Real Estate Matters – March 2017
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Supreme Court business rates case: Important implications for property owners and developers
Revised values for business rates will come into effect on 1 April 2017. At the […]
Revised values for business rates will come into effect on 1 April 2017. At the end of last year specialist Real Estate Litigator Martin McKeague published his tips and tactics for landlords and tenants ahead of the ratings revaluation, particularly for those who could see the changes impact their lease renewal or recovery of possession proposals. In this briefing, Martin explains why a recent, high profile Supreme Court decision on business rates is good news for property owners and developers, and he offers some practical advice ahead of the imminent rate revaluation date.
Business rates and real estate redevelopment
Back in 2015 [1] the Court of Appeal held that, for business rates assessment purposes, a statutory assumption [2] that premises are in a reasonable state of repair should apply to all premises, even those in the process of being redeveloped. That decision meant that property owners and developers faced a ratings liability on even those premises which were incapable of occupation as a result of ongoing works.
The property owner in the case was a company called S J & J Monk. The premises in question had been valued as offices on the assumption they were in repair even though, on the relevant ratings assessment date, the premises were in fact stripped to a mere shell as a result of ongoing redevelopment. S J & J Monk appealed that decision to the Supreme Court, with support from the Rating Surveyors Association and the British Property Federation.
Supreme Court’s common sense conclusion
In a comprehensive judgment [3] which overturns the Court of Appeal decision, the Supreme Court unanimously concluded that the statutory assumption should not displace the long-standing and statutorily-endorsed “reality principle”, which requires premises to be valued as they actually exist on the relevant ratings assessment date. It confirmed that the correct approach is for a valuation officer first to determine whether premises are capable of rateable occupation (and, if so, to determine the mode or category of occupation); and, only then, if they are able, to apply the statutory assumption as to reasonable repair [4]. The result is that for premises which are not capable of occupation as a result of ongoing redevelopment, the ratings liability will be nominal only.
WM Comment
The Supreme Court’s decision is being welcomed by property owners and developers as a victory for common sense. It is sensible that a building that in reality cannot be occupied as offices should not be assessed as offices capable of occupation for rating value purposes.
There is scope for future dispute as to the extent of the disrepair required to render a property incapable of rateable occupation; and as to the point at which properties subject to refurbishment may become, in part at least, capable of occupation again (and, in such cases, the extent and calculation of any business rates liability).
The Supreme Court noted that this decision does not pave the way for ratings avoidance or evasion by the implementation of spurious schemes such as temporarily removing sanitary facilities so as to claim that a property is incapable of rateable occupation at any relevant date. Anti-avoidance legislation is already in place to prevent any such abuse.
In addition, in terms of the 2017 assessment, the relevant date for ratings assessment was 1 April 2015, and so it was the state of premises on that date which will determine ratings liability.
Practical advice
- What property owners and developers can do now – and should do urgently in advance of 1 April 2017 – is to check the draft revised rateable values for their properties and arrange valuation inspections so as to determine the accuracy of (or indeed any obvious errors in) the new ratings. The new ratings will come into effect on 1 April 2017 and appeals can be lodged from that date.
- In particular, where any property was subject to refurbishment or redevelopment works on the relevant date of 1 April 2015, property owners and developers should take advice as to whether that might impact upon – or even effectively extinguish – their ratings liability for any relevant period. Any such review is likely to involve capturing relevant contemporaneous evidence as to the nature and extent of any works, and proactively presenting this to the Valuation Office in support of any ratings challenge or appeal.
- Finally, it is worth noting that a number of ratings appeals have been on hold pending the outcome of the S J & J Monk Supreme Court appeal. It might therefore now be possible for business rates payers to pursue refunds and sensible settlements in suitable cases.
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[1] S J & J Monk v Newbigin (Valuation Officer) [2015] EWCA Civ 78
[2] para 2 (1) of Schedule 6 to the Local Government Finance Act 1988 as amended by the Rating (Valuation) Act 1999 provides that the rateable value of a property is an amount equal to the rent at which it is estimated it might be expected to be let, subject to the assumption (para 2 (1) (b)) that immediately before the tenancy begins, the property is in a state of reasonable repair (but excluding repairs which might reasonably be considered to be uneconomic)
[3] [2017] UKSC 14
[4] Ibid paras 22 and 23

Leasehold ground rent complaints: What housebuilders need to know now – March 2017
Sometimes it seems like everything to do with housebuilding today is controversial. Housebuilders face the […]
Sometimes it seems like everything to do with housebuilding today is controversial. Housebuilders face the almost impossible tasks of building more homes without intruding on too much land or certain types of land; and of developing and maintaining positive relationships with customers and communities in the face of mistrust frequently engendered by developer-unfriendly media. All of this is, of course, at the same time as trying to run a successful, profitable business for the benefit of shareholders and employees, and against the backdrop of a constantly changing political, economic and regulatory environment. In addition, these are increasingly consumer-focused times in which, perhaps more than ever, laws are in place to put consumer protection first – and consumers know it.
Walker Morris partner Louise Power, an expert in real estate and consumer protection law, with particular expertise in assisting housebuilders and developers with their regulatory obligations, highlights the concern with leasehold ground rent complaints – the latest high profile consumer issue facing the industry. In this article, Louise explains what housebuilders need to know now.
“the PPI of the housebuilding industry”… “legalised extortion”
This is how Justin Madders MP and the chief executive of the Chartered Institute of Building respectively have referred to the issue of leasehold ground rent clauses in many new-build properties sold in recent years. The media has picked up on the issue, customer complaints are on the rise, and any housebuilders that might be affected need to know the facts; to understand their legal position; and to decide upon an appropriate strategy to resolve any claims which might be levelled against them.
The issue
The issue concerns leasehold houses and flats which have been sold by housebuilders to consumers where the lease includes clauses which provide for ground rent payable by the homeowner to increase at a significant and, crucially, an unexpected rate. The problem is compounded where developers have then sold the freehold interest in the property to another party, who collects those rents and refuses to sell the freehold to the homeowner except in return for a large premium. In many cases, customers had been told outright, or had at least led to believe by developers’ sales staff, that they would be able to purchase the freehold themselves, shortly after their purchase, for a much lower sum.
The result is that many leasehold owners now feel trapped in a home where they are forced to pay higher ground rents than anticipated, cannot afford to buy-out the freehold owner and cannot sell the property on because the issue has come to light and is adversely affecting saleability. Some retail lenders are also refusing to provide mortgages on properties containing onerous ground rent clauses.
Housebuilders are facing a variety of complaints, including: the allegation that, certainly in the case of detached and semi-detached houses, the leasehold structure is unnecessary and has been put in place merely to extract value via ground rent obligations and sale of the freehold to investors; the detail and significance of the ground rent clauses were not sufficiently brought to the attention of customers prior to and at the point of sale; customers were misled about the potential for them to purchase the freehold and/or the freehold was then sold out from under them to private investment companies; customers felt under pressure to appoint solicitors recommended by the developer (and those solicitors did not then properly advise their client); and that excessive administration fees are charged by developers each time a query or complaint is made by disgruntled homeowners.
All of this has led to the issue being debated in Parliament and to housebuilders being denigrated by the all party parliamentary group on leasehold reform and in the press.
What can housebuilders do?
Walker Morris has significant experience in helping developers to respond effectively to consumer protection complaints so as to resolve disputes, prevent and minimise reputational damage, and to maintain and promote good customer and public relations.
If your business has been or might be affected by leasehold ground rent complaints – or indeed any other customer complaint or consumer protection issue – we can help. Depending on the circumstances of the particular case we may be able to absolutely refute any complaints and allegations levelled against you; we may be able to direct complaints to other parties; we will be able to assist you in negotiating suitable compromise agreements or other innovative solutions wherever there is a liability to be resolved; and we can provide information and education to your staff so as to help protect your brand and your business going forward.
Contact us
For further advice on any of the issues raised in this briefing and for advice about our tailored training options for housebuilders and developers on consumer protection issues, please do not hesitate to contact Louise Power, who will be very happy to help.
For information about, and a sample of, our consumer protection eLearning training package for housebuilders and developers, please click here

How will the development sector feel the ‘impact’ from changes proposed to the EIA Regulations?
In 2014, the European Parliament adopted a revised version of the Environmental Impact Assessment (EIA) […]
In 2014, the European Parliament adopted a revised version of the Environmental Impact Assessment (EIA) Directive (2014/52/EU) (the Directive). This came with the requirement for the Directive to be transposed into member states’ domestic legislations by 16 May 2017. Wales and Scotland consulted on the changes relatively quickly, but only from late December 2016 to February 2017 did the Department for Communities and Local Government (DCLG) consult on revising the existing EIA regulations. In light of the responses received, DCLG will take forward some revisions to give effect to the Directive’s key provisions. But what does this mean in practice? What is the likely impact for planning and development proposals? Walker Morris’ Planning & Environment team consider the amendments proposed.
Key Reforms
DCLG has decided to only introduce minor changes, taking the view that the existing regulations already met the Directive’s requirements in many areas.
The revised legislation will comprise the Town and Country Planning (Environmental Impact Assessment) Regulations 2017 and the Infrastructure Planning (Environmental Impact Assessment) Regulations 2017. Only draft regulations have been released to date, but provide an indication of the likely changes. Some amendments are administrative or procedural, having little practical impact. The main elements of the Directive to be adopted in part or full are as follows.
- Addition of a definition of the EIA process: The Directive’s definition of the EIA process is to be included in the regulations. While the definition now includes human health, alongside cultural heritage and landscape for instance, it is not comprehensive. Transport, for instance, is not included. The list is not exclusive or prescriptive though – as Article 5(1) of the Directive and other guidance includes the catch-all provision that information provided should “include at least…a description of the likely significant effects of the project on the environment”. As is already the case, the detail is therefore left to be resolved in respect of each individual screening or scoping exercise.
- Changes to the circumstances when a project can be exempt from the Directive’s requirements: Projects with defence or civil emergency response as their sole purpose may be exempt.
- Introduction of coordinated procedures for projects that are subject to the Directive as well as the Habitats or Wild Birds Directives: There is to be a coordinated approach for projects involving compliance with these three directives. It is not yet clear who will be the coordinating authority. In reality, as EIA is usually already closely coordinated with Habitat Regulations Assessments (where both are required) the impact of this is likely to be minimal.
- Changes to the list of environmental factors to be considered: It seems the emphasis is now on “likely significant effects” on the environment, rather than needing to take into account any ‘less than significant’ effects. Species protected under the Habitats and Wild Birds Directives are clearly now a focus, but not to the exclusion of other species – as the reworded UK regulations require assessment of biodiversity as a whole. Additional matters are also outlined that are to be considered: climate; land and human health; and projects’ vulnerability to major accidents or disasters. While Environmental Statements (ES) could become lengthier as a result, it is hoped the changes will ensure greater focus on significant effects only and more detailed screening.
- Clarification of screening options and alterations to the information requirement: DCLG are retaining the current mandatory 21 days in which local authorities have to make a screening decision, unless an extension is agreed in writing. The maximum allowed by agreement will be 90 days. Additional supporting information is to be provided when a screening application is made. This will mean more work in advance of submitting an EIA, with early assessment and modelling to ensure certainty. However, in the longer-term, such ‘front loading’ may save time and mean a development can avoid EIA altogether – where successful mitigation is demonstrated.
- Alterations to the information required in the ES: Impacts on or arising from human health; natural disasters; the use of natural resources; and quantity of materials are all factors now to be considered. In reality, the ‘new’ elements are already included in most ES’s. DCLG explains this as simply being a renaming of the issues.
- Requirement for ES to be based on a Scoping Opinion (where applicable): If a voluntary scoping has been sought, the subsequent EIA must adhere to the Scoping Opinion (SO) received. If the final EIA does not do so, it will not comply with the Directive. It does seem this may limit the ability to make later scheme changes, at least without the need to undertake fresh or multiple scoping exercises.
- Use of competent experts: EIAs are to be undertaken by those that the competent authority / decision-maker believes have sufficient expertise to ensure the completeness and quality of the ES. The Statement will therefore need to include a statement outlining how the requirement for sufficient expertise has been met. It seems authors will therefore need to be verified as having suitable expertise, or else there could be refusal of an EIA’s suitability by the local authority.
- Greater information to be given in decision notices and as part of decision-making procedures.
- Conflicts of interest to be avoided.
- Monitoring of significant adverse effects: Any grant of development consent should now include, where appropriate, monitoring measures. In reality, planning conditions, legal agreements and other development documentation generally already includes mitigation and monitoring measures. This is therefore not likely to have a substantial impact in practice.
- Introduction of penalties: DCLG has long-held that the existing enforcement provisions are sufficient to meet the Directive’s requirements. No further systems or schemes for penalties have therefore been introduced. Authorities have the current system of stop notices, breach of condition notices and the possibility of court injunctions at their disposal.
Scope
In explaining the changes ‘selected’ from the Directive, DCLG explained: “In transposing the amendments to the Directive, our view at the outset is that there is merit in retaining, as far as practical, the existing approach to environmental impact assessment in England as it is well understood by developers, local planning authorities and others involved in the procedures”. The amendments being made have therefore been referred to as what DCLG “consider to be the minimum changes necessary to the existing regulations in order to bring them into line with the amended Directive” and will “minimise familiarisation costs and business uncertainty”.
It is likely Article 50 and Brexit will be triggered before the Directive’s implementation deadline of 16 May 2017. However, it is unlikely the UK will have actually left the EU by that date, so the Directive will still have to be transposed into domestic legislation.
Practical Points
Screening
The screening process involves the local authority or Secretary of State confirming whether or not an EIA is required. This has been strengthened and clear attempts made to standardise the information required:
- Applicants must submit formal screening reports with their applications, if an opinion is requested prior to the submission of a planning application. If the local authority feels a proposal may be subject to EIA, it can request a screening report from the applicant where one has not been submitted. Submission of screening reports with (or before) an application will thus avoid delays.
- The local authority can now decide that an application is outside the EIA regime if mitigation measures are proposed to avoid significant effects. It is hoped this will encourage applicants to consider mitigation earlier on in the development process.
- The thresholds and types of project that require an EIA have not altered. However, applicants will now need to include information considering the impacts on waste; use of natural resources, risks from major accidents or disasters (including flooding); and cumulative effects. Both construction AND operational phases are to be taken into consideration.
- More robust and detailed explanations are to be given in screening decisions and precise mitigation measures outlined in the cases of negative screening opinions.
- Local authorities have 21 days to give screening opinions and the Secretary of State will have three weeks. Both have up to a possible maximum of 90 days to make a decision, subject to agreement and unless exceptional circumstances apply.
Scoping and ES’s
A proposal that is subject to EIA, can undergo voluntary ‘scoping’ – that is, the authority or Secretary of State confirms the required contents of the ES. Scoping will still be voluntary. However, going forward:
- if a SO is obtained, the ES must now be based on the latest SO
- the ES must be prepared by a competent expert, as judged by the decision-maker, and the Statement should confirm this has been complied with and
- the various new elements noted above must be considered and assessed.
Consultation and Publication
- the ES and any ‘further information’ must be published electronically and on the local authority’s website
- statutory consultees and members of the public are to be allowed 30 days to comment on any environmental information. This is an extension from the current 21-day consultation period.
Decision-Making and Monitoring
In the future, planning permissions must include a greater level of detail and consideration towards potential environmental impacts. Permissions will need to incorporate:
- any conditions that specifically relate to the development’s likely significant environmental effects
- clear conclusions regarding significant environmental effects envisaged and
- if appropriate, measures to monitor a development’s impact, along with potential approaches to mitigation and remediation – from construction, to completion, and beyond.
Comment
One concern is how confident local planning authorities will be in putting the new regulations into practice when they are making screening and scoping decisions after May 2017. For landowners, developers or businesses with EIA applications pending, it may be advisable to submit these as soon as possible. However, proposed developments that are ‘wavering’ on the threshold of needing an EIA may be at an advantage following the changes – particularly the possibility for a development to avoid needing an EIA if appropriate details of proposed mitigation are provided.
Over the years, the EIA process has opened the way for an increase in judicial review challenges to planning permissions, on the basis of EIA procedures not having been robustly or conscientiously followed. With the new regulations introducing more prescriptive requirements, the potential for scrutiny and challenges may increase. Applicants and local authorities therefore need to quickly understand and ‘get on top’ of the changes to avoid the risk of delays and successful challenges. In the main though, it seems unlikely the new regulations will dramatically alter the way EIA works in practice.

Fast Drinks, first authority: 1954 Act protection, subleases and renewal requests
Ordinarily derivative leases are contracted out of the security of tenure provisions in the Landlord […]
Ordinarily derivative leases are contracted out of the security of tenure provisions in the Landlord and Tenant Act 1954. David Manda considers an unusual case in which a headlease was terminated by a contractual break, but a sub-undertenant retained a statutory continuation tenancy and a right to request a renewal lease.
Facts
The sub-undertenant, Fast Drinks, served request for a new tenancy on its competent landlord and the freeholder, Cetyl, on 14 July 2014 pursuant to section 26 of the Landlord and Tenant Act 1954 (LTA 1954) [1]. The section 26 request was dated 12 July 2014. The date specified as the date for the commencement of the new tenancy was 1 July 2015.
Cetyl’s headlease lease terminated on 17 July 2014 following exercise of a contractual break right. (Cetyl had made Fast Drinks aware of exercise of the contractual break in the headlease.)
Termination of the headlease had the effect at common law of automatically terminating all sub-interests carved out of that lease, including Fast Drinks’ contractual sub-undertenancy. However, under the 1954 Act, Fast Drinks’ statutory tenancy continued following the date of the headlease’s termination.
Was Fast Drinks’ section 26 request for a new tenancy valid?
To decide, the court had to ascertain what was the earliest start-date for a renewal tenancy that could be specified in the tenant’s section 26 request in circumstances where a landlord’s break had been exercised.
Law
Section 26(2) of Landlord and Tenant Act 1954 states:
“A tenant’s request for a new tenancy shall be for a tenancy beginning with such date, not more than 12 nor less than 6 months after the making of the request as may be specified therein:
Provided that the said date shall not be earlier than the date on which, apart from this Act, the current tenancy would come to an end by effluxion of time or could be brought to an end by notice to quit given by the tenant.”
Argument put forward by Cetyl
Cetyl argued that, under the proviso in section 26, the request for a new tenancy was not valid because the date of commencement requested, being 1 July 2015, was prior to the date on which the relevant tenancy would have come to an end but for the provisions of LTA 1954. (The original contractual term of the sub-underlease ended on 15 January 2016. Cetyl claimed that this meant that 16 January 2016 was the earliest date on which a new tenancy could begin.)
Argument put forward by Fast Drinks
Fast Drinks countered, however, that the tenancy would have come to an end on 17 July 2014 were it not for the operation of the 1954 Act, as that was the termination date by operation of law following the break of the headlease. At common law, once a fixed-term tenancy has been terminated before the date on which it would have come to an end by the effluxion of time, that tenancy can no longer end by the effluxion of time. There is no longer any such date; section 26(2) would not apply; and so it followed that the section 26 request was valid.
Decision
The court agreed with Fast Drinks that the section 26 request was valid. The court disagreed with Cetyl’s submission that it is necessary to find an effluxion date in all cases. It held that, when considering the validity of a section 26 request, it is necessary to consider the position as at the date of the request (which, in the present case, was 14 July 2014).
The judgment states that: “…the wording, “apart from this Act” in the proviso envisaged a situation where what – at the time of the request – prevents the tenancy coming to an end by effluxion of time is the operation of the Act and in particular the continuation effect of section 24. In contrast, on the facts of the present case, what prevented the tenancy coming to an end by effluxion of time was the respondent’s prior exercise of the contractual break right under the head lease and the consequential automatic ending of the subleases.”
In cases where the contractual tenancy has expired, a section 26 request is valid if made during a continuation tenancy. In such a case, the start date would never be earlier than the effluxion date of the contractual tenancy and so the problem addressed by section 26(2) LTA 1954 would never arise. The court found that section 26(2) was there to cover the scenario where, but for the proviso, it might otherwise be possible to have a start date for the claimed new tenancy earlier than the effluxion date of the current tenancy.
There can, therefore, be circumstances where the proviso simply does not apply at all.
What can we take from the case?
The present case had unusual facts and addressed a scenario which has not been considered by the courts before. It is normally a condition of landlord’s consent to underletting that any underlease is contracted out of the 1954 Act. Where this is the case all underleases and sub-underleases would simply fall away if a break clause is operated further up the chain in a superior lease.
This case is a salutary illustration of what can happen if derivative leases are not contracted-out of the LTA 1954: landlords can find that their attempts to exercise break options to recover possession can be frustrated by the award of statutory renewal underleases.
Landlords and tenants alike should therefore ensure that they are aware, and understand the implications, of any break clauses and any security of tenure protection that may exist anywhere within a chain of leasehold interests.
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[1] The LTA 1954 confers security of tenure on tenants in occupation of premises for the purposes of their business. That means that, following termination of a contractual tenancy, a statutory tenancy and a right to request a renewal lease continue unless and until brought to an end by one of the means specifically permitted by the LTA 1954.

Streamlining the protection of Great Crested Newts: What does this mean for developers?
After much delay, the Government launched its housing white paper (“HWP”) entitled Fixing Our Broken […]
After much delay, the Government launched its housing white paper (“HWP”) entitled Fixing Our Broken Housing Market in February 2017. The HWP details the Government’s vision for increasing the supply of new homes and increasing delivery to deal with the country’s ongoing housing crisis. Whilst public reception to the HWP will always attract criticism, there was one thing that came out of the HWP likely to provide welcome relief to housing developers – the potential change in the handling of Great Crested Newts.
Great Crested Newts, together with their eggs, breeding sites and resting places, are a protected species. They have full legal protection under UK and European law, making it an offence to kill, injure, capture, disturb or sell them, or to damage or destroy their habitats. Despite being endangered in some parts of Europe, however, Great Crested Newts are fairly common in large parts of England and that has led some to deem their protection as over-zealous and unnecessary red tape.
Current Licensing Scheme
Currently, if developers wish to develop land which is impacted by the presence of Great Crested Newts, they have to go through the onerous licensing process for each site affected. As described in the HWP, this process requires developers to commission site surveys, put in place mitigation measures and, after planning permission is granted, obtain a licence from Natural England. The current licensing process has been described in the HWP to be a “significant impediment to timely housing delivery“, and has caused many-a headache for developers as it can add considerable costs, delays and uncertainty to the progression of development.
Streamlined Licensing Scheme
The HWP suggests adopting a new, strategic approach to the habitat management of protected species, such as that piloted by Natural England and Woking Borough Council. The new scheme streamlines the licensing system for managing Great Crested Newts by replacing site-by-site licensing with a new system of plan licensing; with surveys and habitat compensation undertaken at the district level by Natural England, together with the local authority. Developers would then have the option to buy into the mitigation plan at local authority level, rather than undertaking costly and timely individual licensing for each development site.
What does this mean for housing developers?
Until the streamlined licensing scheme is rolled out, the current licensing scheme will remain in place and so, for the time being, housing developers should apply for a licence in the usual way. However, it is worth enquiring with your local authority to determine whether they have an appetite for rolling out the streamlined scheme sooner rather than later.
Although no definite timelines are given for the introduction of the scheme, the Government has made clear that they are committed to building more homes, and doing so as quickly as possible. The introduction of the streamlined licensing scheme will certainly make it easier for housing developers to make progress on some sites that could otherwise be sitting dormant for years.

Microgeneration on commercial property: Legal and practical matters for landowners
There has been a raft of legislation targeted at commercial property owners over recent years […]
There has been a raft of legislation targeted at commercial property owners over recent years aimed at tackling climate change and helping the UK to meet greenhouse gas emission reduction targets. Most of the energy used in properties is for heating rooms and water and is usually sourced from gas-fired boilers, which accounts for approximately 20% of the UK’s CO2 emissions. Commercial real estate is therefore often seen as an area in which changes could result in real progress towards meeting environmental targets.
Next ‘generation’ energy efficiency
The UK has therefore seen a rise in ‘microgeneration’ – that is, the small-scale production of electricity and/or heat from a low carbon source. This is a way of generating electricity and heat for a single site or local grouping of properties, providing greater efficiency as less energy is lost as heat during transport over long distances, as well as reducing carbon dioxide emissions.
Microgeneration technologies include micro wind turbines, solar panels, ground source heat pumps and biomass boilers. The work involved in setting up these systems often has the benefit of permitted development rights (although specific planning advice should be taken), and most are exempt from the requirement to hold an electricity supply licence. Surplus energy can also be sold back to the grid, depending on the availability of a commercial arrangement in that regard, or stored in batteries for future use.
There can be significant benefits for the property owner in utilising microgeneration, both in terms of reducing long term energy bills and complying with the evolving regulatory framework, however there is inevitably a substantial upfront capital cost and there are other legal and practical matters to consider.
Cost and practical considerations
In order to try and entice property owners to take advantage of microgeneration, the Government has offered financial incentives for such small-scale renewable electricity and heat generation in the form of the Feed In Tariffs (FITs) and the Renewable Heat Incentive (RHI). Unfortunately the future of these incentives is uncertain and property owners can no longer necessarily rely on the supported income which was previously envisaged to alleviate concerns about the increased capital outlay required to install the technology.
Nevertheless landowners may therefore seek (or, increasingly, be approached by third parties offering to install) a microgeneration installation at their property, allowing the owner to take the benefit of reduced energy costs and regulatory compliance, usually while the third party takes the benefit of the subsidy entitlements as well as payment for the energy generated. In simple terms this seems like a fair commercial deal, however integrating third party apparatus with something as sensitive as your building’s essential service media requires careful consideration. For one thing, taking energy through private conduits also precludes you from getting the benefits of a competitive energy market and could leave you exposed to price changes in the future. It is therefore important to ensure that the documentation governing the relationship and the asset ownership and liability is clear and fair.
Key issues and advice
If you are contemplating installing a microgeneration system on any commercial real estate, it is worth bearing the following issues and advice in mind.
- Planning and title matters – Many of the requirements that a landowner-landlord would normally expect of a tenant in terms of ensuring that appropriate planning and other consents are acquired in advance of installation and compliance with title matters will likely be omitted or reversed to the landlord on a microgeneration scheme. As the deal is centred on the installation being ultimately for the benefit of the landlord then there is some rationale behind this approach. However the termination provisions or consequences of planning/title issues should be carefully reviewed to ensure what level of loss the property owner is expected to cover in the event that completion of the installation cannot occur or the kit is required to stop generating. These are issues which the landowner may be more comfortable to accept if it were to become the ultimate owner of the kit upon any such termination or breach.
- Responsibility for damage, repairs and maintenance – These would traditionally be tenant responsibilities but the operator may be looking to pass responsibility to the property owner to remove liability and running costs going forward. This point therefore needs to be part of the commercial deal and carefully weighed up against the upfront cost. In any event, the actual installation will need to have been carried out by an accredited engineer and the property owner should seek the usual guarantees and warranties on manufacture and workmanship.
- Use of services – While the whole concept of microgeneration machinery is to provide energy to the building, most kit requires the use of some input services as well. If the landowner is expected to provide, say, telecoms and water supply, then careful consideration should be given as to what extent this usage should remain the responsibility of the owner and to what extent any such usage should be offset from the cost of the energy received.
- Obligation to generate – In an ideal scenario, the operator ought to be under some obligation to actually generate, although such a term will likely be resisted by an operator. Usage by the property should also be the primary goal and any offtake or storage should be for the benefit of the property in the first instance. There is a lot of value in battery storage and this may well impact on the commercial deal.
- Indemnity/guarantee of subsidy income – A property owner should be wary of a scheme which obliges it to indemnify the installer for the payments it is expecting to receive under the incentives scheme, particularly given the volatile and ever-changing nature of the incentives landscape and the fact that this is outside the control of the property owner. Such protection should also not apply where the benefits are lost due to any default of the operator.
- Decommissioning and reinstatement – Landowners will likely find that the term of the microgeneration licence or lease offered is 20 years, which corresponds with the RHI payment lifetime. After the expiry of this period there is less value in the installation for the operator, who may then be happy to walk away. Landowners and their legal representatives should therefore check the expected life expectancy of the kit and, if it in excess of 20 years, should ensure that there is scope for ownership of the installation to transfer, so that the landowner can continue to benefit from energy efficiency measures. If the machinery is likely to be redundant, however, then landowners may be well advised to agree with the operator who is to be responsible for the cost of decommissioning and reinstatement of the site and considering, in particular, the integration of the plant with the heating and electricity service media throughout the building.
- External funding – Where an installation project is being externally funded, the installer may seek step-in rights for its funder. These need to be carefully considered to ensure that the step-in would not supersede any rights of the property owner to the extent that generation could be stopped and the agreement terminated, particularly if the property owner has accepted any liability for the operator’s subsidy losses.
- Insurance – A key element of eligibility for RHI is that the applicant owns the installation. The lease/licence should therefore be clear on ownership. This may preclude the landowner from being able to insure the kit, in which case the operator could be the only party able to do so. Provisions would therefore be required to oblige the operator to claim on such policy ad spend the proceeds on repair in the event of damage or destruction by an insured risk.
Ultimately it will always be sensible for any landowner considering microgeneration to carefully weigh up the commercial benefits of engaging a third party to supply and operate the equipment against simply buying in the equipment and operating it itself.

Interpretation of service charge clauses: Still a common cause of dispute
Walker Morris has reported previously on the leading case on contractual interpretation, Arnold v Britton […]
Walker Morris has reported previously on the leading case on contractual interpretation, Arnold v Britton [1]. That case was concerned with a service charge mechanism which, when interpreted in accordance with correct legal principles, resulted in an unusual and un-commercial outcome. The case, and the interpretation of contentious service charge provisions, has hit the legal headlines again, but this time in a case where errors and omissions in the lease contract had to be resolved.
The background to First Property Services Ltd v Ahmet [2] is relevant. In 1999 a landowner and housebuilder (Laing) had agreed to cooperate with a neighbouring owner and developer (the Faulkners) in relation to the management of an overall estate which comprised 218 dwellings constructed by Laing and 13 dwellings constructed by the Faulkners. In 2001 Mrs Ahmet bought a long lease of one of the Laing properties believing that estate costs, to which she was obliged to contribute pursuant to her lease, would be shared between all 231 homes. However, Laing and the Faulkners did not then complete their proposed estate management agreement and Laing residents, including Mrs Ahmet, were charged 1/218th of all maintenance charges, rather than 1/231th. Mrs Ahment applied [3] for a determination of liability to pay, and reasonableness of, services charges on the basis that it was unreasonable for Laing residents to pay all estate costs when the Faulkner residents, who also enjoyed the communal facilities, paid no contribution at all.
The service charge clauses in the lease purported to give a formula by which Mrs Ahmet’s proportionate contribution to estate costs should be calculated. However, the relevant clauses contained various terms which were not defined and did not make legal sense. Focusing on what it decided were conveyancing mistakes, the First-tier Tribunal (Property Chamber) construed the lease in Mrs Ahmet’s favour and determined that her liability should be 1/231th only. The management company appealed.
Upper Tribunal applies Arnold v Britton
On appeal, the Upper Tribunal (Lands Chamber) (UT) referred to the following principles of contractual interpretation, which were set out in Arnold v Britton.
- The starting point is the wording of the [lease] contract itself
- an objective test – that of what the reasonable business person would understand the clause to mean – is applied to ascertain the parties’ intention at the time the contract was entered into
- commercial common sense can be a consideration, but:
- it should not be invoked to undermine the ordinary and natural meaning of the wording used
- it is not for the court to depart from clear contractual wording even where that represents a bad bargain for any party
- it cannot be invoked ‘after the fact’ – it is only relevant to ascertaining how matters would or could have been perceived when the contract was made
- where there are two or more tenable interpretations, the most commercially sensible option will be preferred
- the less clear the wording is, the more readily a court will depart from their natural meaning
- if a subsequent event occurs which, judging from the wording of the [lease] contract itself, plainly was not intended or contemplated by the parties, the court may depart from the wording and
- In relation to service charge provisions specifically, there is no general rule that these should be interpreted restrictively. Service charge clauses are to be determined in accordance with general principles of contractual interpretation.
Applying these principles to Mrs Ahmet’s lease and considering the background and facts known to the parties at the time it was completed, the UT noted errors in the drafting and read the relevant clauses in what it considered was the only way they could sensibly be interpreted [4]. That included a finding that the “Development” referred to in the lease formula by reference to which Mrs Ahmet’s service charge liability was calculated did not include the Faulkner site. The UT therefore allowed the appeal and confirmed that Mrs Ahmet’s service charge liability was 1/218th, but excluding any costs relating solely to the Faulkner properties.
WM Comment
Arnold v Britton provides the principles to be applied to determine contractual interpretation disputes in the leasehold context. The correct approach is to start with the ordinary, natural meaning of the wording used and then to make an objective determination, taking into consideration the facts and matters known to the parties at the time, as to what the parties intended the contract to say. If there is real uncertainty, commercial common sense may be invoked, but the court will not readily depart from contractual wording to correct a bad bargain. In relation to services charges in particular, the outcome in First Property Services Ltd v Ahmet demonstrates that there are no special rules for leasehold and service charge clauses will not necessarily be interpreted restrictively in favour of the tenant.
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[1] [2015] UKSC 36
[2] [2017] UKUT 0036 (LC)
[3] pursuant to section 27 of the Landlord and Tenant Act 1985
[4] Ibid. para 38