Welcome to the Autumn edition of the real estate bulletin.
The Courts have been particularly busy in the last few months considering a number of property related matters. In this issue, we look at notable decisions and the impact they have on the property industry:
- The first right to light case to reach the Courts since Coventry v Lawrence will be welcomed by developers concerned about neighbouring owners applying for injunctions
- The Supreme Court has refused to re-write service charge provisions despite this leading to a commercially harsh decision
- In two recent cases, the Court of Appeal confirmed that relief from forfeiture should be granted where the landlord would otherwise obtain a significant windfall
- Bad news for developers who remain liable for empty rates even when the property is being redeveloped and is unfit for occupation
- More bad news on the rates front as the Supreme Court held that occupiers will not be able to treat separate premises on different floors as one unit for business rates purposes
- In a surprising decision, the High Court upheld as valid a notice to complete that contained several errors
- Finally, we look at further tax changes affecting non-UK residents who own residential property in the UK and may now be caught by Capital Gains Tax and Inheritance Tax
LIGHT AT THE END OF THE TUNNEL FOR DEVELOPERS
By Keith Conway and Armel Elaudais
Scott v Aimiuwu (unreported) is the first Court decision since the Supreme Court's judgment in Coventry v Lawrence (see our Real Estate Bulletin, April 2014) examining whether the Court should grant an injunction preventing development or order damages in lieu of injunction in relation to a rights to light claim.
The grant of an injunction is a discretionary remedy and until the relatively recent Supreme Court's decision in Coventry v Lawrence the position on whether damages should be awarded instead of an injunction was uncertain but had moved somewhat against developers. The test was based on a 19th Century decision (Shelfer test) which established that damages rather than an injunction should only be granted in exceptional circumstances where:
- The injury to the claimant's right is small
- The injury is capable of being estimated in money
- The injury can be adequately compensated for by a small payment
- It would be oppressive to the defendant to grant an injunction
At the end of last year, the Supreme Court held in Coventry v Lawrence that the above test should no longer apply. Instead the Court should consider the facts of each case, apply judicial discretion and not award an injunction as of right. It should look to whether the public interests outweigh the breach of the landowner's right and whether the grant of an injunction would be more prejudicial to the developer or others including members of the public who might benefit from the development. The Supreme Court's decision has been regarded as good news for developers. Importantly, the Judge's application of these principles in Scott v Aimiuwu will provide developers with further comfort.
This was a private residential claim. The Aimiuwus had obtained planning permission to extend their home. Although there were discussions between them and their neighbours, the Scotts, about the interference with rights to light to the Scotts' house, they proceeded with the construction without resolving matters. It was not until the works were almost complete that the Scotts applied for an injunction seeking a cut back of the extension. Experts agreed that the interference was actionable, however, it only affected secondary accommodation (a garage, utility room and bathroom). In turn the Aimiuwus argued that the Scotts were barred from taking action on the ground that the discussions between the parties had created an estoppel.
The Judge rejected the estoppel argument, but refused to grant an injunction and awarded damages to the Claimants instead. The Judge accepted that the infringement was actionable but noted that it only affected secondary accommodation. Having applied the Shelfer test in the context of Coventry v Lawrence, the Judge considered that in the circumstances it would be oppressive to grant an injunction.
The decision is also interesting as far as the calculation of damages is concerned. The Judge considered the diminution in value caused by the extension and found that this figure (GBP 11,500) was too low. On the other hand, he found that damages based on a share (in this case a third) of the Aimiuwus' profits (GBP 65,000) would be too high. Instead, the Judge awarded damages based on what he considered would be a reasonable settlement (or release fee) figure if the parties had negotiated a settlement at an early stage.
This pragmatic approach will be welcomed by developers who will be pleased to see that the Courts will look at all the circumstances of the claim and are now prepared to depart from a stricter approach when considering whether to grant an injunction. This approach is in line with the Law Commission's proposed changes to rights to light law, which would prevent neighbours from seeking an injunction if they have not served a statutory notice of their intention to do so at an early stage (see our Real Estate Bulletins, June 2013 and Spring 2015). Each case will be different depending on the circumstances but large commercial developers will also be very pleased that they will not necessarily have to share a large part of their profits.
BE CAREFUL WHAT YOU AGREE TO!
By Rebecca Noble
Judgment was recently handed down by the Supreme Court in the case of Arnold v Britton and Others  UKSC 36. The case provides valuable guidance on how the Court will seek to interpret the unfavourable wording of contracts and leases (in this case, payment of service charge).
The case concerned leases of chalets in Oxwich Leisure Park in Wales. The leases were granted between 1978 and 1991 for a term of 99 years from 25 December 1974. The service charge provisions within the leases (which all had similar wording), provided for the tenants to make a payment in the first year of the term of GBP 90.00 per annum towards service charge and for each following year, to pay a sum which increased on the previous by 10% (therefore a compounding rate of 10%). Whilst this may have been acceptable to the tenants at an earlier time in the term of the lease, at 2015 (had the lease been granted in 1980) the total service charge would have increased to over GBP 2,500 and would be set to increase to in excess of GBP 550,000 towards the end of the term!
The proceedings first came to Court by way of the landlord issuing declarative proceedings (in particular, claiming that the sum payable was not a service charge within the meaning of Section 18(1) of the Landlord and Tenant Act 1985). The Judge at first instance found in favour of the tenants.
The decision was later overturned by Mr Justice Morgan, whose decision in turn was upheld by the Court of Appeal and the Supreme Court.
In the Supreme Court, the tenants asserted that the provision was not what had been intended by the parties. Instead they argued that the sums acted as an overall cap on the amount the landlord could recover (in effect, that the words "up to" should be read into the clauses). The tenants argued that the landlord should instead only be entitled to a fair proportion of the cost of the total services incurred.
The Supreme Court dismissed the tenants' appeal and found that the wording of the leases, albeit commercially harsh on the tenants, was to stand as the correct interpretation.
Lord Neuberger, with whom Lord Hughes and Lord Sumption agreed, reasoned that the wording of the clauses was sufficiently clear and that it was not appropriate for the Court to depart from that wording when it was clear. The tenants would therefore be liable to pay to the landlord a fixed sum (rather than a proportion of what the landlord had incurred in providing the services) as the wording of the clauses had intended.
The Court noted that the leases had been entered into at a time when inflation was high (and therefore the wording had made sense to the parties at the time it was entered into). The risk of the wording fell onto both parties: it was the bad luck of the tenants that in the last fifteen years, inflation had been rarely above 4%, but, had inflation been higher, the landlord would have been required to pay for the shortfall. Lord Neuberger noted that: "The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language."
Lord Neuberger noted what he thought to be relevant factors (which are summarised below):
- Commercial common sense and surrounding circumstances should not take precedence over the importance of the language of a provision. The meaning of what was intended by the parties is most likely to be found by reading the provision
- The clearer the wording of a provision, the more difficult it is for the Court to depart from it
- Commercial common sense cannot be invoked with hindsight. If the wording of a provision results in a bad outcome for one or both parties, it does not mean that the wording does not have the intended meaning
- Courts should be slow to reject the meaning of a provision because it appears to be imprudent and the purpose of interpretation is to identify what the parties agreed and not what, with hindsight, should have been agreed
- The Court can only take into account facts which existed at the time the contract was made
- In some cases, an event later occurs which was not intended or contemplated by the parties, looking at the wording. In such case, if it is clear what the parties would have intended, then the Court will give effect to that intention
- Service charge clauses are not subject to any particular rule of interpretation
Lord Carnwarth, in disagreement with the majority, gave an interesting judgment. He stated that he would have found for the tenants and allowed for a limited addition to the wording, allowing for a commercially better result: "...the limited addition proposed by the lessees does not do such violence to the contractual language as to justify a result which is commercial nonsense."
Whilst the decision results in a commercially harsh decision for the tenants, it shows the Court is reluctant to depart from wording which, although has uncommercial consequences as at the present day, was intended by the parties as at the date of the contract and is sufficiently clear in its meaning. The Court is not able to assist parties by amending or interpreting wording in a different manner solely because the wording has resulted in an unjust outcome or bad bargain for one party (or perhaps both) and will only interfere where the meaning of the wording is so uncertain that a different commercial approach is demanded.
The Court did note that there may be a case for extending the existing statutory provisions which protect tenants against unreasonable service charges to circumstances such as these (although this would be a matter for the legislature).
The case shows that the meaning of particular wording, once tested, can often come as a surprise to parties (for example, if a tenant is required to pay a penalty payment on the exercise of a break clause, when it did not intend to do so when it entered into the lease). It emphasises that parties (together with their solicitors or surveyors) should consider the long term effects of particular wording and in the case of service charge and other financial provisions, calculations should be carried out to assess what the liability will be in five, ten years and so on.
FORFEITURE IS NOT THE WAY TO GET A WINDFALL
By Armel Elaudais
In two recent cases, the Court of Appeal has looked at the factors to be taken into account when considering whether to grant relief from forfeiture to a tenant who has breached the covenants in its lease. In both cases, the Court of Appeal found that relief should be granted where forfeiture would otherwise result in the landlord gaining a windfall.
The Courts have a discretionary power to grant relief from forfeiture for breaches of covenants other than the non-payment of rent. Although the Courts have historically refused to lay down rigid rules setting out when relief should be granted or not, relief will generally be granted where:
- The tenant remedies the breach or, if the breach cannot be remedied, pays adequate compensation to the landlord, and
- The Court is satisfied that the tenant will comply with its obligations under the lease in the future
But the Court will also consider other factors such as the conduct of the tenant and whether the breach was deliberate. The Court has to carry out a balancing exercise between the advantage that the landlord may gain as a result of forfeiture, the disadvantage caused to the tenant by forfeiture and the damage suffered by the landlord as a result of the tenant's breach. All these factors were weighed by the Court of Appeal in Magnic Ltd v Ul-Hassan and Friefeld v West Kensington Court Ltd. In both cases, avoiding the landlord receiving a disproportionate windfall was considered to be a deciding factor in favour of granting relief from forfeiture to the tenant.
Magnic Ltd v Ul-Hassan  EWCA Civ 224
Mr Ul-Hassan had a 125 year long lease of commercial premises. His son had acquired the sub-lease of the premises and together they operated a takeaway pizza business from those premises. Both the lease and the sub-lease contained covenants to comply with planning legislation. Ul-Hassan and his son had obtained planning permission to use the premises as a takeaway restaurant but this permission was subject to the installation of a fume-extraction system. The demised premises did not include the exterior of the building so that Ul-Hassan needed the landlord's permission to install the extraction system. Ul-Hassan sought landlord's consent but this was refused by the landlord. As the planning condition was not satisfied the planning permission eventually lapsed leaving Ul-Hassan in breach of his lease.
There was a series of proceedings between the parties where the landlord sought possession which eventually resulted in the lease being forfeited unless Ul-Hassan ceased business by a required date. Ul-Hassan appealed and continued trading pending his appeal in the mistaken belief that his appeal gave him a stay of execution. When Ul-Hassan's appeal was dismissed, the landlord sought a declaration that the lease was forfeited and Ul-Hassan applied for relief from forfeiture. Both the District Judge and the County Court dismissed the application for relief so Ul- Hassan appealed to the Court of Appeal.
The Court of Appeal focussed on the way the Court of first instance had exercised its discretion and found that:
- The District Judge had incorrectly characterised Ul-Hassan's continuation of business as "a deliberate decision" when this was in fact a genuine misunderstanding about whether the stay of execution following the first appeal had also extended the deadline for him to cease trading
- This had in turn impacted upon the weight given by the District Judge to the windfall that the landlord would obtain from forfeiture. In other words, the fact that the lease was worth about GBP 150,000 should have weighed quite heavily in favour of granting relief but the District Judge had given this less weight because he wrongly considered that there had been persistent failures by Ul- Hassan to satisfy conditions imposed by the Court
- Finally, the District Judge was wrong to state that there had been no significant changes in Ul-Hassan's position, when he had in fact ceased trading as soon as the first appeal had been dismissed
- The District Judge had failed to take into account all the circumstances. The Court must carry out a balancing exercise and give proper weight to the reason for non-compliance. In this instance, it was disproportionate to deprive Ul-Hassan of his property (and the valuable asset that the lease represented) because of a legal error when his extra few months' trading had not caused the landlord any additional damage
Mr Ul-Hassan's appeal was allowed and he was granted relief.
Freifeld v West Kensington Court Ltd  EWCA Civ 806
Mr Freifeld was the tenant of seven commercial units, one of which was sub-let to a Chinese restaurant business without the landlord's consent and in breach of the lease. The restaurant was causing issues with other occupiers on the landlord's estate so the landlord applied for forfeiture. Freifeld made a first application for relief on such terms as the Court saw fit but relief was refused. By then Freifeld had procured the surrender of the infringing sub-lease. It therefore re-applied for relief, this time on the condition that it had to assign the lease within six months, failing which it would surrender the lease. Once again, the Court refused the application so Freifeld appealed.
The appeal focussed on the fact that the lease was worth GBP 1-2 million so that forfeiture would result in the landlord gaining a significant windfall. While the Judge at first instance had considered this windfall, he had considered that this should make the tenant more scrupulous in complying with his obligations under the lease and, because the breach had been deliberate, relief should be refused. The Court of Appeal rejected this approach:
- While the wilfulness of the breach is a relevant factor to be taken into account, the fact that the breach is deliberate does not mean that relief cannot be granted. The Court of Appeal reiterated the well-established principle that the Court is not required to find exceptional circumstances to grant relief in such a case
- It repeated the points made in Magnic v Ul-Hassan that when considering whether to grant relief the Court should have regard to the value of the leasehold interest. By obtaining forfeiture the landlord should not be able to gain a disproportionate windfall for a breach that has not caused him irreparable damage
- Taking these factors into account, the Court must carry out a balancing exercise. The question of the landlord's windfall must be considered on its own and then weighed against the tenant's conduct
The Court of Appeal therefore granted relief on the condition that Freifeld would sell the lease within six months.
These decisions reinforce the principle that forfeiture provisions in a lease are intended to ensure compliance by the tenant with its lease obligations but are not intended to have excessively penal consequences by depriving the tenant of a valuable asset in favour of the landlord. While this may provide some comfort to tenants, the Court of Appeal has made it clear that these decisions should not be misinterpreted as giving tenants carte blanche to disregard their obligations, as the Court will have regard to all the circumstances in each case and could still refuse relief if forfeiture is the only way to ensure the tenant's performance of its covenants. In addition obtaining relief from forfeiture is usually a costly remedy for a tenant who is normally required to indemnify its landlord for all legal and other costs incurred.
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