Welcome to the October 2019 edition of the Real Estate Bulletin
In this edition we update you on recent decisions and legal developments affecting the property industry:
- Landlords prove unsuccessful
in challenging Debenhams CVA despite its somewhat draconian
A group of landlords known as the Combined Property Control Group mostly unsuccessfully challenged the CVA proposed by Debenhams Retail Limited. Here we look at the background and challenge behind this, and the implications for retail and other CVAs.
- Court of Appeal pulls the
trigger on Town and Village Greens
The Court of Appeal decision in Wiltshire Council v Cooper Estates Strategic Land Ltd will come as good news for developers as the Court of Appeal upheld a High Court ruling overturning Wiltshire Council's decision to register a plot of land as a town or village green and resolved previous ambiguities as to what constitutes a trigger event by adopting a wide interpretation of the same.
- Contracting-out of security
of tenure – Can tenants have their cake and eat it
We consider the important decision in TFS Stores Limited v BMG (Ashford) Limited et al regarding the contracting out procedure under section 38A of the Landlord and Tenant Act 1954
- Overage - How reasonably hard
does a developer have to work to make himself
The Court of Appeal upheld the first instance decision that a developer had not used "reasonable endeavours" to achieve "as soon as reasonably practicable" the satisfaction of certain conditions which would trigger liability to make an overage payment: Gaia Ventures Ltd v Abbeygate Helical (Leisure Plaza) Ltd.
- When should a judgment be set
aside for fraud?
In the context of a family property dispute, the Supreme Court ruled in Takhar v Gracefield Developments Ltd that a party who applies to set aside a judgment on the basis of fraud need not demonstrate that the evidence of the fraud could not have been uncovered at the earlier trial through reasonable diligence.
- Court of Appeal upholds order
We consider the case of Persimmon Homes Ltd v (1) Anthony John Hillier (2) Colin Michael Creed in which housebuilder Persimmon Homes was successful in arguing that a share purchase agreement and disclosure letter should be rectified in order to give effect to the common intention of the parties' negotiated deal.
- Section 21 Notices to be
abolished – Disaster for Landlords?
We discuss the government's ongoing consultation regarding its proposals to abolish section 21 notices.
- 1954 Act protected leases
We have included a helpful flowchart which outlines the various procedures to be adopted by landlords and tenants when seeking to terminate/renew 1954 Act protected leases.
Landlords prove unsuccessful in challenging Debenhams' CVA despite its somewhat draconian provisions
Discovery (Northampton) Ltd & others v Debenhams Retail Ltd & others  EWHC 2441(Ch)
Company Voluntary Arrangements ("CVAs") are seen as most unfair by landlords who are often forced to continue to make a supply of premises at an imposed reduced rent.
A group of landlords known as the Combined Property Control Group ("CPC") unsuccessfully challenged the CVA proposed by Debenhams Retail Limited ("Debenhams"). CPC argued that, pursuant to section 6 (1) (b) the Insolvency Act 1986 (the "Act"), the CVA was unfairly prejudicial because it treated landlords less favourably than other unsecured creditors.
A CVA is a legally binding arrangement entered into by a financially distressed company and its creditors. A CVA serves to allow a company to continue trading whilst its liabilities and debts are restructured. CVAs have become increasingly popular as a method of reducing the rental costs that commercial tenants (often retailers) perceive to be onerous. Debenhams' prepack administration was announced 9 April 2019. The company proposed a CVA soon after with the aim of restructuring the company's balance sheet and store portfolio. The CVA was approved at a meeting of creditors on 9 May 2019. On 10 June 2019 CPC launched its legal challenge against the CVA.
Grounds of Challenge & Decision
The challenge was brought on five grounds (detailed below) all of which failed, with the exception of Ground 3.
Ground 1 – under the Act landlords do not constitute 'creditors' in respect of future rent; therefore, they cannot be compromised under a CVA.
This challenge failed. It was held that the Act did provide jurisdiction for landlords to be deemed creditors in respect of future rent. Mr Justice Norris stated that '"future rent is a pecuniary liability (although not a presently provable debt)... whilst the term endures the company is "liable" for the rent, and the fact that in the future the landlord may bring the term to an end by forfeiture does not mean that there is no present "liability"'.
Ground 2 – in reducing the rent payable under a lease the CVA was 'unfairly prejudicial' to landlords.
CPC argued this on two grounds:
- as a matter of law and basic fairness; and
- it is beyond the scope of a CVA to do so
These challenges also failed. It was held that the CVA was fair because it retained the landlords' freedom to bring an end to the lease if they so wished to. The Court was also of the opinion that because the CVA did not impose any new obligations, but only altered existing ones, it did not act beyond its scope.
Ground 3 – a landlord's right to forfeiture is a proprietary right beyond the scope of the Act and cannot be altered by a CVA.
This challenge was successful. Justice Norris held that pursuant to section 1(2) of The Law of Property Act 1925 a landlord's right to re-enter premises is a proprietary right between a landlord and tenant, not debtor and creditor relationship, and, therefore, cannot be altered by a CVA.
Ground 4 – under CVAs landlords are treated less favourably than other unsecured creditors, without any proper justification. This challenge failed. The court held that there was justification to treat landlords less favourably under CVAs. Justice Norris stated that payment to suppliers in full was justified on the grounds of business continuity, as in this case, a reduction in rent that maintained rent above market value was fair insofar as it allowed other creditors' claims to be paid in full.
Ground 5 – Debenhams' directors gave such inadequate disclosure that the CVA failed to comply with the content requirement of the Insolvency Rules ("IR")
The landlords argued that the CVA failed to comply with rule 2.3 IR because it did not set out the circumstances that could give rise to claw-back claims in the event that Debenhams did go into administration/liquidation. Mr Justice Norris dismissed this challenge on the grounds that it was an irregularity that did not make a material difference to the way in which creditors considered the CVA overall. Goods and services were traded daily on an order-by-order basis. The landlords in question, on the other hand, had been providing accommodation over long terms at above market prices. It was noted that it would be unfair to force landlords to accept rent reductions that took rents below market value. Mr Justice Norris explained that fairness would be judged in the round and not in respect of each individual creditor.
Had the challenge been successful Debenhams would most likely have entered administration. Debenhams will now progress its CVA and close a further 22 stores by January 2020. The CVA also allows rent reductions at a further 105 stores. In total, 50 of 166 stores will close.
Although the landlords did not achieve their desired outcome overall, the judgment grants them a certain amount of power insofar as it preserves their right to forfeit notwithstanding CVAs purporting to effect the contrary. Provided the clause in the lease is robust, a landlord could use a CVA as justification to exercise a forfeiture clause and take back their property. Equally, landlords will now be on notice that efforts to reduce their rental income below market value will likely be deemed unfair
For retail tenants
Retailers will be comforted by the ruling as it provides further justification for the contemporary use of CVAs as a means of reducing rental costs. Going forward retailers should note that the court will not allow for re-entry rights to be varied and should not seek to obtain a rent reduction that would take rent to below market rates.
Court of Appeal pulls the trigger on Town and Village Greens
In the case of Wiltshire Council v Cooper Estates Strategic Land Ltd  EWCA Civ 840, the Court of Appeal ("CA") upheld a High Court ruling which overturned the decision of Wiltshire County Council ("the Council") to register a plot of land as a town or village green ("TVG") owing to the fact that a "trigger event" had occurred.
Section 15 of the Commons Act 2006 ("the Act") grants members of the public the right to apply for land to be registered as a TVG. The effect of such a registration is, for practical purposes, to sterilise the land for development. Since 2006 (and the "Trap Grounds" case)1 the courts have adopted a wide definition of TVG which goes far beyond that which one might expect to constitute a traditional village green: car parks, golf courses and scrubland have all been registered as TVG and, therefore, protected from development. Successive governments grew increasingly concerned that the TVG registration system was being used as a means of stopping developments that might otherwise have been permitted through the planning system.
In response, the Act was revised by the Growth and Infrastructure Act 2013, which inserted a new Section 15C into the Act. This new Section 15C prevents a TVG registration where a "trigger event" occurs. Trigger events include situations where a development plan, which has been adopted by a local authority, identifies the land for potential development. Once a trigger event has occurred, the land in question could only ever be registered as a TVG if a "terminating event" were to occur (see Section 15C(2) of the Act). Terminating events include situations where a development plan ceases to have effect or is revoked, or a relevant policy is superseded.
Facts of the case
In Wiltshire Council v Cooper Estates, an application was made to the Council by an interested third party to register a small triangular plot of land (totalling 380 square metres) ("the Land") within the settlement boundary of Royal Wootton Bassett as a TVG.
Cooper Estates, the owner of the Land, objected to the application and argued that as the Land had been identified for potential development in the Wiltshire Core Strategy, a trigger event had occurred.
The Wiltshire Core Strategy was adopted by the Council in 2015 and two of its key policies include:
- Core Policy 1 ("CP1") which is the settlement strategy identifying settlements, one of which is Royal Wootton Bassett, where sustainable development would take place; and
- Core Policy 2 ("CP2") which provides that within those settlements there is a presumption in favour of sustainable development.
The Council considered that the provisions of the Wiltshire Core Strategy were not enough to satisfy the definition of a trigger event and the Land was therefore registered as a TVG.
In the High Court
Cooper Estates successfully challenged the Council's decision in the Administrative Court. The judge found that a trigger event had occurred, stating "the Core Strategy through CP1 and CP2 identifies an area of land which includes the Land (i.e. the boundary of Royal Wootton Bassett) and identifies it for potential development by creating a presumption in favour of development within the settlement boundary."
In the Court of Appeal
The key issue on appeal was whether the Land had been sufficiently identified in a development plan document for potential development. In support of the High Court's decision, the CA found as follows:
- Identification: it was not a requirement for the Land to be specifically identified for development. It was sufficient for it to be included as part of a larger area identified in a development plan
- Potential development: CP1 and CP2 resulted in the Land being identified as having the potential for development, and this was sufficient to constitute a trigger event. It was incorrect to adopt a restricted approach whereby the trigger event would only arise where the Land had been specifically identified for development. It was not the role of the Council to consider whether planning permission would ever be granted in respect of the Land, just whether there existed the potential for development, which in this case there was.
With regard to the issue of potential development, the Court did not rule out the possibility that in certain cases, development plans could indicate that a specific parcel of land would not be developable and therefore not result in a trigger event. Equally, the CA highlighted that where a trigger event had occurred, and the absolute protection against development in consequence of registration as a TVG is removed, it would not necessarily lead to the consequence that the land will be developed.
The CA held that allowing a TVG registration in the present case would frustrate the objectives of the development plan and be contrary to the intentions of government policy and the new legislation. The TVG registration was therefore successfully overturned
This case will come as good news for developers who may wish to object to the registration of land as a TVG. The CA has resolved previous ambiguities as to what constitutes a trigger event by adopting a wide interpretation. As such, if land is identified in a development plan document as having the potential for development, regardless of the prospects of obtaining planning permission for any development, it is likely that a trigger event would have occurred, thereby blocking registration of the land as a TVG.
The judgment clearly indicates that the protection of a piece of recreational land with identified development potential should instead be achieved through the planning system and not by means of registration as a TVG. The identification and protection of green recreational land can be realised through the planning process by the designation of land as Local Green Space2 in development plan documents, which are themselves the subject of extensive public consultation and involvement.
Contracting out of security of tenure – Can tenants have their cake and eat it too?
The recent High Court decision in TFS Stores Limited v BMG (Ashford) Limited et al  EWHC 1363 (Ch) is an important decision dealing with the contracting out procedures under Section 38A of the Landlord and Tenant Act 1954 (1954 Act) and Schedule2 of the Regulatory Reform (Business Tenancies) Order 2003 (2003 Order).
Background and facts
The Fragrance Shop (TFS), a large perfume retail operator with over 200 stores nationally, entered into leases at six designer retail outlet centres and in each case the contracting out procedure was followed. Following the expiry of the leases, and the landlord's decision not to renew but to let the stores to a rival perfume retailer, TFS sought to establish that the six leases were protected by the 1954 Act.
The contracting out procedure
Unless a commercial lease is contracted out, the 1954 Act serves to protect the tenant's right to remain in occupation of the premises and its right to the grant of a new lease following the expiry of its existing lease.
The parties can agree that this protection is waived prior to the grant of a lease provided the following steps are taken:
- The landlord serves a warning notice explaining the tenant's rights that are being waived;
- The tenant makes a declaration to acknowledge that it understands the consequences of contracting out; and
- The lease includes an endorsement referring to the landlord's notice and the tenant's declaration and the parties' agreement that the relevant provisions of the 1954 Act are to be excluded from the lease.
Issues raised by TFS
The court firstly considered arguments concerning the alleged absence of authority of the tenant's solicitor and the tenant's retail director, as agents, to receive the warning notices and/or to make the declarations and secondly, the alleged defective wording in the statutory declarations due to the failure to include a fixed date for the grant of the lease.
The court considered the law of express and implied actual authority, ostensible authority and the imputation of knowledge via an agent, in order to answer the following two questions:
- Did the tenant's solicitors have authority to receive the warning notices as the tenant's agent?
- Did the person who made the declaration in each case have the authority to do so?
The judge held that the tenant's solicitors had actual authority to accept service of the warning notices on the basis that this formed part of their instructions to complete the transaction in accordance with the terms agreed between the parties, which included the leases being contracted out.
Where the tenant's retail director had made the declarations, the tenant argued that this was invalid because he was not a statutory director of the company. The court held that the tenant was bound by the acts of professional and employee agents as having actual authority to act as they did, meaning that the tenant was unable to challenge the validity for lack of authority by the person making the declarations.
Another argument put forward by the tenant was that the statutory declarations were invalid due to a failure to include the exact term commencement date of the leases. As the term commencement date was not known at the time of drafting the notices, wording was used to circumvent using an exact date, such as "the term of the lease to be granted would begin on the access date determined under the agreement for lease between the parties" or "for a term commencing on the date on which the tenancy is granted"
The judge held that an exact term commencement date was not essential because the purpose of the wording is to identify the tenancy to be granted and the wording used was sufficient for those purposes.
The court also confirmed that statutory declarations must be made "in the form, or substantially in the form" set out in the 2003 Order. The declarations could therefore be rescued by virtue of them being in "substantially" the form contained within the 2003 Order.
Ultimately, the court found that the leases were validly contracted out
The approach taken by the court in this case will be a relief to landlords and their lawyers as it confirms the validity of current market practice. Had the court reached a different conclusion, this could have caused practitioners significant difficulties, particularly in relation to specifying a future date in the warning notice where the term commencement date is not known in advance.
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