Property update - July/August 2008

Lock-out agreements / duty to act in good faith

During negotiations for a development agreement, a developer entered into two lock-out (or "exclusivity") agreements with English Partnerships. The first ran from 26 October 2004 until 21 December 2004 and the second ran from 21 December 2004 until 21 April 2005.

The lock-out agreements provided that English Partnerships would not, during the period of each agreement, "invite tenders for or enter into negotiations for the sale, development letting or charging of the Property" or "allow any person to view, measure, survey or carry out site investigations on the Property". The agreements also provided that the developer and English Partnerships "each owed the other a duty of good faith".

The developer had difficulties in obtaining funding, and the second lock-out agreement expired. English Partnerships continued to deal with the developer, but it laid down target dates by which the developer had to exchange the development agreement and start work on site. Unfortunately the developer's partner in the deal pulled out on 12 July 2005. This caused English Partnerships to terminate negotiations on 15 July.

The developer claimed that, in breach of the lock out provisions, English Partnerships had negotiated with, and entertained a tender from, a third party. In addition, the developer claimed English Partnerships had gone through the motions of negotiating and let the developer incur considerable expense, when in reality English Partnerships had no intention of entering any agreement with the developer. The developer argued that consequently English Partnerships had not acted in good faith.

The court found on the facts that English Partnerships had negotiated with the developer in good faith. Provided the developer could meet its requirements, English Partnerships was willing to enter a development agreement. Against the background of the protracted period of time over which negotiations had been conducted, and the various sources of finance courted by the developer over that period, it was perfectly proper for English Partnerships to say that, if the partnership with the developer's then partner failed, the negotiations would be terminated.

The court also found that English Partnerships did not deal with any other party in respect of the land until after the negotiations with the developer had been terminated.

As such, there had been no breaches of the two lock-out agreements. There was no bar to English Partnerships terminating negotiations as it did.

Things to consider

Some continental jurisdictions have the concept of a duty to carry on negotiations in good faith, but this is not generally recognised by English law. It is seen as being contrary to the right of a party to withdraw from negotiations at any time and for any reason, and is considered too uncertain to be enforceable. However, there have been several cases in the last year where a duty to act in good faith (as opposed to a duty to negotiate in good faith) has been in issue. The exact scope of such a duty will depend on the facts of each case and the context in which it arises.

In this case, the allegation that English Partnerships had not acted in good faith was because the developer believed that the negotiations were a sham. It argued that English Partnerships never had any intention of giving the project to the developer. The court found that allegation to be unfounded. On that basis, there was no need to examine the scope of the duty to act in good faith in any more depth.

Chilli Developments Ltd v Commission of the New Towns

Proprietary estoppel - court holds tenant at will entitled to a lease

The claimant in this case was occupying premises for the purposes of his business running a cash and carry. However, the status of his occupation was unclear. He had initially moved in while negotiating with the then tenant for an assignment of the lease. However, no assignment had ever been completed. The landlord had been happy to accept rent from the claimant, and commenced negotiations with the claimant for the grant to it of a new 21-year lease.

However, nothing was ever concluded, and the claimant continued to occupy on fairly amicable terms with the landlord for a number of years, although no formal documentation was in place. When the parties eventually fell out, the claimant served a request for a new tenancy under section 26 of the Landlord and Tenant Act 1954. The landlord served a counter-notice which opposed the claimant's request on the ground of the claimant's persistent delay in paying rent.

The issue before the court was whether the claimant was entitled to a new lease and, if so, on what grounds.

Since no assignment of the original lease had been completed, the claimant's occupation was either on the basis of a periodic tenancy, or as a mere tenant at will.

The judge at first instance found that the claimant was a tenant at will. The claimant had initially gone into occupation in the expectation of terms being agreed for an assignment. When negotiations for that broke down, he remained in occupation in the expectation of terms being agreed for the grant of a new lease.

The Court of Appeal did not find it necessary to decide the point, although it did indicate that the claimant had not persuaded it that the trial judge's conclusion was wrong. The reason it was unnecessary to reach a firm conclusion on the question of whether the claimant was a periodic tenant or a tenant at will was that in neither case was the claimant entitled to serve a section 26 request. Such a request can only be made by a tenant under a fixed term lease exceeding one year, not a periodic tenancy. Tenancies at will are outside the scope of the Act altogether. The request made by the tenant was therefore of no effect.

Were there any other grounds on which the claimant was entitled to a lease? The court held that there were. The claimant had spent money improving the premises under the landlord's encouragement of an expectation in the claimant that he would be granted a 21-year lease. This gave rise to a proprietary estoppel in the claimant's favour.

The general rule in relation to proprietary estoppel is that the court must award the minimum equity necessary to do justice to the claimant. The landlord argued that this would mean reimbursing the claimant for his expenditure. However, the court disagreed, as the claimant had invested heavily in the business being run at the property. Instead, the court declared that the claimant was entitled to a 21-year lease of the premises.

The landlord had argued that the claimant ought not to be granted a new lease because of his persistent delay in paying rent. That was initially raised as a defence to the claimant's request for a new lease under the Act, but the landlord argued that it was also a circumstance which ought to defeat the claimant's proprietary estoppel. The court found that the landlord had acceded to the late payments, and that it was not a factor which would disentitle the claimant to a lease.

Things to consider

This case illustrates the dangers of allowing occupation without formal documentation in place. The landlord's problems began when it did not take decisive action following the change in occupier under the original lease.

Although in this case the court found that the claimant was only a tenant at will, where rent is accepted there is always a risk that this will give rise to a periodic tenancy which will benefit from security of tenure under the Landlord and Tenant Act 1954. In this case, despite the finding in the landlord's favour on the tenancy at will point, the landlord was by its conduct estopped from denying the claimant a new lease.

On a lease renewal claim under the Act, the maximum term a court can order is 15 years. Since the claim in this case was founded in proprietary estoppel, the court was not limited by the Act and ordered a 21-year lease.

Nazam (trading as New Dadyal Cash and Carry) v Manton Securities Ltd

Easements - scope of right of way

This case arose out of a dispute between neighbours, but it has implications for the scope of any right of way.

The Brooks family and the Young family owned adjacent terraced houses. The Youngs had the benefit of a right of way from their back garden along a path at the rear of the Brooks' house. The path then ran down the side of the Brooks' house to reach the street. Both houses had access via their front doors onto the street in the usual way.

The Brooks complained that the Youngs' use of the right of way was excessive. The dispute centred around the wording of the easement, which was "for all proper purposes connected with the reasonable enjoyment of the property". The Brooks argued that these words limited the right of way, so that the Youngs could only use the path at the rear when it was impractical to go in and out via their front door.

The County Court found in favour of the Brooks' construction of the right of way. However, this was overturned by the Court of Appeal.

When construing an easement, the court will have regard to the intention of the original parties, which has to be determined from the words of the grant in the light of the surrounding circumstances. Both houses had been sold off under the right-to-buy scheme by the local authority, which had therefore granted the original easement. The Brooks produced a letter from the local authority which supported their interpretation. The court held that this evidence of the authority's actual intentions would only be admissible in a claim for rectification – no such claim was made.

The court found that there was nothing to suggest that the Youngs' enjoyment of their house was unreasonable, for the purposes of the wording of the easement. Their various uses of the path, including as a means of access for their visitors, were perfectly proper purposes connected with the occupation of their house. To read the grant in the way the Brooks were suggesting would mean substituting "all necessary purposes" for "all proper purposes".

Things to consider

When granting easements, careful thought should be given as to the precise scope of the rights required. Standard forms of wording are commonly used, which may need to be cut down to suit the circumstances of a particular case. In the May edition of Property Update we reviewed the case of Hunte v E Bottomley & Sons, where it was held that a landlord was not entitled to re-route a tenant's right of way over the roads on the estate.

By definition, an easement will involve some impingement on the grantor's enjoyment of his land. If it is intended that a means of access should only be used where there is no viable alternative, this must be clearly spelled out.

In this case, the court was careful to point out that if the Youngs had been using their house for some improper or unreasonable purpose, then the right of way would not extend to that purpose. The court did not give examples, but it would seem to follow that if, say, business use was prohibited at the property, then use of the path by clients, or for deliveries to the business, would not be within the scope of the easement. On the facts of this case, the Youngs' use of the right of way when they could just as easily have used the front door instead may have been inconsiderate, but it was not unlawful.

Brooks v Young

Landlord and tenant - consent to assignment / refund of deposit

In Landlord Protect Ltd v St Anselm Development Company Ltd, a buyer contracted to purchase a leasehold property. The contract was conditional on obtaining landlord's consent to the assignment. If consent was not obtained within three months, either the seller or the buyer could rescind the agreement and the deposit which the buyer had paid on exchange would be returned.

In the sale contract, the seller agreed to use all reasonable endeavours to obtain landlord's consent. The buyer had to execute such licence or other deed of covenant as may be required and provide guarantees, a rent deposit or other security if properly required under the lease. As the buyer was a dormant company which had never traded, the landlord required a guarantee from the buyer's sole director as a condition of giving consent. Unfortunately, the parties could not agree as to the terms of the guarantee.

Under the lease, the landlord could not unreasonably withhold its consent. Pursuant to the Landlord & Tenant Act 1988, this meant that any conditions imposed by the landlord had to be reasonable. The buyer had initially agreed to the provision of a guarantor, but only if the guarantee was released after three years. In previous proceedings, the buyer had argued that the landlord was acting unreasonably in refusing to accept this. This was rejected by the court.

The buyer then agreed to the guarantee, provided that it would automatically be released on an assignment of the lease. The lease pre-dated the Landlord & Tenant (Covenants) Act 1995, which provides for the automatic release of guarantors in this way. The landlord agreed to this, provided that a "reasonable alternative guarantor" was provided by the assignee. This was subsequently amended to a proviso that "reasonable alternative security" was provided by the assignee.

The buyer argued that this requirement was an unreasonable condition. On that basis, after three months it gave notice to rescind the contract and requested the return of its deposit.

The seller disputed that the buyer was entitled to rescind the contract, arguing that the buyer was in breach of its obligation under the sale contract to provide a guarantee. The seller served notice to complete on the buyer, and when the buyer failed to complete, the seller rescinded the contract and forfeited the buyer's deposit.

The question before the court was whether the buyer was entitled to rescind the contract and reclaim its deposit. This depended on whether the condition proposed by the landlord was a reasonable one. The buyer argued that the landlord was trying to improve its position beyond that in the lease, which it was not entitled to do.

The court found that the landlord's requirement was a reasonable and proper one. The condition stipulated a reasonable alternative security, not an equivalent security. The security referred to was capable of being satisfied by the covenant strength of the assignee itself. In this context "security" did not mean an additional asset or something which had to be provided by a third party, such as a rent deposit or guarantee, but bore the natural dictionary meaning of protection and safety. Therefore, the condition did not secure any additional rights than those which the landlord already enjoyed under the lease.

Things to consider

This case illustrates the potential uncertainties of exchanging contracts conditional on a third party's consent. The litigation was drawn out over a period of two years, and ended with the buyer losing a deposit of over £100,000. The buyer was a weak covenant, and should have been able to foresee that a guarantee would be requested.

If there are matters to which a buyer is adamant it cannot agree, it should negotiate a right to withdraw in the event that consent is offered subject to those conditions. Sellers will however resist such attempts on the ground that consent should be governed by the terms of the lease. In this case the property was purchased at auction, and so the contract was not open to negotiation.

The court found that the landlord's original requirement - that a reasonable alternative guarantor should be provided by any purchaser of the lease before the buyer's guarantor would be released - would have amounted to a collateral advantage and would therefore have been unreasonable. The lease did not give the landlord an entitlement to a guarantor throughout the term of the lease. However, this requirement was abandoned in favour of the provision of reasonable alternative security, and this was found to be reasonable.

Landlord Protect Ltd v St Anselm Development Company Ltd (2008)
Landlord Protect Ltd v Dolman (2006)

Leasehold enfranchisement - right of a head tenant to a new long lease of an individual flat

Tenants of long leasehold flats have a number of statutory rights. They have a right of pre-emption if the landlord makes a relevant disposal, and they have a separate right of collective enfranchisement to acquire the landlord's interest in the property. In addition, a qualifying tenant of a flat also has the individual right to acquire a new long lease of the flat from his landlord. The question raised in this case was whether a tenant of premises which included a flat, but which also included property other than flats, could claim a new lease of the flat.

In each of the two cases which made up this conjoined appeal, the majority of a building had been let under a headlease. In one case, the building comprised six storeys; the lower three of which were used as offices, and the upper three consisted of a maisonette (which had been subject to an assured shorthold tenancy, but was now vacant). In the other case, the building contained five residential flats; the upper three were subject to long underleases, and the lower two were let on assured short-hold tenancies. The head tenant in the first case was claiming a new lease of the maisonette. In the second case, the claim related to the lower two flats.

The House of Lords considered the matter in a number of stages.

At the first stage it considered the language used in the Leasehold Reform, Housing and Urban Development Act 1993, which is the statute conferring the right to a new lease. Having reached the conclusion that the wording of the Act allowed the head lessees to make a claim, the court went on to consider arguments of public policy put forward by the freeholders as to why the Act should not apply in these circumstances. These were essentially that the statute was intended to benefit owner occupiers, and not property investors.

The court disagreed. The residence requirement which had previously existed (whereby the tenant had to have occupied the flat as his principal residence for three out of the last 10 years) was abolished by Parliament in 2002. It was replaced by a requirement that the tenant must simply have owned the lease for two years before making a claim.

This opened the way for non-resident tenants (including buy-to-let landlords) to claim new leases. The Act had been introduced to deal with the problem of leaseholds being a wasting asset, and this was as much of a problem for investors as for owner occupiers. The Act provides for compensation to be payable to the freeholder, so there was no reason why the right claimed should be contrary to public policy.

Finally, the court looked at whether it would be practical to apply the provisions of the Act to the grant of a new lease in these circumstances. A number of difficulties had been identified by the freeholders. These included:

• How to determine the extent of the demise under the new lease
• How to adapt the terms of the headlease to make it suitable for use as a lease of an individual flat
• The fragmentation of ownership which would result from a new lease being granted in these circumstances, since the head tenant would then hold its interest in the building under two separate leases: the headlease (excluding the flat), and the flat lease
• How to apportion the rent payable under the headlease
• How to grant easements in the flat lease (since the tenant of the flat lease and the tenant of the common parts would be one and the same person)
• How to deal with repairing obligations in the flat lease (since the head tenant, not the freeholder, was responsible for repair of the building by virtue of the headlease).

Nonetheless, the court felt that none of these difficulties was insuperable, and that they could be addressed by the Leasehold Valuation Tribunal on a case-by-case basis.

Things to consider

The opportunity to apply for a new lease of a flat contained in a headlease of larger premises will usually only be of benefit to a head tenant where the headlease has (in headlease terms) a relatively short period of time left to run. The right under the Act is to a new lease for a term expiring 90 years after the end date of the existing lease. The headleases in this case were only about 60 years, so there was a considerable advantage in buying another 90. Where head tenants hold buildings under 999 year leases, there will be little cause to use the provisions of the Act.

Another point worth mentioning is that, under the Act, there cannot be more than one qualifying tenant of a flat at the same time. This means that where a flat has been sublet on a long lease, the head tenant will not be able to take advantage of the right to a new lease of that flat.

Earl Cadogan v 26 Cadogan Square Ltd; Howard de Walden Estates Ltd v Aggio

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

Planning

Delay in bringing judicial review proceedings

A local group sought permission to bring a judicial review of the council's grant of planning permission for a wind farm on the ground that the council had failed to comply with the requirements of the Environmental Impact Assessment Regulations. This was on the basis that technical wind speed data supporting the wind farm application had not been made available to the planning committee nor to the interested parties. At the committee meeting the members were made aware of the existence of the data, which was contained on CDs, but they declined to carry out a site visit.

The court found that planning permission would have been granted in any event. The data was disclosed to the committee meeting and the local group knew of the existence of the data a few days before the meeting but failed to act on that knowledge. There was no unfairness in the breach of the Regulations.

Additionally, the court refused permission on the basis that the claimant did not start proceedings until three months after the decision of the committee. The court said that the need for expedition was of particular importance in challenges to the grant of planning permission. It was important that at the very least a claimant should demonstrate that he was serious at an early stage. It was not reasonable to wait three months after the grant of permission. The developer had incurred expense between the grant of permission and the application having been made and it would be prejudiced if the claim were to succeed.

Andrew Finn-Kelcey v Milton Keynes Borough Council and MK Wind Farm Ltd (17 July 2008)

Compulsory purchase – betterment and date of entry

In Esso Petroleum Co Ltd v Secretary of State for Transport, the acquiring authority was planning some highway improvements which required the compulsory purchase of part of the claimant's property. The authority removed hedges and vegetation from land occupied with the claimant's petrol station for the purpose of avoiding the bird nesting season and to help combat foot and mouth disease. No development was carried out for some time and the claimant carried on operating its petrol station.

The court had to determine date of entry by the acquiring authority. This is relevant in setting the date at which the value of the acquired land is calculated and from which interest on the compensation starts to run.

The court concluded that the land clearance was not minimal and was carried out for the purpose of enabling construction of the highway improvements to proceed. It did constitute entry and the taking of possession and set the date for valuation of the acquired land.

The court also settled the point that, in setting compensation for land acquired under a Compulsory Purchase Order, the Lands Tribunal is entitled to take into account any betterment (i.e. increased value) in the claimant's retained property.

Consultation on changes to the London Plan

This document has been published by the new Mayor of London outlining policies and initiatives he intends to implement. Most changes can be dealt with under the existing London Plan but will require Supplementary Planning Guidance (SPG) to be issued. This is the first stage in a review of the whole plan which is expected to be completed in 2012.

Key issues

Housing – a draft housing strategy will be published in 2008 with revised SPG. The mayor wants to see boroughs bringing vacant property back to use and increased housing densities where appropriate.

Affordable housing targets – the 50% target will be removed. The mayor wants to work with organisations to deliver 50,000 affordable homes over three years.

Tall buildings – Locations will be identified as suitable for tall buildings, in places where there are existing clusters of tall buildings such as Isle of Dogs and Croydon.

Outer London – an Outer London Commission will be established.

Retail – The mayor will work with Camden and Westminster councils to support and improve the West End. Proposals will be introduced to enable the use of section 106 agreements to require developers to provide affordable shop units in major retail schemes.

Transport – The Crossrail Act received Royal Assent on 22 July 2008. The plan will be changed to allow the planning system to seek contributions towards the cost of Crossrail. In addition, the mayor will oppose a third runway at Heathrow and will review the long-term options for London's airports including scope for a new airport in the Thames Estuary. SPG will be issued on cycle parking and a cycle hire scheme similar to that in Paris. Use of the Thames and other waterways for transportation will be encouraged.

Detailed planning permission – plans form a part of the permission

The High Court has held that the plans submitted with a detailed application for building operations form an integral part of the permission granted. The plans would therefore be taken into account when construing the permission even if there was no direct reference to them in the permission.

The court did draw a distinction between an application for a new build property and an application for an extension to an existing property. In the former the "red-line plan" could be reasonably inferred to show the curtilage of the new house. In the latter there may be an application to extend the curtilage but there was no necessary implication that it would do so.

Barnett v Secretary of State for Communities and Local Government and another

Written by Jan Hebblethwaite, associate in Wragge & Co's Real Estate group.