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Real Estate Matters – September 2018

Real Estate Matters – September 2018

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Overage and contractual interpretation: Another recent development dispute

Yet another overage dispute has hit the legal headlines. Will Cousins and Martin McKeague explain […]

Yet another overage dispute has hit the legal headlines. Will Cousins and Martin McKeague explain and offer practical advice.

Common cause of development dispute

In recent years contractual interpretation (in particular the question as to whether a strict, literal approach to interpreting contractual language, or a more purposive/commercial common sense approach is to be preferred) has prompted several high profile disputes. In recent months there has been a flurry of development disputes, with a number involving the interpretation and operation of overage agreements [1].

In a developer/housebuilder market that is presently strong, many clients have the funds and appetite to renegotiate or litigate options, conditional contracts, promotion agreements and the like. The desire to ‘make hay’ while the going is good, progressing as many developments as possible, also involves actively pursuing claims where commercially justifiable. The longevity of many development agreements and JV arrangements can give rise to disputes, particularly if circumstances and market conditions change. In the case of, London & Ilford Ltd v Sovereign Property Holdings Ltd [2], the Court of Appeal has again considered the approach to contractual interpretation.

Approach to contractual interpretation

The approach to contractual interpretation can now be summarised as follows:

The courts will strive to uphold the clear wording of the clause wherever possible, applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a ‘bad’ bargain for any party [3].
The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their agreement when read in the context of the factual background known or reasonably available to the parties at the time of the agreement [4].
However, where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense [5].
Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy [6].

In short, a literal approach to contractual interpretation is to be preferred over a more purposive approach wherever possible. However, there may sometimes be provisions in even a detailed, professionally drawn contract which lack clarity. A court interpreting such provisions may take into account the factual matrix to ascertain the objective meaning.

London & Ilford v Sovereign Property Holdings

In this case the overage agreement provided that the developer would pay £750,000 to the landowner upon receipt of prior approval from the local planning authority for the development of 60 residential units. “Development” was defined as as “…change of use… to a use falling within Class C3 (dwellinghouses)” and “residential units” were defined as “…dwellings to be comprised in a development…for residential use for sale or lettings”.

Planning approval was obtained, but the 60 units could not be lawfully built because it transpired that would contravene buildings regulations.

The developer argued, in reliance on the wording “dwellings… for residential use for sale or lettings”, that the purpose of the overage agreement was to provide a commercially viable benefit in exchange for the £750,000 payment, and that, in light of the building regulations issue, that benefit had not been provided and the payment was not due. The Court of Appeal disagreed.

Finding for the landowner, the Court of Appeal confirmed that the regime for planning consent was entirely separate from the building regulations regime. There was no mention in the overage agreement of compliance with building regulations or any other such requirement and it had been entered into between two sophisticated developers who were professionally advised. The developer’s attempt to rely on a commercially-focused, purposive approach to interpretation of the overage provisions was “impossibly weak”. The developer was therefore left having to pay out £750,000 and unable to develop the scheme as planned.

Practical advice

When entering into overage arrangements, parties and their lawyers should consider very carefully what exactly will trigger overage payments and they should spell that out very precisely. Ideally, provisions should include clear and specific timescales within which detailed conditions are to be met; obligations are to arise; and payments are to be made. Consideration should be given as to whether there should be included formulas for ascertaining any values and longstop dates and/or mechanisms for enforcing obligations and for resolving disputes. This case also specifically highlights that developers may prefer to ensure that payments do not fall due until, say, implementation of a planning permission or disposal of the completed units; and that developers’ conveyancers should, depending on the extent of their instructions/retainer, be careful to ensure that they draft to cover every eventuality if they are to avoid potential professional negligence liability.

Please contact Will or Martin for any further advice or information about overage agreements and development disputes.

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[1] Please see our earlier article for more information about overage agreements and recent key cases.
[2] [2018] EWCA Civ 1618
[3] Arnold v Britton [2015] UKSC 36
[4] Wood v Capita Insurance Services Ltd [2017] UKSC 24
[5] Rainy Sky SA v Kookmin Bank [2011] UKSC 50

Reasonable refusal: When can a landlord refuse a tenant’s application for planning permission?

Nick Cannon offers his practical insight following the recent Court of Appeal judgment in Rotrest […]

Nick Cannon offers his practical insight following the recent Court of Appeal judgment in Rotrest Nominees v Hautford Ltd [1], on the Leasehold Reform Act 1967 (LRA) and its effect on consent and user covenants in modern leases.

Case

The tenant had a 100 year lease of a building on Soho, granted in 1986. The building was mixed use for planning purposes including retail, office and residential elements (on the top two floors only). Crucially, the lease permitted residential use anywhere in the building.

The tenant wanted to convert the whole of the building to residential use and, eventually, to acquire the freehold by enfranchisement under the LRA. However, only the top floors of the building had planning permission for residential use. The tenant therefore needed to apply to the local authority for planning permission for change of use for the rest of the building. The lease stipulated that the tenant would need the consent of the landlord in order to make an application for planning permission, such consent not to be unreasonably withheld.

No planning permission or landlord’s consent was required for the works so the tenant refurbished the building. The tenant then applied to the landlord for consent to apply for planning permission. The landlord promptly refused on the grounds that full residential use may facilitate a claim for the freehold under the LRA.

Court of Appeal decision

Historically, the courts have found refusal of consent for this reason to be reasonable. However, in these past cases, the leases in question were granted prior to the introduction of the LRA. In this case the court noted that the lease was granted when the LRA was in force and both parties had agreed a lease that permitted residential use throughout. The court considered that the landlord must therefore have accepted the risk of the tenant converting the whole of the property to residential. To argue that the consent clause could restrict the use of the property would be a “re-writing” of the user clause. The court therefore determined that the landlord refusing consent on this basis was unreasonable.

Practical insights

Master of the Rolls Sir Terrance Etherton said the court needed to “ascertain the purpose of the covenant intended by the original parties to the lease“. As the covenant expressly authorised residential use throughout the building, it was not designed to prevent the remainder of the building being converted to residential use, even if the same would lead to a claim under the LRA.
For mixed use properties, covenants stipulating the permitted uses of the property must be carefully drafted so as not to imply that the landlord automatically consents to residential use anywhere in the property if this is not the intention of the parties. If this is the intention, landlords need to be aware that such a covenant may allow the tenant to bring a claim for the freehold under the LRA.
This is the first reported post-LRA case in which the court has considered the reasonableness of a landlord refusing consent to a tenant’s request to apply for planning permission. Clearly, a risk of enfranchisement will not automatically be considered a reasonable ground for refusing consent.

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[1] [2018] EWCA Civ 765

Disability discrimination and enforcement of possession: Court of Appeal clarity for landlords

Karl Anders explains why Paragon Asra Housing Ltd v James Neville [1] provides welcome clarity […]

Karl Anders explains why Paragon Asra Housing Ltd v James Neville [1] provides welcome clarity for landlords dealing with disabled tenants.

Court of Appeal ends long-standing confusion

The Court of Appeal has held that, where a court has decided that making a possession order against a disabled tenant would be proportionate and not discriminatory [2], that question does not have to be considered again when it comes to enforcement of the order, unless there has been a relevant material change in circumstances.

The Court of Appeal has also confirmed that, in reaching its decision on proportionality when assessing whether to make a possession order, it is sufficient for a court to have applied the Akerman-Livingstone proportionality test [3] in substance, even if the four-stage structured approach referred to in that case has not been specifically followed. (In substance, that Akerman-Livingstone proportionality test asks: is the eviction sufficiently important to justify limiting the tenant’s fundamental rights; and is the requested possession order rationally connected to, and no more than necessary to achieve that justified objective?)

WM Comment

Landlords dealing with disabled tenants – including those with mental health issues and behavioural difficulties (as was the case here) – will be relieved to note the Court of Appeal’s practical approach to the court’s initial proportionality assessment; and also to what is required at the enforcement stage in the absence of any material change. The enforcement aspect of the decision should also reduce costs and the administrative burden on landlords who seek to enforce a right to possession as a means of balancing the needs of one disabled tenant with those of other tenants and visitors to whom they also have a responsibility in the locality.

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[1] [2018] EWCA Civ 1712
[2] In accordance with section 15 Equality Act 2010
[3] Akerman-Livingstone v Aster Communities Ltd [2015] UKSC 15; and see our earlier briefing.

Strict approach to service of notice

Ropemaker Properties v Bella Italia [1] is the latest in a flurry of cases [2] […]

Ropemaker Properties v Bella Italia [1] is the latest in a flurry of cases [2] which have highlighted traps for the unwary when it comes to serving legal notices. In an uncertain economic climate parties often want to escape contracts or leases that are no longer viable, or they want to avail themselves of opportunities to bring claims under warranties or indemnities where contracts and timescales allow. In recent months we have seen an increase in cases where parties have tried to do all of these things, but have fallen foul of service requirements. Specialist Real Estate Litigator Ruth Ormrod shares her top tips to mitigate risk.

Invalid notice to terminate agreement for lease

In this case the tenant had, in 2014, entered into an agreement for lease in relation to a retail unit in a proposed new development in Colchester. In May 2017, however, the tenant sought to terminate the agreement by sending written notice to the landlord. Unfortunately for the tenant, the relevant clause in the agreement for lease also required service on the guarantor for any such notice to be valid. The High Court held that it was irrelevant: that the tenant and guarantor were group companies; that the relevant requirements had been complied with in substance (if not in form) by virtue of the fact that intention to terminate the agreement for lease had been noted in the board minutes of the tenant’s and guarantor’s parent company; and that the additional service requirement had no apparent purpose or commercial benefit. In doing so the court insisted upon the well-established strict approach to service of notices, emphasising that service formalities must be complied with absolutely precisely, even if that ultimately means that a notice is found to be invalid on a very technical, even unattractive, basis. The tenant therefore remained bound to complete the lease, despite that no longer being its preferred commercial course.

Top tips for effective notices

A good tip, when it comes to the service of any legal notice, is to remember the mantra: who, when and how?

Immediately a party considers serving (or, conversely, challenging) a notice, it should ascertain exactly:

Who

Who is required to give notice and on whom the notice should be served. (Consider the party/counter-party itself? Legal representatives? Other agents? Have there been any assignments, novations or variations which change the position? What are the current names and addresses/contract arrangements for the relevant parties/agents?)

When

When the notice should be served, including whether there are any long-stop dates for service or for completion of any other conditional/procedural steps (such as commencing any follow-on court claims, or the like).

It is also important to bear in mind, when calculating dates, that there may be different dates to ascertain. For example, depending on the nature and wording of the notice clause, you may need to know the date on which a notice actually has to take effect; the date by which it has to be served on (i.e. received by) the receiving party; and/or the date by which it has to be issued.

All of those dates can be influenced by other factors (such as the required method of valid service; how long that will take; whether the contract designates when service will take place or whether the contract relies on external deeming provisions; whether there are any weekends/bank holidays to take into account and/or whether only working/business days count (which can differ across different countries); and so on.

How

The ‘how‘ covers: the specific content of the notice; the form of the notice and any strict procedural requirements (in Mannai [3], the leading case, Lord Hoffmann famously said: “if the [termination] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper“); and the fact that service must be effected in accordance with any contractually specified method. (The latter can, in turn, can lead to problems if notification obligations within contracts are drafted in isolation from, or inconsistently with, more general service clauses and other relevant contractual provisions. For example, what happens if a party gives a PO box as its service address, but the contract specifies service by recorded delivery? (You cannot effect recorded delivery on a PO box) What happens if the contract specifies that the service address is a party’s registered office, but the agreement is assigned to an individual? (Individuals do not have registered offices).)

WM Comment

The best advice is to leave the service (or, again conversely, the acceptance) of any legal notice entirely to the experts. The consequences of getting it wrong can be too costly to gamble. Instructing specialist legal representatives to take on the risk for you reduces the chance of any problems arising.

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[1] [2018] EWHC 1002 (Ch)
[2] See our related articles for cases involving lease break notices and warranty claim notices, for example.
[3] Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, HL

Advice for developers following Court of Appeal decision on Assets of Community Value

The Court of Appeal has considered the Assets of Community Value (ACV) regime for the […]

The Court of Appeal has considered the Assets of Community Value (ACV) regime for the first time. Andrew Beck reviews Banner Homes v St Albans City and District Council (1) and Verulam Residents’ Association (2) [1] and offers some practical advice for developers.

The ACV regime

The Localism Act 2011 (the Act) and the Assets of Community Value (England) Regulations 2012 (the Regulations) allow local communities to bid for land and facilities in their area, with the aim being to protect assets deemed to be of local value and importance. The regime can be summarised as follows:

A local community group can nominate an asset.
Provided the nominated asset satisfies the ACV definition, it should be included on the list of ACVs maintained by the local authority. It is open for the landowner to request a review of the listing at this stage, provided it acts within the statutory time-frame.
The threshold for listing is relatively low. The local authority is simply required to have a realistic belief that (1) the building or land’s main use furthers the local community’s social interests or wellbeing; and (2) it is realistic to think this use will continue. The decision is therefore rather subjective.
Once the ACV is listed, the next ‘trigger’ arises if/when the owner decides to either sell the freehold or grant or assign the lease (that is, if the lease is granted for at least 25 years). Then a moratorium will apply [2].
During an initial six-week interim moratorium (the Initial Moratorium), the qualifying community group has the opportunity to express an interest in bidding for the ACV. If it does so, a six-month moratorium comes into play (which includes the Initial Moratorium) (the Moratorium). The Moratorium gives the group the opportunity to compile a bid to acquire the ACV.
The owner is under no obligation to sell or utilise the ACV in any particular way and can also reject the group’s bid if desired. Once the Moratorium has elapsed, the owner can sell to whomever they chose.
However if the land or facility is disposed of without compliance with the Act and Regulations, the transaction will be deemed invalid.
Since the Act and the Regulations came into force, a wide variety of properties have been listed, ranging from car parks, hospitals, pubs, football grounds, school playing fields, bowling clubs and village halls to nature reserves, parks and, as in the recent Banner Homes case, open land.

Court of Appeal case

Banner Homes owned some undeveloped land which was bisected by public footpaths. The land was used by the public for various recreational activities. That use, being without the landowner’s permission, constituted a trespass. When the land was listed as an ACV, Banner contended that the “actual use” for the community’s social interests or wellbeing as defined in section 88 of the Act, must refer to lawful use. (Otherwise, Banner argued, the regime would reward the unlawful actions of the community). The listing decision was appealed to the First-tier Tribunal, the Upper Tribunal and ultimately to the Court of Appeal. The Court of Appeal allowed the listing to stand, explaining that Banner was asking the court to read into section 88 a “bright line rule which is neither specified in the section nor appropriate“. The court was unwilling to do that, as to impose such a rule would mean that any unlawfulness, no matter how slight, could prevent use from qualifying, and could thereby undermine the whole ACV regime.

WM Comment and practical advice

This case is a useful reminder that, whilst the intentions behind the ACV legislation are no doubt noble, community groups can utilise the regime to put landowners and developers to additional cost and delay. Apart from the obvious financial and scheduling frustrations that can follow the imposition of the Moratorium, ACV listings can be treated as a material consideration when it comes to future planning applications and they may therefore indirectly affect or inhibit development. The case is also a salutary warning that uncontrolled open land, in particular, is at risk. The Court of Appeal noted that, as a consequence of the listing of this land, Banner Homes erected fences, thereby preventing public access to its land from the footpaths. Other landowners/developers may be well-advised to do the same in order to minimise the risk of ACV nominations and to protect development potential and value.

ACV listings are just one of several risks or potential impediments to development to which uncontrolled open land is vulnerable. Others include town and village green registrations [3], trespass, adverse possession and the establishment of new public rights of way. In the majority of cases, landowners/developers will be able to take some very straightforward, pre-emptive steps to guard against these risks. However the most appropriate solution will differ on a case-by-case basis, depending on a variety of factors including the characteristics of the land itself and the landowner/developer’s plans.

Please contact Walker Morris partner Andrew Beck if you would like any strategic advice or assistance in relation to open land risk management, or if any ACV, TVG or other application is already threatening proposed development on your land.

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[1] [2018] EWCA Civ 1187
[2] The asset already has to be listed before the disposal begins. If there is subsequent listing as an ACV, the moratorium will not ‘bite’.
[3] See our earlier briefings for further information and advice.

Contacts

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

Martin McKeague
Partner
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Karl Anders - Partner, Housing Litigation & Management Team at Walker Morris LLP.

Karl Anders
Partner
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