REAL INSIGHT - Property Update - January 2011
The grand plan for localism
The Localism Bill started in Committee last week and news reports reveal differing views as to its impact on property owners. However, two striking features of the Bill - which have received little media attention - have the potential to cause unwanted delays to transactions.
The Community Right to Buy allows local groups to require local authorities to designate certain properties as “community assets”. For a five-year period (which can be renewed indefinitely) owners are unable to sell the property without first notifying the local community and giving them time to submit their own bid. The range of assets is yet to be published, but will probably include local pubs and shops and could stretch to any building that the local community think may be convertible to one of the new free schools. As well as intentionally causing delay, there is a risk of entire asset classes being tagged as "difficult to sell".
Planning enforcement provisions have been altered to give local authorities power to enforce breaches of planning control even when the usual time limits have expired. The Government’s drafting goes beyond deliberately hiding a planning breach and arguably allows the local authority to enforce against any breach that they did not previously know about, even if decades old. If not handled properly, this will only add to the costs and difficulties relating to property transactions.
Red light for tenants who sublet
From a brothel in Central London to a garage in Northumberland: two recent cases highlight the problems experienced by landlords in policing subtenancies. Both cases relate to failed attempts, by landlords, to forfeit the head lease but the rationale provided in each case is very different.
Patel v K & J Restaurants concerned a central London flat which was turned into a brothel in breach of a covenant not to use the premises for illegal or immoral use, while Roadside Group v Zara Commercial related to the breach of a covenant not to park on a garage forecourt
In the first case, the Court of Appeal granted the tenant relief from forfeiture because the breach was by a subtenant, the premises had since been re-let by the tenant and the premises had not been stigmatised as they were in close proximity to a red-light area. In the second case, the High Court considered the detailed wording of the lease, and ruled that the tenant was not liable for his subtenant's activities and no breach had occurred.
The over-riding point to note is that courts have a wide discretion in deciding whether or not to grant relief from forfeiture. The court will look at a large number of factors including the financial positions of the parties and the detailed wording of the lease.
Patel v K & J Restaurants
The landlord granted a lease of a restaurant and flat in Tottenham Court Road and the tenant sublet the flat to a woman who used it as a brothel. This was in breach of a covenant in the lease that “the demised premises shall not be used for any illegal or immoral purpose”. The police served notices on the landlord and tenant requiring them to take immediate action to remedy the situation. This was one of the grounds used by the landlord to seek forfeiture of the lease. The tenant evicted the subtenant and applied for relief from forfeiture.
Generally, courts consider a breach of covenant involving immoral use as irremediable, in some cases because the property can be stigmatised. However, it can be remediable where the breach is by a subtenant and the tenant acts promptly on discovering the breach. In this case the court decided that the breach was irremediable, as the tenant had not made enquiries as to the user when the police had first contacted him about their suspicions, some three months earlier than the formal notices. However, the premises had been re-let, no further police action was taken, and the premises had not been stigmatised as they were in close proximity to a red-light area.
The court held that the landlord had not suffered any lasting damage and would gain a financial advantage, subjecting the tenant to a corresponding financial disadvantage out of proportion to the breach. Therefore the court granted relief from forfeiture
Roadside Group v Zara Commercial
The second case related to an underlease of a car showroom and service garage. The covenant in the head lease, which was replicated in the underlease was "not to use the demised premises or any part for the parking of cars for sale on any forecourt". The subtenant parked cars for sale on the forecourt with the consent of the tenant. The landlord sought forfeiture of the head lease.
It seems strange that, despite the provisions of the lease, the tenant could avoid the covenant entirely, simply by under-letting, but that was the result in this case.
The High Court held that there is a distinction between a covenant "not to use" (as in this lease) and a covenant expressed either as "shall not be used" or "not to permit the use".
The lease contained some covenants in the latter style, but the parking covenant was in the former style (“not to use"), suggesting that it was intended to be narrower than the other covenants.
Furthermore, the landlord was not able to rely on Section 79 Law of Property Act 1925, which would normally pass the burden of the covenant to a subtenant. The statutory provision only applies where there is no evidence of contrary intention. The court held that the perceived limitation of the covenant was evidence of contrary intention, so s.79 did not apply.
Therefore the court held that tenant was not liable for the subtenant's activities and was not in breach of the lease.
Left high and dry by flood insurance
Recent floods around the world serve as a reminder that flooding can have a devastating effect on communities. There is also a great cost involved in rebuilding and defending affected communities; the UK floods in 2007 cost insurers over £3 billion.
The Coalition Government recently reduced their proposed budget for flood defences and, as the risk of flooding increases, insurers are growing wary.
Without insurance, the mortgageability of a property is questionable. Residential land and small businesses are covered by the 2008 Statement of Principles which guarantees insurance against flooding subject to certain conditions. This agreement expires in 2013 and some commentators predict that it will not be renewed.
If you are considering buying a property, we can carry out enhanced searches using detailed data which insurance companies will take into account when considering cover. We can also recommend consultants to price up flood protection measures and plan the use of the building to minimise flood damage.
Click here to view a consultation being carried out by the Coalition on the proposed reforms to flood defence funding.
Bribery Act: coming ready or not
Despite speculation about when the Bribery Act will come into force, steps should be taken now to ensure your organisation is prepared. Mishcon ASSURE™ is a unique product designed to help you to meet the new standards.
The Act is the most comprehensive anti-bribery legislation ever introduced in the UK. It focuses on how you gain and retain business and touches every aspect of your organisation, including your overseas operations. Individuals and organisations convicted of an offence under the Act face substantial sanctions, which could include a heavy fine and up to 10 years' imprisonment.
And the property industry will be particularly affected: click here to read Susan Freeman’s recent article in Property Week.
Preparation is the best form of defence
The Act introduces a brand new strict liability offence for organisations that fail to prevent bribery. The primary defence is to demonstrate that your organisation has in place “adequate” anti-bribery procedures and that such procedures are then followed. This is where we come in.
Mishcon ASSURE™
Mishcon ASSURE™ enables our legal experts to identify and enhance key areas of your organisation’s anti-bribery procedures to ensure they are as robust as possible. We will provide all necessary training and will liaise closely with communications experts and, where necessary, a behavioural psychologist to embed your anti-bribery policies into the culture of your organisation.
Should a crisis arise, our Fraud Defence team will provide strategic advice and our Reputation Protection team will act swiftly to mitigate any potential damage to your reputation.
For more information about the changes the Act will bring to the UK’s corporate compliance laws, and how Mishcon de Reya can help you to prepare, please click here.