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Real Estate Matters – January 2014

Real Estate Matters – January 2014

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24/01/2014

Building for the future

A significant social issue of recent times is the lack of housing in the UK, […]

A significant social issue of recent times is the lack of housing in the UK, and particularly the fact that we’re building an insufficient number of new homes to meet the needs of the growing population. Estimates suggest that 200,000 to 250,000 houses need to be built each year in order to match population growth. However, in 2012, only 117,000 new-builds were completed. This short supply of homes has become a major social issue as the lack of supply when compared to increased demand serves to push up the costs of buying and renting. This has a significant impact on living standards as larger proportions of incomes are then being spent on rent or mortgages.

To deal with the issue, the Government launched a number of schemes in the past few years which aim to increase the number of new-builds. The focus can generally be divided between plans to give finance for house building projects and plans to help buyers who can’t afford a deposit on a new home.

The initiatives

The two main initiatives which help buyers who can’t afford a large deposit are ‘Help to Buy’ and the ‘NewBuy Guarantee’. Help to Buy equity loans are available to purchasers of new-build homes worth up to £600,000. Under this scheme, the Government loans property purchasers up to 20 per cent of the cost of a new-build home, so that they only need a five per cent deposit and a mortgage to make up the remainder. £3.5 billion has been set aside to help up to 74,000 home purchases, and the scheme will end either when the funds are used up or at the end of March 2016.

Under the NewBuy Guarantee, buyers who have a deposit of at least five per cent can secure a 95 per cent mortgage from participating house builders. So far, over 70 house builders and six lenders have signed up to the NewBuy Guarantee.

Additional funds have been set up to encourage development on house building projects. The ‘Get Britain Building’ fund is a £570 million investment fund available for developers to make progress on development sites that haven’t started or on are hold. The aim is for the fund to enable homebuilders in possession of stalled sites to build up to 16,000 new homes by de-risking projects.

There are also additional grants available for developments fitting into certain criteria. For example, grants are available if house builders are making homes to be rented out, affordable homes, or for large-scale housing projects.

Other measures which have been launched include a financial reward for a council that increases the number of homes in their districts. New rules being proposed also mean that if councils are taking too long to reach a decision as to whether to grant planning permission, house builders planning large developments can appeal directly to a minister for approval.

Finally, the ‘Funding for Lending’ scheme, although not directly aimed at house builders will hopefully serve to stimulate lending. This scheme gives banks access to cheaper funds on the requirement that they improve their own lending. Unfortunately, however, from this month on, Funding for Lending can no longer be used for mortgage lending, as there was a fear it would lead to a housing bubble.

The results

As to the effectiveness of these schemes, the results have been promising. The number of new residential planning approvals last summer increased by almost 50 per cent compared to the previous year. In addition, housing construction activity is now at the fastest pace for almost a decade.

Most market commentators have attributed this rise to the schemes aimed at boosting mortgage approvals. Funding for Lending was a big part of that, and Help to Buy has also been seen as successful (for example, Help to Buy accounted for just under a third of Barratt’s completions last year). The rise has also been attributed to the encouragement of local authorities to release undeveloped land.

However, it should be noted that the increased activity in house building is skewed in favour of London and the South East, and the proportion of homes being built there has increased by 10 per cent from the position fifteen years ago. Despite the initiatives in place the levels of house building still are a fair way off the numbers seen during the peak of activity and in Yorkshire, the level of house building is still more than 50 per cent lower than levels seen prior to the recession.

There is also a fear, voiced amongst some commentators, that such incentives are leading to first-time buyers over-stretching themselves and an acceleration in an already rapidly rising market within London. Furthermore, there is concern that such schemes are only serving to increase the already evident north-south divide in the housing market.

As to the future, the industry is generally anticipating a rise in house building, and national house builders have been purchasing land at the fastest rate since before the recession. Whilst the increases seen so far are still not significant enough to address the housing problem, the effects are heading in the right direction. The house building issue was a key point at the Labour Party conference in 2013, and as a key political topic it is likely that there will be further new initiatives to come, which hopefully will continue to address this ongoing and hugely important issue.

Do you get what you pay for? Reasonable non-reliance clauses defeat misrepresentation claims

One would think that a property buyer should be entitled to a remedy where a […]

One would think that a property buyer should be entitled to a remedy where a seller makes untrue misleading representations about a property, inducing a sale that would not have happened but for those representations. And yet it is also reasonable for the parties to achieve certainty by agreeing that the terms of the contract alone constitute the extent of the agreement between them.

The recent Court of Appeal case of Lloyd v Browning [1] confirms that a seller’s liability for misrepresentation can be excluded by the terms of the contract provided that the exclusion clause is fair and reasonable in accordance with the Unfair Contract Terms Act 1977 (UCTA).

The facts

To sell their farm, the defendant farmers sought to make the sale more attractive by obtaining planning permission to extend an L-shaped barn into a U-shaped building which would be split into three dwellings. Planning permission for the extension was denied, but planning permission was later granted for amended plans that did not include the extension.

Looking to buy separate yet adjacent properties, the claimants were interested in buying the barn and build the U-shaped extension. During various meetings at the property, the defendants produced the unamended plans and the claimants were led to believe that the planning permission that had been granted covered the U-shaped extension.

In the pre-contract enquiries the claimants’ solicitors made no enquiry at all about the planning permission plans nor did they send any letter to clarify the point. Unfortunately, due to “some error” by the local council, the amended plans were not put on the file, which was flagged by the claimants’ planning consultant.

In short, the claimants bought a property that they would not have purchased if they had known that the U-shaped plans had been rejected. The court accepted that the difference between the value of the property without the extension, as opposed to with it, was £55,000.

The contract

The contract in this case contained the following special condition:

“The buyer admits that he has inspected the property and he enters into this contract solely as a result of such inspection and upon the basis of the terms of this contract, and that in making this contract no statement made by the seller or his agent has induced him to enter except written statements, if any, made by the seller’s conveyancers in replies to enquiries raised by the buyer’s conveyancers or in correspondence between the parties’ conveyancers.”

This ‘non-reliance clause’ purported to limit the parties to the terms of the contract and written correspondence and excluded reliance on any oral representations made during the sale negotiations. Such non-reliance clauses are ineffective to the extent that they do not satisfy the reasonableness test of section 11 of UCTA [2].

Section 11 of UCTA requires that the term, “shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”

At first instance, the judge found that there had been a clear provable misrepresentation causing a measurable loss, but the non-reliance clause was effective to exclude the defendants’ liability for misrepresentation.

The Court of Appeal dismissed the claimants’ appeal and held that the defendants had shown that the special condition was a fair and reasonable exclusion clause, which operated to exclude the defendants’ liability for their misrepresentation. Various factors indicated that the exclusion clause was reasonable:

the parties were both represented by solicitors with equal bargaining power
the clause had been added by the agreement of both parties, rather than it being a ‘small print’ clause.
the clause was clear and unambiguous and in common use by the regional Law Society
it was designed to achieve certainty; avoiding the need to dissect pre-contract oral discussions
the clause itself gave the parties permission to rely on written statements made by the seller in response to the buyer’s written enquiries (or in correspondence). It included a means to give legal effect to any pre-contract representation.

The fact that the defendants knew the claimants would not purchase the property if they had known about the true extent of the planning permission had no bearing on the reasonableness of the clause. It had been the claimants that had pushed for the exchange of contracts despite knowing that the planning information they had was incomplete. The importance of the barn extension should have led the claimants to clarify the issue in writing as dictated by the clause.

The aim of non-reliance clauses, to reduce any important representation to writing and prevent disputes about pre-contract oral discussion, was endorsed by the Court of Appeal. Where one is included in a contract, the parties should reduce any oral statements at least in writing or, better, within the terms of the contract itself. It is important to remember that no contractual clause can exclude fraudulent misrepresentation. In this case, the buyers were given the impression that the property came with the U-shaped barn planning permission. Had they been deliberately misled, the exclusion clause would have failed.

The case also highlights the need for thorough due diligence. The buyers should have clarified the planning permission ambiguities prior to exchange. Just two weeks later the council confirmed that the extension was not permitted. In their eagerness to exchange, the buyers ended up owning a property which was worth much less than what they paid for.

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[1] Lloyd v Browning [2013] EWCA Civ 1637
[2] Section 3 of the Misrepresentations Act 1967

For whom the bell tolls – the end of chancel repair liability?

Overriding interests have been a hot topic recently, due to the fact that, as of […]

Overriding interests have been a hot topic recently, due to the fact that, as of midnight on 12 October 2013, their overriding status was lost. It is a common misconception though that as a result of this change of status we need no longer concern ourselves with such matters. Whilst it is true to say that in the absence of registration by the beneficiary such rights can be lost, this does not mean that we can allow overriding interests to become a distant memory as, in certain circumstances, such matters could still prove problematic. This article therefore examines the current position in relation to such matters.

Overriding interests and the position pre-October 2013

Overriding interests are a diverse class of third party interests, including such matters as rights to mines and minerals and chancel repair liability, which bind a purchaser of land even though they are not noted on the title entries of registered land or in the deeds of unregistered land. Such overriding interests bind the owner of the land even where their existence is unknown and they could be financially valuable to their beneficiary as they can grant the right to take minerals from the burdened land or permit the recovery of the costs of upkeep of a church.

One of the aims of the Land Registration Act 2003 (the Act) was to provide greater transparency for the purchasers (or mortgagees) of land and in order to achieve this aim it was decided that certain overriding interests would lose their overriding status following the coming into force of the Act on 13 October 2003. Due to the potential value of such rights, a ten-year transitional period was introduced by the Act to give the beneficiary of the rights time to protect them by registration. That transitional period came to an end on 12 October 2013. As a result of that deadline, the summer of 2013 saw a flurry of activity at the Land Registry with beneficiaries lodging applications to register protective notices in respect of their rights.

Chancel repair liability

Prior to the Act, very few people had even heard of chancel repair liability and less still considered it to be an issue when purchasing land. This ancient liability has origins that stem back to the dissolution of the monasteries during the rule of Henry VIII when the liability to pay for the repair of a church chancel passed to lay persons or organisations. Such people became ‘lay rectors’ and were entitled to the income from tithes and assumed responsibility for chancel repairs. The Ecclesiastical Dilapidations Measure 1923 relieved spiritual rectors from chancel repair liability but liability remained at common law for lay rectors. The Tithe Act 1936 abolished tithes but the liability to repair remained. As a result, land within a Church of England parish which has a vicar and a church dating from medieval times or earlier may still have a residual chancel repair liability.

The issue of chancel repair liability hit the headlines in 2003 when a Warwickshire couple, Mr & Mrs Wallbank, inherited a farm, one field of which was formerly rectorial land. The local Parochial Church Council (PCC) billed the couple for chancel repairs. The Wallbanks argued that the PCC was acting in a way that was incompatible with a convention right (the First Protocol to the European Convention of Human Rights, which protects quiet enjoyment of property) and so in breach of the Human Rights Act 1998. Although the Court of Appeal accepted this argument and ruled that liability was unenforceable, in 2003 the House of Lords overruled this decision and ruled that the liability was enforceable and the Wallbanks were bound to pay for the repairs.

Partially due to the increased publicity surrounding chancel repair liability as a result of this case, despite the lack of a central register for chancel repair liability, and somewhat patchy records, it has become standard practice to undertake a chancel repair liability search on the acquisition of an interest in land. A standard search does not categorically confirm whether a property is subject to a chancel repair liability but would confirm whether it is situated in an area that has the potential for such a liability. A positive result generally led to chancel repair indemnity insurance being put in place (with policies being widely available and relatively inexpensive). Despite the increased awareness of the risk associated with chancel repair liability the number of claims for contributions to the cost of chancel repair have remained relatively low and the flood of claims that some commentators believed would arise has never materialised.

The end of chancel repair liability?

It was assumed by some that the loss of overriding status would mark the death knell for chancel repair claims. Unfortunately though, this is not the case, and whilst further protection is required to preserve the liability, it has not disappeared altogether. The position is now as follows:

Registered land

The right to demand payment for chancel repairs can be protected by a notice on the register. Such notices can still be registered as of 13 October 2013 but at a cost and only if there has been no change in ownership of the land since 12 October 2013. The right will continue to bind the owner of land purchased or voluntarily registered before 13 October 2013 until that land is sold to a third party, even if the right has not been protected by a notice in the register. After a sale a purchaser for valuable consideration will take free of any liability that has not been protected by a notice.
Since a notice can still be entered at any time before a transfer is registered, the absence of a notice on the official copies of the register entries for a title should not be relied upon. A pre-completion priority search will protect a transfer prior to its registration and will therefore ‘block’ the registration of a notice following the date of a search.
At present, it would still be safest to undertake a chancel repair liability search as this will give some indication as to whether there is a risk that a notice could be entered onto the register before completion of an acquisition.

Unregistered land

The right to demand payment can be protected by a caution against first registration. As with notices in respect of registered land, a caution can still be lodged as of 13 October but at a cost and only if there has been no change in ownership of the land since 12 October 2013 and the land remains unregistered. The right will continue to bind the owner of unregistered land after 13 October 2013, until that land is conveyed to a third party or voluntarily registered. If a caution has been lodged, upon a sale and subsequent first registration the registrar will notify the cautioner, enabling them to protect their interest by entering a notice in the register. As from 13 October 2013 a purchaser will take free of any liability if it has not been protected by a notice in the register at the time of first registration.

It is worth noting that other previously overriding interests that lost their overriding status in October 2013, e.g. rights to mines and minerals, can also be protected in a similar way.

And what does this mean for the indemnity insurance market? It is likely for the time being that mortgage lenders will still require insurance to be put in place where a potential chancel repair liability has been discovered by a chancel repair search, particularly on any remortgage, as in these cases there will not have been a disposition for value to ‘wipe the slate clean’ in the absence of a registration. Insurance is also likely to be required (and advisable) where a purchaser is acquiring a property with a notice registered on the title, though at this stage the terms of a policy and the level of premium which it attracts have yet to be clarified.

What can be said with certainty though is that, despite the loss of overriding status, we’ve not yet heard the last of chancel repair liability.

Points to ponder when planning a new development

This year is heralded to be an “exciting year for commercial property”. An improving economic […]

This year is heralded to be an “exciting year for commercial property”. An improving economic outlook has seen activity in the construction industry steadily increasing, culminating in eight months of growth to the end of 2013. Furthermore, this growth is not solely confined to housing and infrastructure projects; it also includes commercial building work which is rising at its fastest pace since 2007. With such an optimistic outlook, it seems fitting to bring to the fore some of the key challenges which often face any proposed development, with a view to ensuring that these issues do not delay or even derail a new development plan.

Obtaining vacant possession

Perhaps the key issue facing any development plan, and also the one which can prove the most challenging for any developer to overcome, is that of obtaining vacant possession of the proposed development site. The nature of occupation will have the greatest bearing on how difficult it will be to clear occupiers from the site. A tenant occupying by way of licence, for example, will be considerably easier to remove than a business tenant who has security of tenure under the Landlord and Tenant Act 1954 (the 1954 Act).

Where an occupier does have security of tenure, however, this does not mean that any hopes of redeveloping the land are to remain but a pipedream, as it is possible to oppose a renewal lease on a number of grounds under the 1954 Act. The ground most relied upon by developers is ‘ground F’: an intention to demolish, reconstruct or carry out substantial works of construction. It is important to bear in mind that, should a landowner wish to rely on this ground, compensation may be payable and, where a tenant has been in occupation for more than 14 years, the sums involved are likely to be substantial, as compensation will be payable at twice the rateable value of the property.

As a final point, it is also important to consider whether there are any trespassers on the proposed development land. The costs involved in removing trespassers can be considerable, especially if it is necessary to obtain a court order or instruct bailiffs to have them cleared from the site.

Rights of residential tenants

Related to the issue of obtaining vacant possession, the occupation by residential tenants of properties earmarked for development can often give developers cause for concern for two key reasons. Firstly, under the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, tenants of flats with leases with a term of more than 21 years have the right to collectively acquire the freehold to their property or the right to extend their lease term. This can cause a potential problem where a developer’s profit depends on its ability to retain the freehold and any rental income for a period or its ability to dispose of the freehold unencumbered by any such rights.

Secondly, under the Landlord and Tenant Act 1987, in some instances, where a landlord wishes to dispose of its interest in a property comprising a number of flats, it must first offer ‘qualifying tenants’ a right of first refusal. These rights of first refusal can be of particular concern to those proposing to develop flats or mixed use buildings. In both of these scenarios, however, ensuring that lease structures are put in place, which prevent any such rights arising, offers a simple solution to what could otherwise become a major hindrance to any development plan.

Conquering rights to light

Another stumbling block along the way is that of rights to light, which are not unusual to encounter, especially when embarking upon a development project in London. A right to light gives the owners of certain long-standing buildings a right to maintain a certain level of illumination through the windows of such buildings and such rights could at worst, completely derail any proposed development and at best, could cause a developer to have to reconsider its design plans.

The options available in respect of dealing with rights to light are not too dissimilar to those available in relation to restrictive covenants. However, in addition to the possibility of seeking to negotiate with the owner benefitting from the right to light or attempting to put in place insurance, in some circumstances it is possible to approach the local authority for assistance. Under the Town and Country Planning Act 1990, local authorities have the power to step in and extinguish rights to light in certain circumstances. However, it is worth noting that the circumstances giving rise to this are limited, as the local authority must own or have owned the development land in question.

Finally, where there is a risk that a landowner might acquire a right to light by prescription (20 years’ enjoyment) before development commences, then serving a timely light obstruction notice can stop the clock running and prevent the acquisition of such a right.

Land benefitting from restrictive covenants

Whilst by no means the only other obstacle facing developers, the final one which we will discuss, and one which is often encountered when development is proposed, is the existence of restrictive covenants which make any development subject to an adjoining landowner’s consent being obtained, for example, or which restrict the use to which the land can be put.

Fortunately, there are a number of options available in situations such as these, the first of which is to consider whether it is possible to negotiate with the person benefitting from the restrictive covenant. It may be that they are willing to release the development land from the burden of the covenant, in return for payment of a sum of money, for example. In many instances, insurance can often be put in place to protect against any claim which might arise due to a breach of the terms of the covenant. Lastly, where a restrictive covenant appears to be obsolete or of no practical benefit to anybody, then making an application to the Lands Chamber in the Upper Tribunal for release or modification of the restrictive covenant is a possibility also worth considering.

Lessons learnt?

The key message which this article seeks to convey is that, whilst there are many issues meriting consideration when embarking upon a new development, in only but a limited number of circumstances should those issues prove to be insurmountable. Careful and timely planning and involving your advisors at an early stage should, for the most part, ensure that any proposed development becomes a reality.

Should we stay or should we go?

The recent case of Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited [1] provides […]

The recent case of Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited [1] provides a valuable reminder that remaining in occupation at the end of a fixed-term tenancy can have adverse consequences for tenants as well as landlords. Real Estate Litigation specialist, Martin McKeague, explains the law underpinning this important decision.

Where a tenant occupies premises for business purposes, the Landlord and Tenant Act 1954 (the Act) gives the tenant security of tenure when his contractual tenancy [2] comes to an end. The Act provides that the tenancy continues on a statutory basis; the tenant may therefore remain in occupation, and he has the right to ask his landlord to grant him a new tenancy. A landlord may only object on certain limited statutory grounds [3] to the grant of a new tenancy.

However, if the parties so wish, by following statutory procedures prior to entering into a lease the landlord and tenant can agree that the tenancy will not have the security of tenure which would otherwise be conferred by the Act. Following the statutory procedure creates an ‘excluded tenancy’, which will simply come to an end on the contractual termination date.

Holding over

In practice, it is quite common for a tenant to remain in occupation of premises after his excluded tenancy comes to an end [4]. The landlord and tenant may be in the process of negotiating a new lease, or it may be that both parties are happy with their existing arrangements and are content to allow them to continue. Either way, the tenant will often remain in the premises and keep paying rent, which the landlord accepts.

In this situation, the tenant is no longer occupying the premises under its excluded tenancy because that has come to an end. Instead, the occupation and the payment and acceptance of rent creates either (a) a tenancy at will, or (b) a periodic tenancy. Which of the two types of tenancy is created depends on the parties’ intentions and conduct. Where the landlord and tenant are actively negotiating terms for a new lease, they may have created a genuine tenancy at will; if, however, the parties have simply allowed their existing arrangement to continue, then a periodic tenancy is more likely.

Tenancies at will are regarded by the law as temporary arrangements. They do not attract the protection of the Act, and can be terminated by either party at any time. Periodic tenancies, however, can attract the protection of the Act, and in any event more notice is required in order to bring them to an end.

Ending a periodic tenancy

Periodic tenancies are ongoing ‘period’ after ‘period’. The period is generally defined by the payment and acceptance of rent. So, where a tenant pays rent weekly, his is a weekly periodic tenancy; where a tenant pays rent monthly, his is a monthly periodic tenancy (and so on for quarterly or yearly rent).

To end a periodic tenancy, either party must give at least one period’s notice to quit to the other, with such notice expiring at the end of a period. Thus, if a tenant pays his rent on the 1st of each month, a landlord could serve notice to quit on 28 February (for example) to bring the tenancy to an end on 31 March. An exception is the case of an annual periodic tenancy, where the notice period must still expire at the end of a period but only six months’ notice is required.

How this can cause problems for tenants as well as landlords

When establishing the period of a periodic tenancy, however, it is not always just a question of seeing when rent is paid. If rent is paid quarterly but the amount of rent is referable to an annual amount, then the periodic tenancy is annual, not quarterly. So, if an excluded tenancy defined an annual rent of £100,000 paid in quarterly instalments of £25,000 on the usual quarter days, then any periodic tenancy created at the end of the excluded tenancy’s term will be an annual periodic tenancy.

In these circumstances, and bearing in mind the requirement that any notice to quit must expire at the end of a period, the notice required to end the tenancy may be as much as 18 months. This is often seen as being solely to the landlord’s detriment as he cannot compel the tenant to vacate; but if a tenant wishes to leave then he may not be able validly to terminate his tenancy for a considerable time. In the meantime, he would be liable for rents, service charges and so on.

This was exactly what happened in the Barclays case. Erimus Housing Limited occupied Barclays’ premises under a five-year excluded tenancy. When that ended on 31 October 2009, Erimus remained in occupation and the parties began negotiating a new lease. After two years, negotiations broke down and in June 2011 Erimus gave three months’ notice to quit. Barclays, however, claimed that the notice was insufficient. Barclays argued that Erimus had an annual periodic tenancy, so the earliest Erimus could terminate the tenancy was 31 October 2012. The High Court agreed. Erimus remained liable for rent until that time – some £185,000.

Practical considerations

Whether you are a landlord or tenant of an excluded tenancy, be aware that simply maintaining the status quo at the end of the tenancy’s contractual term can have long-term consequences. Have your solicitors review your position before the lease term comes to an end, and consider expressly entering into a new tenancy on terms that are suitable for your business.

[1] [2013] EWHC 2699
[2] Throughout this article, the terms ‘tenancy’ and ‘lease’ can be read interchangeably. The Act refers to tenancies rather than leases, which is why we generally do so here.
[3] It is outside the scope of this article to explain statutory grounds and procedures for terminating tenancies with security of tenure protection pursuant to the Act.
[4] This is often referred to as ‘holding over’, but the same phrase is also used where a tenant remains in occupation under the Act. In this article, when referring to a tenant remaining in occupation following the end of an excluded tenancy, we use the phrase “remaining in occupation”.

The basics of forfeiture explained

It is hardly surprising that in today’s economic climate some tenants are struggling to […]

It is hardly surprising that in today’s economic climate some tenants are struggling to meet their rental payments. This often leaves landlords in a difficult situation, unsure of their rights and keen to secure an ongoing rental income. This article examines one of the remedies available to landlords in such circumstances: the right of forfeiture. Establishing and enforcing this right is not often straightforward and therefore this article will examine situations in which the right of forfeiture most commonly arises, the importance of preserving this right, and issues to be aware of regarding enforcement.

What is forfeiture and when can it be used?

The ability to forfeit enables a landlord to re-enter their property following a breach by the tenant, and by doing so, terminate the lease. Depending upon the reason for forfeiture, termination can take place with immediate effect, or following a period of notice.

In order to be able to forfeit a lease, a landlord will firstly need to establish the basis of their right to do so. The most common way to do this is to rely on a specific clause in the lease which grants to the landlord the right to forfeit in certain circumstances.

It is also worth noting that, in certain situations, a landlord can exercise a right to forfeit in the absence of a specific clause in the lease. If the tenant has breached a condition of the lease (i.e. a fundamental provision going to the root of the contract) then the right arises automatically. However, the right should be exercised with caution, following legal advice, to establish whether the tenant’s breach does indeed go to the root of the contract. The danger of attempting to forfeit a lease in the absence of an explicit right to do so is that the landlord could be in breach. Legal advice should therefore be sought in relation to breach as soon as it occurs.

Factors to consider

Care should also be taken to ensure that the clause relied upon actually covers the breach in question, and that any preconditions to the exercise of the right have been complied with. It should be borne in mind that in an insolvency situation, it may be wise to seek further advice as additional requirements and/or obligations may arise before the right to forfeit can be exercised. For example, if a corporate tenant is in administration, then permission of the court is needed, or consent from the administrator, before a lease is forfeit.

If a right to forfeit arise, a landlord must then follow a statutory notice procedure before the lease can be terminated. In relation to all breaches, apart from non-payment of rent, a s146 [1] notice must be served upon the current tenant, giving them time to remedy the breach in question. The notice must set out the breach complained and, if the breach is capable of remedy, contain a request to do so and/or pay monetary compensation. It is only following the service of this notice, and a subsequent failure by the tenant to remedy the breach within a reasonable or stated period and/or pay reasonable compensation, that a landlord can exercise its right to forfeit.

Preservation

Establishing whether a right to forfeit exists raises various issues and the position may not, therefore, be immediately clear. So what should a landlord do if they believe a tenant has breached the terms of the lease, thus entitling the landlord to forfeit?

It is imperative that, in a potential forfeiture situation a landlord preserves any right which may exist. Care should be taken to ensure that the right is not lost (waived) through any action on the part of the landlord. No action should be taken which affirms or accepts the continued existence of the lease.

Ideally, therefore, a landlord should have no contact with the tenant, or its representatives, until the position has been fully considered. If communication is unavoidable, any discussions regarding the breach should be limited and should be stated to be ‘without prejudice’. The use of this term may limit the effect of such conversations further down the line, however this cannot be guaranteed.

Secondly, the landlord must ensure that no sums or rent due under the lease are demanded or accepted. This is because by accepting these sums, the landlord is allowing the lease to continue and could therefore be accused of accepting any earlier breach by the tenant.

Final considerations – effecting forfeiture

In the event that a landlord believes it has the right to forfeit the lease, and it has preserved this right, what are the final issues which the landlord should be aware of?

Perhaps the primary consideration will be how the landlord will regain control of the premises. One way is by ‘peaceable re-entry’, however, before utilising this method, thought should be given to the practicalities of this, for example, is it possible to simply change the locks when the building is empty, or are the premises occupied by a commercial tenant who is likely to have individuals on the premises throughout the day? If an individual is present and/or objects, the landlord risks committing a criminal offence by changing the locks to the property.

Furthermore, following re-entry, a landlord should be aware that it becomes responsible for any goods remaining on the premises. The landlord must therefore be able to ensure the safety of any tenant’s property remaining on the premises, to avoid any subsequent claim from the tenant for loss due to damaged goods.

The alternative to re-entering the property is to issue court proceedings. This involves issuing forfeiture proceedings using the relevant claim form. A possible advantage to this is that it avoids the difficulties of re-taking possession; however it can be a lengthy process incurring additional legal fees.

Finally, a landlord seeking to effect forfeiture should be aware that a tenant has the right to apply for relief from forfeiture, via an application to the court. Therefore, even in the event that the landlord’s right to forfeit can be established, and the statutory procedure is followed, a tenant may still be able to remain in the property. In addition, relief may be granted even if the landlord has already re-entered the property.

Conclusion

The right of forfeiture, whilst a useful remedy, is not a simple one, both in terms of its establishment and its effect. This article has summarised some of the main issues and concerns which a landlord should be aware of, but highlights the importance of obtaining legal advice at the early stages of any potential exercise of the right to forfeit.

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[1] Such a notice must follow the requirements under section 146 of the Law of Property Act 1925.

The Importance of being adverse

Making a claim for adverse possession is a method by which an ‘unlawful’ occupier can […]

Making a claim for adverse possession is a method by which an ‘unlawful’ occupier can acquire legal title to the land, by ‘displacing’ the paper owner. Adverse possession can be relied upon by squatters residing in a property or making use of a piece of land for the requisite length of time [1].

The case of Robert Smart v Lambeth London Borough Council [2] concerned a claim for adverse possession which was said to have arisen by virtue of occupation for a period of at least 12 years prior to 1993, but the principle considered in the case applies equally to any claim for adverse possession.

The case involved properties in Clapham, London which, in 1971, were acquired by Lambeth London Borough Council (the Council). Following acquisition, the properties were left vacant and squatters took possession. Rather than evict the squatters, the Council decided to re-house them in the occupied properties. With the agreement and involvement of the squatters, the Council granted a licence to a housing association which, in turn, gave the housing association permission to grant licences to occupy (in a specified form only) [3], to the squatters.

Occupation without lease or licence…

The claimant, Mr Smart, became the sole occupier of one of the properties in 1984. His predecessor had been one of the squatters and the predecessor’s boyfriend had signed a licence granted by the housing association. Neither the predecessor nor the claimant had ever signed a licence; they were aware, however, of the overall Council/housing association occupation scheme.

The claimant sought to argue that he (and before him, his predecessor) had been in adverse possession of the property for a period of 12 years prior to 1993 by virtue of their own lack of licence. His argument failed in the county court where it was held that neither he nor his predecessor had ‘adversely’ occupied the property, as the Council had impliedly consented to his occupation i.e. by generally allowing the housing association to grant licences to occupy to squatters.

… is not necessarily without consent

Mr Smart appealed to the Court of Appeal, where his claim was dismissed. The Court of Appeal confirmed that occupation of a property with the owner’s consent was not adverse possession and, crucially, that the consent to occupy did not have to be express nor contractually binding – it could be implied. Here, consent by the Council to the claimant’s occupation was implied because the licence granted to the housing association indirectly gave consent for any person within the envisaged category of squatters and their successors to occupy, and that included the claimant. Regardless of the lack of signed licence, the claimant knew of the existence and terms of the housing association scheme and so he knew that he was among the class of people intended by the Council to be permitted to occupy. The Court of Appeal therefore held that the claimant occupied with the Council’s consent and adverse possession could not be established.

Important principle
The important principle to take away from this case is that, in addition to proving the requisite length of period of uninterrupted occupation of the land and demonstrating an intention to possess in spite of the lack of legal ownership during that period, a claimant must also establish that its possession is adverse – i.e. patently without the landowner’s consent. The Court of Appeal has clearly shown that this is a high threshold to meet, and that mere lack of direct legally documented consent will not do. Any claimant seeking to acquire legal title to land by displacing the paper owner will have to carefully consider all the circumstances of the case – in particular they will have to be alive to the possibility of any consent having been granted impliedly.

The case is likely to be welcomed by landowners, who will be reassured that the courts do not regard their legal proprietary rights lightly.

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[1] Pursuant to the Land Registration Act 2002 the requisite period of occupation for registered land will be either 12 or 10 years respectively, depending on whether the possession relied upon was for a period ending before 13 October 2003 or includes occupation since that date.
[2] [2013] EWCA Civ 1375
[3] The form contained a restriction that no individual was to be granted exclusive possession.

The reasonableness of restrictive covenants

Restrictive covenants continue to provide significant concern, difficulty and delay for developers. In the recent […]

Restrictive covenants continue to provide significant concern, difficulty and delay for developers. In the recent case of 89 Holland Park (Management) Ltd and others v Hicks [1] (Holland Park) the court was asked to consider the enforceability and extent of two restrictive covenants preventing specific activities in respect of development.

Background

Holland Park concerned two adjoining plots of land in Kensington. In 1965 the then owner of both plots sold the undeveloped site, subject to planning permission, for the construction of a single-storey dwelling. The 1965 Transfer (the Transfer) contained a positive obligation on the purchaser to develop the planned single-storey development within two years. The Transfer also contained a number of restrictive covenants, including covenants:

not to make any planning application to modify the approved plan without approval by the seller
not to commence development until the plans, workings and drawings had been submitted to, and approved by, the seller.

In each case these covenants were subject to a proviso that the seller should not unreasonably withhold approval.

The Supplemental Deed

The buyer failed to develop the land within the two year period permitted by the Transfer. As a result, the original parties to the Transfer entered into a Supplemental Agreement in 1968 (the Supplemental Agreement) which provided for the development of the undeveloped land in accordance with a new set of plans and designs, which had not at that time received planning permission, provided the development was completed within 18 months.

The Supplemental Deed imposed similar restrictive covenants to those outlined above but, crucially, these did not include the requirement for the seller not to unreasonably withhold consent.

The 2013 dispute

The claimants in the 2013 dispute comprised the freehold owner of 89 Holland Park (the land with the benefit of the restrictive covenants) and six of the long leasehold owners of the flats in the building (the Claimant). The defendant was the owner of the adjoining, burdened land. The defendant purchased the land in 2012 with the intention to develop it. The Claimant sought to enforce the restrictive covenants and the court was required to assess whether the covenants remained enforceable and, if so, whether or not the Claimant was subject to an obligation not to unreasonably withhold consent to development.

A number of arguments were put forward by the Claimant to show that the restrictive covenants were not subject to a requirement of reasonableness; these were, inter alia, that:

the removal of the reasonableness wording was a deliberate action by the parties when drafting the Supplemental Deed and illustrated a clear intention to provide unqualified covenants. Counsel for the defendant even conceded that this argument had some force
the commercial context of the transaction had changed since the Transfer. The Transfer had originally also included a positive obligation to develop, and restrictions on sale. The original purchaser had failed to comply with the positive obligation to develop and the previous restrictions on sale were lifted in the Supplemental Deed. As such, it was argued that the removal of reasonableness in the Supplemental Deed was a trade off for the additional options afforded to the purchaser
the seller had shown himself to be reasonable in entering into the Supplemental Deed given the commercial context and, therefore, it was not surprising that the parties were content to enter into the Supplemental Deed as drafted.

The decision

As an initial point, the court found that the restrictive covenants were validly binding on successors in title. In reaching this decision they applied section 78 of the Law of Property Act 1925 [2]. The wording used in the Supplemental Deed was not sufficient to disapply section 78.

In considering whether the restrictive covenants were subject to the requirement of reasonableness, the court found that the third argument regarding the reasonableness of the seller’s conduct prior to entering the Supplemental Deed actually, “went the other way”. The court highlighted that, had the parties asked themselves whether the seller would, “be able to unreasonably withhold his consent”, the answer would surely have been no, since the clear intention had been to develop the undeveloped land. It would be pointless for the Deed to provide for a process for approval of the development if the Claimant could refuse consent for any reason, regardless of whether it was reasonable or not.

The court, therefore, implied a requirement of reasonableness into the restrictive covenants.

WM Comment

Holland Park illustrates that in specific circumstances, involving a dispute between successors in title, the courts are unwilling to accept that the original parties would have intended the vendor to unreasonably withhold consent to activities that are integral to the purpose for which the land was sold.

This decision is likely to be welcomed by developers, as it is often the case that requirements to obtain consent in freehold covenants are silent as to whether consent can be unreasonably withheld. This case which infers that, in certain circumstances, consent cannot be unreasonably withheld may provide a useful tool for developers.

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[1] [2013] EWHC 391 (Ch)
[2] “A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and his successors in title and the persons deriving title under him or them, and shall have effect as if such successors and other persons were expressed. For the purposes of this subsection in connexion with covenants restrictive of the user of land ‘successors in title’ shall be deemed to include the owners and occupiers for the time being of the land of the covenantee intended to be benefited.”

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