, the High Court held that the landlord (BNP Paribas) was obliged to repay to the tenant (M&S) rent which had been paid in advance but which related to the period following a contractual lease break. The High Court decided that a reasonable person would expect that rent would only be payable for the period up to, and not beyond, the break date; and that implying a term to that effect was necessary to give business efficacy to the lease.

The Court of Appeal reversed the High Court’s decision. The Supreme Court, agreeing with the Court of Appeal, has now authoritatively reasserted the law relating to apportionment of paid sums following a lease break and has reiterated important principles regarding the implication of terms into commercial contracts. The key points are:

Where rent is payable in advance and a break date falls part way through a payment period, the tenant must pay the full period’s rent and will not be entitled to a refund for sums relating to the post-break period unless there is an express apportionment provision to that effect in the lease.
The implication of terms into commercial contracts is potentially intrusive, such that terms will not be implied lightly.
When deciding whether or not to imply a term into a detailed commercial contract the court will consider the presumed intention of the parties at the time the contract was made.
In order for a term to be implied, the test remains that it must be necessary to give business efficacy to the contract. The test is whether, without the term, the contract simply does not work.
Where the parties have entered into a lengthy, carefully drafted contract, particularly where they have been legally advised, it will be difficult to imply any term(s).
In addition, for a term to be implied, it must be obvious; capable of clear expression; and must not contradict any express term of the contract.

Landlords will no doubt be pleased that the Supreme Court has definitively ruled that, without an express apportionment provision, post-break ‘overpayments’ will not be refundable. However this judgment is to be lauded even more generally, for its clear message that the courts will not lightly intrude upon any lease or contract, so as to imply additional terms after the event.

For further detailed information and advice, please see our earlier briefing.

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Martin McKeague - Partner, Real Estate Litigation at Walker Morris LLP.

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