Full property update

Easements

The claimant owned two single-storey industrial units which backed onto a yard owned by the defendants. The claimant had the benefit of the following right:

"The right...to enter (without vehicles) upon such part of the yard ... as is necessary for the purpose of carrying out maintenance repair rebuilding or renewal to the property subject to the minimum disturbance and inconvenience being caused to the owners and occupiers of the adjoining property".

The claimant proposed to demolish the existing units and build a five or six-storey block containing a mix of commercial units and flats in its place. For this purpose, it would need to erect a fence round the site (including over the yard), as well as put up scaffolding and a crane which would overhang the yard. It sought a declaration that this would be covered by the existing right.

It was accepted that the redevelopment plans were not works of maintenance or repair; the question was therefore whether they could properly be described as rebuilding or renewal. The judge held that the term 'rebuild' did not require the new building to be in all respects the same as the original. However, it must be a substantial replacement of what is already there. There may be differences in construction technique as a result of progress in building techniques and materials, different and improved amenities, and different external or internal styles (reflecting changes in taste). But what is built must in broad substance be equivalent to what was there before. The judge gave the example that the new Wembley Stadium bears sufficient similarities to what was there before to be recognizable as being broadly equivalent. Similarly, the term 'renew', as defined in the dictionary, means to restore to original condition.

The judge also placed reliance on the other wording of the grant as establishing evidence that the scope of the right was intended to be strictly limited and to derogate to the minimum possible extent from the enjoyment of the yard. For example, the requirement that there should be minimum disturbance and inconvenience caused to the owner of the yard; the fact that the right of access was to be only for the specified purpose and even then should be over only 'such part of the yard as was necessary for that purpose'. In addition to this there was the important limitation that the right to enter had to be exercised without vehicles.

On this basis, the judge concluded that the projected development was not either a rebuilding or a renewal, and therefore the claimant could not take advantage of the right.

Things to consider

Most of the case law on the meaning of terms such as 'rebuild' and 'renew' is in the context of repairing obligations in commercial leases. The judge was referred to cases in this area but thought that they did not assist since different considerations could apply in a landlord and tenant context from the present situation.

Developers who require rights of entry, drainage etc in order to carry out developments must examine the wording of expressly granted easements carefully to ensure that their proposals are covered.

Risegold Ltd v Escala Ltd

Restrictive covenants

In the December edition of property update, we looked at three cases dealing with applications to modify or discharge restrictive covenants.

In another case, Turner v Pryce, T applied to the High Court for an injunction preventing P and S from building three houses on land to the rear of their properties. All the properties in the road in which T, P and S lived were burdened by a covenant:

"To erect … a good and substantial … dwelling-house or one pair of semi-detached… dwelling-houses and no more".

The first point to note is that, despite the opening wording, this is a restrictive, not a positive covenant. It regulates the density of dwellings on the plot.

The court found that a building scheme existed on the road. This enabled anyone who owned a house which was part of the scheme to enforce the covenant against the owner of another property which was affected by it.

P and S argued that other properties in the road had built in contravention of the covenant. The court thought that a person who had the benefit of a covenant should not be deprived of his rights by the acts and omissions of others. The existing breaches had not changed the character of the estate as a whole. In fact, as the surrounding neighbourhood began to change, it was more important, not less, to uphold the covenants. Although the court had the power to declare a covenant unenforceable through obsolescence, it would only exercise this power in a very clear case. The better forum for determination of such questions was the Lands Tribunal.

The court did not think that a (more minor) breach of another covenant in the scheme by T prevented T from enforcing the covenant against P and S. T was prima facie entitled to an injunction and no exceptional circumstances existed to justify an award of damages instead.

Things to consider

The court noted that where development has taken place in breach of a restrictive covenant, under section 84 of the Law of Property Act 1925, the Lands Tribunal could modify the covenant to permit similar development on particular plots without having to declare the whole of the scheme obsolete.

The court does not have similar jurisdiction. A defendant in court proceedings for breach of covenant may apply to have the matter dealt with by the Lands Tribunal instead. In view of the flexibility offered by the ability of the Lands Tribunal to modify covenants and the reluctance of the court to declare covenants obsolete, this may be the preferred route for developers to take. This should however be weighed against the requirement on the Lands Tribunal to notify persons who may have the benefit of the covenant of the application to modify/discharge.

Where a building scheme exists, developers may face an uphill struggle in an application to discharge or modify a restrictive covenant. For so long as the original character of the scheme remains intact, the covenant will usually continue to secure a practical benefit.

Options

The claimants were the tenant of a property owned by a brewery. They had been granted an option to purchase the freehold of the property. After they had exercised the option, but before the sale to them had been completed, the brewery transferred the property to its wholly-owned subsidiary. The sale was at book value, which was substantially less than market value.

The property was unregistered. The option should therefore have been registered as a land charge if it was to bind a purchaser. This was not done. The trustees claimed specific performance of the option agreement against both the brewery and its subsidiary.

Applying established case law, the Court of Appeal held that the sale to the subsidiary was genuine and not a sham. There was no requirement in the land charges legislation that the sale should be to a purchaser acting in good faith. Therefore, the claim for specific performance against the subsidiary failed.

However, the brewery was liable for breach of contract. Since the brewery had parted with the property, usually the only remedy would be in damages. However, it was within the brewery's power to compel its subsidiary to transfer the property to the claimants. Therefore the claimants were awarded specific performance of the option against the brewery.

Coles and others v Samuel Smith Old Brewery (Tadcaster) and another

Things to consider

The court was able to do justice to the claimants in this situation because of the relationship between the defendants. Where the purchaser is not a company which is controlled by the grantor of the option, the grantee of an unregistered option will be left with a remedy in damages.

Adverse possession

In Ofulue v Bossert, B claimed title by adverse possession to a property owned by O. Until the Land Registration Act 2002 came into force, all cases of adverse possession were governed by the Limitation Act 1980. This provides that an action to recover land cannot be brought more than 12 years after it first accrued.

Adverse possession will only be established if the applicant can demonstrate not just factual possession but also an intention to possess the land. In the case of J A Pye (Oxford) Ltd v Graham, the House of Lords held that the fact that the Grahams would have been willing to pay rent for the land did not mean that they did not have the requisite intention to possess.

In Ofulue v Bossert, B had appeared to believe that he had a tenancy of the property from O. B was not paying any rent, although he did carry out substantial works to the property. In fact no tenancy had been granted. The Court of Appeal found that the fact that B believed himself to be a tenant did not mean that he did not have the intention needed for an adverse possession claim to succeed, since what is required is not an intention to own the property but an intention to possess it.

Under the Limitation Act, the 12 year period will start to run afresh if the person in possession acknowledges the title of the paper owner. In this case B had made an offer to purchase the property from O. O argued that this was an acknowledgment of his title which would have the effect of starting the clock running again from the beginning.

Unfortunately for O, the offer was made during possession proceedings commenced by O and was contained in a letter marked 'without prejudice'. As such, the usual rules of evidence applied and the letter was inadmissible. Neither was B's initial claim that he was a tenant an acknowledgment of title for the purposes of the Act. The relevant question in the dispute was who had the better claim to possession, and B had not acknowledged that O was entitled to possession.

Things to consider

Where a person in possession of registered land had not completed 12 years' adverse possession prior to 13 October 2003, the new procedure under the Land Registration Act 2002 will apply to determine their claim. Under the 2002 Act, it is much harder for registered proprietors to lose title to squatters.

Owners of unregistered land should therefore consider applying for voluntary first registration, to gain the protection of the mechanism in the 2002 Act. This is particularly the case given the decision of the Grand Chamber of the European Court of Human Rights in J A Pye (Oxford) Ltd v United Kingdom, which held that the procedure under the Limitation Act outlined above does not infringe the European Convention on Human Rights.

Contract

Was the vendor of shares in a company that owned a single property, who had served notice to complete on the purchaser, itself ready, able and willing to complete? That was the issue the court had to decide in Midill (97PL) Ltd v Park Lane Estates Limited.

Under the contract the purchase price of £4 million was payable in three instalments: £400,000 on exchange of contracts, a further £800,000 several weeks later and the balance on completion. The purchaser made the first two instalments but failed to complete on the contractual completion date. The seller served a notice to complete but this was not complied with. As a result the seller rescinded the contract and forfeited the £400,000 deposit paid on exchange of contracts, although it refunded the second instalment of £800,000 to the buyer.

The buyer claimed that the notice to complete was invalid as the seller was not 'ready, able and willing to complete' as required by the contract. As the sale was a share sale of the company which owned the property, the contract provided for the seller to deliver a number of things to the buyer on completion. These included a signed stock transfer form, resignations of the directors and company secretary and various items such as the company's books. A board meeting was to be held on completion at which these resignations would be accepted and new officers nominated by the buyer would be appointed.

The buyer alleged that the seller was not in a position to deliver the resignations of the directors and that as a result it was not ready, able and willing to complete. The court disagreed. It found that the seller was waiting for names of the new directors to be supplied by the buyer before the existing directors would sign the relevant resignation forms.

Once those names were supplied, the forms (which had been prepared in draft) could have been signed within an hour or so. Although the outgoing directors were located in Jersey, the documents could have been faxed over in time for completion. The court concluded that the seller would have been able, within the time reasonably required to do so, to set up the necessary administrative arrangements to enable completion to take place. The court commented that, where there were no signs that the buyer would complete on time, it was not surprising that not all of the seller's documents were in order.

The court declined to return the initial deposit paid on exchange of contracts to the buyer. It did not think that the fact that the seller had subsequently sold the property for a higher price constituted special circumstances justifying the return of the deposit

Things to consider

The seller was wise to return the second instalment of £800,000 to the buyer. A clause which provides for a pre-determined sum to be forfeited by one party to a contract as a result of its default can be regarded in law as a penalty clause. Such a clause will be unenforceable unless it is a genuine pre-estimate of loss. It is well established that the normal conveyancing practice of taking a 10% deposit on exchange constitutes an exception to this rule.

However, sellers who take and forfeit deposits of more than 10% cannot benefit from this exception and may be obliged to return the whole amount (not just the excess over 10%). The purchaser initially argued that, as this was a contract for the sale of shares, not land, the established exception did not apply. If this were the case, it could also have challenged the forfeiture of the 10% deposit paid on exchange. However, this submission was not developed further and so the court did not find it necessary to decide the point.

The court said that there would be nothing to stop the parties to a contract agreeing as between themselves that whether or not a deposit should be returned would depend on the outcome of a future sale. While a court would almost certainly have some regard to such an agreement, it seems doubtful whether it would be binding on the court. This is because recent case law has confirmed that the court's jurisdiction to decide whether or not a deposit should be returned cannot be ousted by agreement between the parties.

A seller who suspects its buyer is going to default should still use all endeavours to ensure it is ready, able and willing to complete. This will minimise the risk of a subsequent challenge by the buyer.

Landlord and Tenant Act 1954

What rights will be included in a renewal lease which is granted to a tenant pursuant to the Landlord and Tenant Act 1954?

In Picture Warehouse Ltd v Cornhill Investments Ltd, an undertenant agreed with its immediate landlord to give up its existing lease of the second floor of a building in return for a new lease of the ground floor. It would keep one of the three car parking spaces it had on the first floor, but would give up the other two in return for having two designated spaces on land at the front of the building. The rent under the new lease was to be reduced as a result.

Some work was required to the land at the front of the building in order to make it suitable for car parking. The freeholder of the premises objected as their permission had not been sought for the work.

Although the original intention was that a right to park at the front of the building would be included in the lease, the difficulties with the freeholder made this impossible. Instead, the undertenant requested an 'assurance letter' from its landlord regarding the parking. The landlord wrote to the undertenant:

"You, your customers and deliveries are allowed to park on the front block paved area for a maximum of 30 minutes (pick-up, drop-off point). …This must be adhered to to avoid further conflict with [the freeholder]".

The move took place, but it was some time before the new lease was entered into. It contained no provision as to parking save for the retained space on the first floor. Difficulties subsequently ensued over parking at the front of the premises. The area was often occupied by the vehicles of other tenants.

The undertenant sought a new lease under the security of tenure provisions in the Landlord and Tenant Act 1954. In particular, it sought a right to park two vehicles on the area at the front of the property for no more than 30 minutes at a time. The undertenant's argument was based on section 32(3) of the 1954 Act, which provides:

"Where the current tenancy includes rights enjoyed by the tenant in connection with the holding, those rights shall be included in a tenancy ordered to be granted [under the Act]".

The court held that, as the lease did not include any rights as to parking at the front of the property, section 32(3) was of no assistance. Under section 35 of the Act, the court has a general discretion to determine the terms of the new lease. The judge held, following previous case law, that this did not enable the court to enlarge the undertenant's holding by ordering the grant of an easement over the landlord's land which the undertenant had not previously enjoyed.

The court found that the letter from the landlord amounted to no more than a bare licence. As such, it was liable to determination. The undertenant had not established a case to have a term included in the lease giving it an irrevocable right to park two cars outside the building. The undertenant had to continue to rely on the terms of the existing letter from its landlord.

Things to consider

There are many reasons why side letters may be used rather than incorporate terms into the main lease. Often, where the relationship between landlord and tenant is good, the parties are content to rely on such letters. However, they can give rise to difficulties. Questions can arise as to whether they are enforceable against successors in title to the landlord, or (where not expressed to be personal) whether assignees of the tenant's interest in the property can take the benefit.

This case reinforces the potentially precarious nature of such rights. A tenant cannot use a lease renewal under the 1954 Act to 'boost' existing informal benefits into the status of full easements, which would be irrevocable and capable of being passed on to successors in title.

Contracts (Rights of Third Parties) Act

The Contracts (Rights of Third Parties) Act 1999 made headlines when it was enacted since it made it possible for a person who is not a party to a contract to take the benefit of it. However, in practice its impact has been minimal, since most commercial contracts exclude the operation of the Act. As a result, there are very few instances in which it has come before the courts. The High Court's decision in Prudential Assurance Co Ltd v Ayres and another (considered in the June 2007 edition of Property Update) has been overturned by the Court of Appeal.

The tenant, a partnership, had taken an assignment of a lease from the defendants. On the assignment the defendants had given an authorised guarantee agreement (AGA) to the landlord, guaranteeing the partnership's obligations under the lease. A supplemental deed was entered into between the tenant and the landlord, under which it was agreed that the landlord's right of recovery against the tenant or any previous tenant would be limited to the assets of the partnership. The aim of the deed was that the individual partners should not incur any personal liability beyond the partnership assets.

Subsequently the partnership fell into financial difficulties, and the landlord sought to recover from the defendants under the AGA. The defendants relied on the words 'or any previous tenant' in the supplemental deed to limit their liability. The defendants were not a party to the supplemental deed and their defence was based on the Contracts (Rights of Third Parties) Act 1999.

The defendants had argued that the intention in including former tenants in the supplemental deed was to prevent the landlord being able to recover in full from the defendants under the AGA. Otherwise, the defendants would in turn be able to pursue the tenant for the full amount under the indemnity which was given to the defendants on assignment. This would circumvent the protection which the tenant had negotiated for itself with the landlord.

The High Court ruled in the defendants' favour, holding that the wording of the deed purported to confer a benefit on them. The Court of Appeal disagreed.

The court held that, against the commercial background to the transaction, the words 'or any previous tenant' in the supplemental deed had clearly been inserted in the wrong place. The relevant clause should have read 'any recovery by the Landlord or any previous tenant against the Tenant shall be limited to the assets of the partnership'. In other words, the clause was actually designed to restrict the defendants' remedies against the tenant, not confer a benefit on them.

The court acknowledged that, since the defendants were not a party to the supplemental deed, the clause was in fact ineffective to achieve this aim. However, it found that the tenant had made it clear from a very early stage that it was only willing to proceed on the basis that there should be no recourse against the personal assets of the individual partners, and that both the landlord and the defendants were willing to accept this. The Court of Appeal noted that the supplemental deed was entered into around the same time as the AGA. The court thought that if the parties had intended that the defendants' liability under the AGA should be limited, the defendants would have been a party to the supplemental deed. In addition, the court would have expected to see the liability in the AGA similarly qualified.

Things to consider

The court showed it to be willing to rewrite the terms of the supplemental deed to fit with what it thought was the commercial background to the transaction. That background will include any information (other than evidence of negotiations or subjective intention) that was reasonably available to both parties at the time of entering into the contract, which would have affected the way in which the language of the document would have been understood by a reasonable man. The background may enable the reasonable man to conclude that the parties must, for whatever reason, have used the wrong words or syntax.

While there are undoubtedly times when this is the case, these are usually situations in which a rectification claim would be appropriate. Outside this course of action, many will be concerned at the court's apparent willingness to effectively amend the terms of documents which have been negotiated at arm's length between commercial parties with the benefit of legal advice.

The court did make the point that the defendants' construction of the supplemental deed would give rise to great uncertainty. It would be necessary to read it as if it provided that the amount that could be recovered from the defendants should not exceed the value of the assets of the partnership or, perhaps, the amount that could be recovered from the partnership in a liquidation. It would be unclear both how much the landlord was entitled to recover and the date at which that was to be determined. The court therefore concluded that this was not what could have been intended.

There are circumstances in which the Contracts (Rights of Third Parties) Act can be useful. Those advocating the use of the Act may be disappointed by the Court of Appeal's decision. Following this case, it seems that if the Act is to fulfil its purpose of enabling third parties to enforce contracts, very clear wording must be used.

The above articles were written by Sarah Allen, associate in Wragge & Co's Real Estate group.

Planning and related matters

Compulsory purchase

New rules for compulsory purchase inquiries have come into force with effect from 29 January. These replace the various rules in force since the 1990s and update the language used. There are changed timetabling procedures which bring the process more in line with planning inquiries.

Call-in directions

Under s77 of the Town and Country Planning Act, the Secretary of State can direct that planning applications of certain types should be referred to her for determination, and not by the local planning authority. Currently there are directions relating to some types of retail development, playing fields, development plans, green belt proposals and development in the flood plain.

In a survey carried out in 2006-2007, of the 786 applications which fell within the descriptions in the directions, only 36 were actually called-in.

The Secretary of State has published a consultation paper (closing date 31 March) which considers whether it is appropriate to reduce the number of applications which fall within the requirements for call-in, thereby reducing administration cost and delay. The proposals are to reduce the number of applications which have to be notified by the elimination of outmoded notification requirements, ensuring that thresholds for notifications are at a sufficiently high level and consolidating the directions to a single direction.

The new direction would deal with:

• Playing fields - referral of proposals which the local planning authority is minded to approve, but where there is an unresolved objection by Sport England. This could be because there would be a deficiency of playing field provision in the locality, or because the alternative provision proposed by the application is not of sufficient quality, quantity or accessibility.
• Green belt – referral of buildings with a floorspace of more than 1000 square metres and any other development with a significant impact on openness.
• Flooding – any major development in the flood plain to which there is an unresolved objection by the Environment Agency.
• Town centres – referral of proposals for more than 5000 square metre gross retail leisure office or mixed commercial floorspace. But only for sites in edge or out of centre locations and which do not accord with an up to date development plan document. Referral may also apply to smaller proposals where there is a cumulative effect with existing retail etc provision.
• Heritage – referral of significant development affecting World Heritage Sites where there is an unresolved objection by English Heritage.

Planning Policy Statements (PPS) on climate change

The Government has published a PPS as a supplement to PPS1. It sets out ways in which the planning regime can contribute to reducing carbon emissions and combating climate change.

There is (at least) one controversial issue. The PPS gives local planning authorities considerable flexibility to decide whether the energy needs of a new development should be met by on-site/near-site renewable or low carbon energy sources. This appears to apply to all new development, whether residential or not.

This requirement is known as 'Merton-plus' and derives from the 'Merton Rule' introduced in 2003 by the London Borough of Merton:

'All new non-residential developments above a threshold of 1000 square metres will be expected to incorporate renewable energy production equipment to provide at least 10% of predicted energy requirements'

Local authorities must treat the PPS as a material consideration in determining planning applications. Developers may have a challenging time in meeting requirements such as this, when faced with a north facing site in a sheltered location, where solar panels and small scale wind turbines would be ineffective. These requirements may put some proposals beyond economic viability.

This analysis was written by Jan Hebblethwaite (jan_hebblethwaite@wragge.com), associate in Wragge & Co's Real Estate group.