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Real Estate Matters – Winter 2018/19

Real Estate Matters – Winter 2018/19

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Anti-competitive lease terms – Heathrow’s £1.6 million Parking fine

The Competition and Markets Authority (CMA) has used its enforcement powers for the first time […]

The Competition and Markets Authority (CMA) has used its enforcement powers for the first time in relation to a land agreement restriction, and has fined Heathrow Airport £1.6 million for a breach of competition law. Walker Morris’, Nick Cannon, explains.

Background

Land agreements are broadly defined in the former Office of Fair Trading guidelines (which are relevant for these purposes) as ‘agreements which create, alter, transfer or terminate an interest in land’.

Prior to April 2011, restrictions contained in land agreements were excluded from competition law rules because of the Land Agreements Exclusion Order 2004. However that exclusion was revoked in April 2011, after a Competition Commission investigation gave rise to concern that grocery retailers were using restrictive covenants to prevent land being developed as competing grocery stores. Since that revocation, certain land agreements can be deemed to restrict competition, contrary to UK law, and was expected to arise in scenarios where, for example:

the parties to the agreement are competitors and the restriction is to share the market between them; and
the restriction prevents or limits entry in a market where at least one of the parties possesses market power.

Heathrow Airport case

In 2006 Heathrow Airport Limited acquired the head lease for the Sofitel Hotel at Heathrow Terminal 5. This lease concerned Heathrow Airport Limited (and its parent Heathrow Airport Holdings Ltd) and Heathrow T5 Limited (and its parent Arora Holdings Ltd). The lease contained tenant’s covenants prohibiting Heathrow T5 Limited from charging non-guests of the Sofitel lower parking rates than those charged at Heathrow Airport’s car parks.

The CMA began investigating this in December 2017. Subsequently both Heathrow Airport Limited and Heathrow T5 Limited admitted breaching prohibition 1 of the Competition Act 1998. On 18 September 2018 it was announced that the parties had agreed a settlement in which Heathrow Airport were to pay a fine of £1.6 million. (This fine included a 20% settlement reduction.)

Heathrow T5 (and the Arora Group) were granted immunity for highlighting the breach under the CMA’s leniency programme, which encourages companies who may be involved in wrong-doing to come forward.

On 23 November 2018 the CMA published a non-confidential version of its settlement decision which sets out its findings. The decision notes that whilst Heathrow Airport did not actively enforce the restriction, proof of implementation is not necessary for a finding that the Chapter I prohibition was breached.

This decision is the first time that the CMA has used its enforcement powers in relation to a land agreement restriction. The CMA has issued additional guidance for businesses and has sent warnings to other airports and hotel operators in relation to similar restrictions.

WM Comment

The decision serves as a keen reminder that restrictions contained in property documents can constitute competition law infringements. Companies are required to self-assess any potential restrictions in new or existing land agreements to ensure that no documents contain breaches of competition law. Failure to do so may result in significant penalties, and such penalties will be based on the amount of time that the restriction has been in effect, regardless of how much later the CMA decide to investigate. There are, however, some instances in which certain land agreements might still be exempt from competition law prohibitions. Businesses would therefore be well-advised to seek specialist advice in connection with both the drafting of any new agreements and when conducting its land agreement review/assessment.

Landlord insurance obligations: High Court limits protection for tenants

The High Court has ruled that the extent of a landlord’s obligation to obtain insurance […]

The High Court has ruled that the extent of a landlord’s obligation to obtain insurance for the benefit of itself and a tenant will depend on the construction of a lease. In a recent case, the obligation placed on a landlord to protect its tenant’s interests by obtaining insurance for its benefit was found to only extend to areas of the building that the tenant occupied under its lease. Jeremy Moore and Will Cousins explain the significance of this decision.

Tenant responsibility pre and post Prezzo

Clauses obliging landlords to insure property are commonplace in commercial leases. It follows that, should a rented property be damaged or destroyed by an ‘insured risk’ (defined in the lease as an event that the landlord’s insurance specifically protects against), the landlord is further obliged to reinstate the premises using insurance monies received.

Since the 1980’s, these closely related obligations have worked favourably for tenants. In Mark Rowlands v Berni Inns Ltd [1], the Court of Appeal ruled that, where insurance is obtained for the benefit of both landlord and tenant, any loss suffered as a result of an insured risk must be recovered from the insurance. This barred any claim against a tenant in negligence. However, earlier this year, this wide form of tenant protection appears to have been tightened…

In Prezzo Limited v High Point Estates Limited [2], the tenant (Prezzo) sought a declaration that it was not liable for losses caused by fire damage to a rented property. The fire started in an area that Prezzo occupied but caused significant damage throughout the building. Prezzo’s landlord was itself the tenant under another lease (the Superior Lease). The landlord, whilst owing certain obligations to Prezzo, was therefore also subject to the terms of the Superior Lease. The lease between Prezzo and the landlord (the Lease) required the landlord to ‘insure the Premises in accordance with the Superior Lease’. The Superior Lease required the landlord ‘to insure and keep insured in the joint names of the landlord and lessee the demised premises’. Prezzo submitted that, as the landlord had an obligation to insure the demised premises under the Superior Lease (that being the entire building), then the building in its entirety benefitted from insurance and so, as per Mark Rowlands, no claim for loss could be brought against Prezzo if damage occurred to the building as a result of their actions.

High Court Clarification

The court did not rule in Prezzo’s favour. It found that Prezzo was not immune from claims for losses caused by the fire. Note that in the particular Lease clause above, ‘Premises’ is a defined term. This is likely to have been Prezzo’s biggest pitfall. The definition will have been similar to ‘the area of the Building in which Prezzo is in occupation’. There will also have been a second definition for ‘Building’, which will have covered the remainder of the rented space not occupied by them. In accordance with the leading authority on contractual interpretation, Arnold v Britton & Ors [3], the judge construed the wording of the Lease strictly. That meant that the landlord was only obliged to obtain insurance for the tenant’s benefit covering the area which they occupied, leaving them uninsured against damage caused to the rest of the property by any event occurring within their demised premises.

WM Comment

This High Court ruling should be seen by tenants as a reminder that care needs to be taken when reviewing obligations assumed by themselves and landlords in commercial leases. Key points to remember include:

Where a landlord is subject to a superior lease, a tenant should be mindful that there will not be a wholesale adoption of the terms of that lease into a sublease. Even if the terms of a superior lease are copied word for word into a new lease, their practical effect will likely differ significantly given the difference in defined terms – in particular the extent of the defined premises.
Defined terms play a vital role in a lease and should not be overlooked. Reference should be made to the defined terms when reviewing all major operative provisions of a lease to ensure that the clauses properly reflect the true intentions of the parties.

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[1] [1986] 1 QB 211
[2] [2018] EWHC 1851 (TCC)
[3] [2015] UKSC 36

Drone usage and the law

It is likely that, in the run-up to this Christmas, perhaps more online shopping will […]

It is likely that, in the run-up to this Christmas, perhaps more online shopping will have been done than at any time ever before. Amid news stories about traffic congestion being caused by the growing numbers of delivery vans on our roads, and as technological innovations develop apace, retailers may be increasingly tempted to consider drone delivery as an option. Other potential uses for drones in today’s commercial world include surveillance, image-capturing and data collection.

However, the increasing usage of drones has highlighted ambiguities in the relevant and applicable law. Jane Weaver and Martin McKeague, Real Estate and Real Estate Litigation experts respectively, and both specialists within Walker Morris’ Retail team, take a look at some of the issues of which drone operators need to be aware.

What are the legal issues?

Small unmanned aircraft [1] are now widely available for commercial use. More popularly known as drones, they can cause injury or damage if they are not used responsibly and so are subject to specific rules relating to the way they are operated.

Primarily the law relating to the flight of drones is governed by statute. Section 60 of the Civil Aviation Act 1982 and the Air Navigation Order 2016 SI 2016/765 (the Order), regulate and place obligations on drone operators and pilots so that it is an offence if any provision is contravened.

In particular, anyone using a drone needs to be aware of the regulations in the Order shown below.

Article 241 – A person must not recklessly or negligently cause or permit an aircraft to endanger any person or property.
Article 94 – Small unmanned aircraft requirements:
- 1. A person must not cause or permit any article (whether or not attached to a parachute) to be dropped from a drone so as to endanger persons or property.
- 2. The remote pilot of a drone may only fly the aircraft if reasonably satisfied that the flight can safely be made.
- 3. The remote pilot must maintain direct, unaided visual contact with the drone sufficient to monitor its flight path in relation to other aircraft, persons, vehicles, vessels and structures for the purpose of avoiding collisions.
- 4. If a drone has a mass of more than 7 kg excluding its fuel but including any articles or equipment installed in or attached to it at the commencement of its flight, there are additional restrictions on where, when and how it can be flown.
- 5. An operator must not cause or permit a drone to be flown for the purposes of commercial operations, and a remote pilot must not fly a drone for the purposes of commercial operations, except in accordance with a permission granted by the CAA.
Article 94A – An operator must not cause or permit a drone to be flown, and a remote pilot must not fly a drone, at a height of more than 400 feet [2], unless the permission of the CAA has been obtained.
Article 94B – There are additional, detailed and strict provisions of which operators and pilots should be aware in relation to drone flights in the vicinity of airports and air fields.
Article 95 – There are also additional detailed provisions about the operation and flight of drones which are equipped to undertake any form of surveillance or data acquisition. (Any such operations may also be subject to separate privacy and data protection laws.)

Apart from relevant legislative provisions, causes of action for the unlawful flying of drones may also lie in common law trespass and/or nuisance [3].

Trespass is the physical intrusion on another’s land; and nuisance is an interference with the use of enjoyment of one’s land, without a physical intrusion, but which causes damage. Whilst ‘land’ is not confined to physical, horizontal boundaries, the vertical extent of a piece of land for the purposes of a drone usage claim in trespass or nuisance is, as yet, untested and unknown.

Further information and resources

The Civil Aviation Authority (the CAA) has published guidance (CAP 722, which was amended in July 2018) on how to comply with the Order. This is coupled with the CAA’s Drone Code and dedicated website, which provide recommendations for a safe flight.

However, there is no doubt that the technology and the demand for drone usage are developing quicker than the law, so this area remains ‘one to watch’. Walker Morris will report on key developments, but in the meantime it will be prudent for retailers and any other businesses considering the use of drones for any commercial purposes to take specialist advice in connection with their particular requirements.

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[1] A small unmanned aircraft is any unmanned aircraft, other than a balloon or a kite, having a mass of not more than 20 kg without its fuel but including any articles or equipment installed in or attached to the aircraft at the commencement of its flight.
[2] In aviation terms, ‘height’ means the vertical distance of an object above the surface of the earth. It does not automatically apply to heights/distances from tall buildings or other structures: in such cases, additional permission from the CAA will be required.
[3] Section 76 of the Civil Aviation Act 1982 does, however, provide a statutory defence to a trespass or nuisance claim if the drone flight is at a reasonable or ordinary height and is carried out in accordance with the Order.

Property Guardianship and the Lease/Licence distinction

Lease/Licence distinction… The 1985 case of Street v Mountford [1] confirmed that the grant of […]

Lease/Licence distinction…

The 1985 case of Street v Mountford [1] confirmed that the grant of exclusive possession for a term [2] creates a lease as opposed to a licence, no matter what the parties may have labelled the arrangement. This legal distinction between a lease and a licence is of fundamental importance, as it can have very significant implications for anyone owning or occupying premises.

In particular, a licence is simply a personal, contractual permission for the licensee to do something – in this context to occupy land. A licence does not confer any proprietorial rights, it cannot be assigned and it does not survive any change in the ownership of the freehold/superior interest. Crucially, a residential licence does not confer any statutory protections in relation to the state and maintenance of the property or any Housing Act security of tenure. . In view of the latter, it is therefore much easier to evict a licensee.

In contrast, a lease or a tenancy (those terms are interchangeable) is much more than a contractual permission – it is an estate in land. A lease can therefore be bought and sold and it survives changes in ownership of any superior interests in the land.

Where it is a lease of commercial premises and the requirements of Part II of the Landlord and Tenant Act 1954 are met, a tenant’s occupation cannot be brought to an end, even following expiry of the lease term, unless and until the landlord can establish (at court if necessary) one or more of certain limited statutory grounds for repossession. Where it is a lease of residential premises, a whole host of statutory protections apply.

…in the property guardianship context

The lease/licence issue arose recently in an interesting and increasingly prevalent context – property guardianship. Property guardianship schemes are arrangements where one or more individuals move into vacant premises (which might be commercial or residential units), paying less than market ‘rent’, in return for them providing ‘live-in’ security and maintenance services and to limit the potential for vandalism and squatting.

In Camelot Guardian Management Ltd v Khoo [3], Khoo and other guardians had been occupying rooms in a vacant office building. When the owner wished to redevelop, Khoo refused to move out, asserting that he had a tenancy.

Property owners and guardianship scheme operators will be relieved to note that the High Court decided that Khoo’s occupation did not amount to a tenancy, for the following reasons:

The guardianship agreement (the agreement) was personal to Khoo and stated that it did not grant him exclusive occupation;
The agreement allowed Khoo, in common with others, to occupy the whole of the premises – it did not grant exclusive possession of any part/room; and
The specific nature of the guardianship arrangement was clearly known and understood by both parties and its operation, commercial purpose and continued existence depended on the agreement meaning what it said and amounting to no more than a licence.

WM Comment

Whilst this decision will be welcomed by property owners and guardianship scheme operators for its commercial and common-sense approach, it may not be the end of the story. Guardianship schemes are innovative arrangements that are growing in popularity and number. There are likely to be other challenges raised in future, and it may be that a slightly different form of agreement or set of facts produces a different outcome. In the meantime, property owners and scheme operators should ensure that they take specialist legal advice on the wording of their guardianship agreements. They should also undertake regular inspections of occupied premises with a view to ensuring that, as a matter of fact on the ground, no incidences of de facto exclusive possession of any premises (or any parts of any premises) arise.

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[1] [1985] 1 EGLR 128
[2] and usually at a rent, although this latter is not necessarily essential/determinative
[3] [2018] EWHC 2296 (QB)

Retailers, are you due a rebate? Court of Appeal ruling on ATM rates

Retailers have been paying business rates dating back to April 2010 for automated teller machines […]

Retailers have been paying business rates dating back to April 2010 for automated teller machines (ATMs) which are built into the external walls of their stores. Real Estate and Real Estate Litigation experts Jane Weaver and Martin McKeague, both specialists within Walker Morris’ Retail team, highlight a recent Court of Appeal ruling which confirms that such ATMs do not give rise to a separate business rates liability.

Cardtronics & Ors v Chris Sykes & Ors (Valuation Officers) [1] turned on whether an ATM that was built into the external wall of a shop was a separate hereditament [2] from the store in which it was housed. If it was not, it would not give rise to a separate ratings liability and would, instead, form part of the store’s overall rating for valuation purposes.

The Court of Appeal applied both the ‘geographical test’ from the 2015 Supreme Court case of Woolway v Mazars LLP and the principle of ‘general control’ from the 1936 House of Lords case Westminster Council v Southern Railway Company Ltd and confirmed that:

where an ATM operator has only a right of access to a machine wherever it happens to be located (as opposed to a right of occupation of a specific unit of property); and
where a retailer has “retained sufficient control of the site, in contractual, physical and functional terms”; then
there is no “sufficiently coherent and settled ‘unit of property’ capable of forming a separate hereditament”.

WM Comment

The Court of Appeal’s decision means that retailers nationwide could be due business rates rebates of some £500+ million [3] and it is also good news for consumers. Had the decision gone the other way, that could have impacted the numbers of free ATMs located on store frontages up and down the country.

However, retailers should note that: (a) the opposite outcome (and therefore a separate ratings liability) is likely to arise in cases where an ATM is not, in fact, capable of being moved from place to place to suit a retailer’s requirements and/or because it is situated on a site deliberately designed or adapted to house it; and (b) as at the date of writing, the valuation officers in this case have applied for permission to appeal the decision to the Supreme Court.

Whether or not an ATM will give rise to a business rates liability will turn on both the contractual and factual arrangements in place in any particular case and on the state of the law as it is ultimately resolved. Walker Morris will report on developments and our retail experts will be happy to help any retailers or ATM operators who wish to understand whether or not they might be entitled to a refund and how best to draft their ATM licences so as to minimise ratings liability going forwards.

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[1] [2018] EWCA Civ 2472
[2] that is, a self-contained piece of property
[3] Source, Property Week 6 December 2018

Welcome to PropTech

The real estate industry contributes 5.4% to GDP and employs approximately 1+ million people in […]

The real estate industry contributes 5.4% to GDP and employs approximately 1+ million people in the UK. However technology is disrupting the industry with the promise of improved physical and cost efficiencies, flexibility and a more agile working experience. Welcome to PropTech:

“PropTech: is one small part of a wider digital transformation in the property industry. It considers both the technological and mentality change of the real estate industry and its consumers to our attitudes, movements and transactions involving both buildings and cities.” James Dearsley [1].

Key technological disruptors in the real estate sector today are based upon capturing data; effective utilisation of that data; the use of virtual reality to attract funders and investors (in particular, promoting the ability to view development proposals throughout the UK in areas in which funders/investors may have no knowledge or presence); and creating more flexible working environments.

For example, demand in today’s market for space changing, short term access and all-round flexibility can be facilitated through digital means. As the concept of the fixed office changes, landlords are also spotting opportunities to create more flexible co-working spaces which provide networking opportunities, shared research and development and can more easily adapt to the changing agile working environment. A recent example of this is CBRE’s flexible workspace concept, Hana. Hana seeks to enable institutional investors to capitalise on the rapidly growing demand for flexible office space. At the same time, websites such as Appear Here give landlords the option to maximise the potential of their property, offering short term space to over 150,000 businesses with access to over 10,000,000 sq ft. of space across the globe. (It is possible that this general shift towards a more co-operative working environment may result in the development and prevalence of a form of licence or alternative leasing structure which provides more flexibility than a traditional fixed term lease.)

Savills Studley has recently teamed up with German AI and PropTech firm Leverton to harness technology which will allow clients to input PDFs of their leases and related documentation into an integration programme which will use artificial intelligence to recognise, structure and store property metrics and information accordingly. A key anticipated advantage of this is to put the portfolio managers on the front foot in terms of strategy and industry and client knowledge, which in turn should facilitate more efficient decision-making.

The PropTech innovation is progressing at such a pace that it is now a priority within the UK’s government’s attempts to increase efficiency – in particular in relation to the streamlining of the house buying/selling process. As part of that, the government plans to introduce PropTech digital solutions, including harnessing the usage of big data to provide up-to-date pricing and timing information to managing agents and owners; and HM Land Registry has already embraced technological innovations with its project to centralise and digitise the local Land Charges Register (which aims to access local authority searches within 10 days, as opposed to the current up to 40 days).

WM Comment

So, PropTech is here, it is developing apace, and it promises to be a significant feature of the future of the real estate industry. Whilst the initial expenditure in new tech that is required before any practical benefits can really be seen may seem prohibitive to some businesses, indications are that the potential advantages to those that adopt and embrace new available technologies could be endless.

Our advice? To use an historical analogy from another form of revolution, don’t be like Decca: “We don’t like their sound, and guitar music is on the way out.” — Decca Recording Company on declining to sign the Beatles, 1962.

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[1] Recently voted the most influential person in PropTech by LendInvest

Developers beware! Lessons to be learnt from a recent restrictive covenants case

Following the case of Alexander Devine Children’s Cancer Trust v (1) Millgate Developments Ltd and […]

Following the case of Alexander Devine Children’s Cancer Trust v (1) Millgate Developments Ltd and (2) Housings Solutions Ltd [1], a developer who built homes on a green belt of land in breach of a restrictive covenant faces the possibility of having to demolish all 13 homes. Specialist Real Estate Litigators Martin McKeague and David Manda explain this important decision.

Millgate case

Millgate Developments Ltd (Millgate) obtained planning permission to carry out a housing development on land that was unaffected by the restrictive covenant. It was a condition of the planning consent that Millgate provide affordable housing. In order to satisfy the condition, Millgate built 13 homes and bungalows on adjacent land (the Development Land) in breach of restrictive covenants which specifically prohibited the use of the Development Land for building or for any purpose other than parking of motor vehicles. Millgate was aware of the covenants and of objections raised by the beneficiaries of the restrictive covenants, but continued to build regardless. (It should be noted that the beneficiaries of the covenant did not object to the planning permission.)

The Development Land was adjacent to a children’s hospice (the Trust Land). The Trust Land had been gifted to the Trust by the local farmer and had the benefit of a covenant.

In 2016, the Upper Tribunal (Lands Chamber) decided the case in favour of Millgate and allowed 13 houses which had been built on the Development Land in breach of the restrictive covenant to remain. Millgate was ordered to pay compensation of £150,000, but the beneficiaries wished to protect the Trust Land in order to provide a peaceful setting for the children and their families. The beneficiaries therefore took the case to the Court of Appeal.

Court of Appeal Decision

Section 84 of the Law of Property Act 1925 (the Act) sets out a power for the Upper Tribunal, in certain circumstances, to discharge or modify restrictive covenants affecting land.

However, the Court of Appeal confirmed that section 84(1B) of the Act also required the consideration of any other material circumstances and found that the Upper Tribunal had put the significance of the planning consent too high. The planning consent did take into account the private property rights afforded to the beneficiaries of the covenant but the court also made clear that there is an equal public interest in ensuring that private property rights are respected in dealings between parties.

The Court of Appeal also found that the Upper Tribunal had failed to have proper regard to the availability of alternative affordable housing provision (in that Millgate was able to pay a commuted sum of £1.6 million to the local authority to provide social housing elsewhere in the locality). Therefore the Upper Tribunal had failed to correctly assess whether the covenants would be contrary to the public interest.

Finally, the tribunal had failed to attach sufficient weight to Millgate’s deliberate and unlawful conduct. Millgate had been aware of the restrictive covenant and deliberately dismissed the objections it received about the development. The beneficiaries were easily identifiable and yet Millgate did not approach them to seek a release or modification of the covenant. It also failed to apply to discharge or modify the covenant under section 84 of the Act before it started building.

The Court of Appeal held that, under the circumstances, no discretion had arisen under section 84 and subsequently there was no basis upon which the Tribunal could grant that the restrictive covenant be modified so as to permit the residential development. Accordingly, the Trust’s appeal was allowed. The result is that the development has been found to be unlawful and is at risk of having to be demolished.

WM Comment

The Court of Appeal was very critical in its assessment of Millgate’s conduct. It confirmed that, even if the public interest was justified, it would not have exercised its discretion to modify or discharge the covenant due to Millgate having “acted in a high-handed manner by proceeding to breach the restrictive covenants without any justification or excuse”. The court stated that there was need “for due protection of the Trusts’ rights and to the general public interest in having the section 84 procedure invoked at the proper time and in the proper manner”.

The key takeaways for developers are to ensure that their conduct is exemplary when discovering and dealing with beneficiaries of restrictive covenants and that any application under section 84 is made before building works commence.

This case subsequently went to the Supreme Court. For an update and the Supreme Court’s decision, read more in Claire Acklam’s round up of development cases in 2020.

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[1] [2018] EWCA Civ 2679

Contacts

Nick Cannon
Consultant
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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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