Commercial Property Newsletter Spring 2011

Spring 2011

Welcome to our quarterly legal update for the commercial property industry.

For more information or if you have any comments about this newsletter, contact Jo Clark, a solicitor in our commercial property team or Maureen Edwards, our business development manager.

Service of break notices

Guarantors of assigning tenants still off the hook

Residential service charges

Tax update

Budget 2011

Service of break notices
getting it right

In MW Trustees Ltd v Telular Corporation, a tenant had a lucky escape when it served a break notice on its former landlord by mistake.

When that landlord informed the tenant that it had sold the property, the tenant then emailed a copy of the notice to the existing landlord. The landlord forwarded the email to its managing agent who said it was happy for the tenant to break the lease, but also asked that the tenant re-address the notice to the address of the current landlord (the tenant failed to do this).

The landlord challenged the break notice on the basis that service by email was not an option under the lease terms and that the notice was addressed to the wrong party.

However, the court held that the landlord’s agent’s email represented an acceptance by the landlord of the notice and the landlord was therefore estopped from challenging the validity of the notice and that it had waived its right to require a new notice to be served in the way specified in the lease.

The court noted that the break clause simply provided that the tenant had to "give" notice to the landlord. Applying the principles in Mannai Ltd v Eagle Star Insurance Co Ltd, a reasonable recipient of the notice would not have been misled as to the tenant's intention to terminate the lease because the notice was addressed to the wrong person. The court commented that if the landlord or its agent had simply acknowledged receipt of the notice and said nothing more, it would have been open to them to challenge the validity of the notice.

It is therefore essential to get the process right and ensure that notices are served strictly in accordance with the procedure laid down in the lease.

Landlords should be careful what they say when acknowledging receipt of break notices, otherwise they may find that they have inadvertently waived their right to insist on strict compliance with the terms of the lease.

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Guarantors of assigning tenants
still off the hook

The ruling in Good Harvest Partnership LLP v Centaur Services Ltd has been upheld and applied in K/A Victoria Street v House of Fraser (Stores Management) Ltd.

This ruling was that provisions requiring a guarantor to the assignor of a lease to guarantee the assignee’s performance of the tenant’s covenants in the lease are void.

This is because they fall foul of the extensive anti-avoidance provisions contained in section 25 of the Landlord and Tenant (Covenants) Act 1995, as they “exclude, modify or otherwise frustrate” other provisions of that Act. In the House of Fraser case, parties had entered into an agreement for lease which was guaranteed by the tenant’s parent company.

The agreement contained an obligation on the tenant to assign its lease to another group company and for the parent company to act as guarantor for the assignee.

The court held that this requirement was unenforceable.

Unfortunately, the court did not give any guidance as to whether sub-guarantees (whereby the assignor’s performance under an AGA is guaranteed) are lawful and so this remains unclear.

Landlords can therefore still not rely on assignor’s guarantors remaining on the hook following an assignment, in any format.

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Residential service charges
buyers beware

With the growth of mixed use development, more commercial landlords need to be aware of detailed rules requiring advance consultation in relation to residential service charges.

In Daejan Investments Ltd v Benson and others, the Court of Appeal upheld the Leasehold Valuation Tribunal’s ruling that Daejan (the landlord) did not comply with the rules governing consultation requirements, as set out in the Landlord and Tenant Act 1987.

Daejan’s claim of around £270,000 from five long leaseholders of a mixed use building was shot down and the landlord was only permitted to claim £250 from each leaseholder.

Although the Leasehold Valuation Tribunal has the power to dispense with the consultation requirements laid down in the Act, it refused to do so in this case.

When the matter went to the Court of Appeal, it was made clear that the financial consequences for the landlord are not relevant and the primary consideration for the Tribunal in deciding whether to sanction dispensation is whether the tenants will be significantly prejudiced.

Landlords ignore these rules at their peril.

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Tax update
SDLT

Remember that from 6 April 2011, the SDLT rate for residential property acquisitions exceeding £1million increases to 5%.

The top rate of SDLT for commercial property will remain at 4%.

VAT

A landlord’s VAT option to tax can sometimes be disapplied where the occupier is VAT-exempt and so unable to recover at least 80% of its VAT.

This is clearly bad news for a landlord who cannot recover its input tax.

HM Revenue and Customs has therefore moderated the disapplication rules so that they will not affect an option to tax where:

- The landlord or a connected person occupies 2% of the building for exempt purposes;

- A person providing finance to the landlord for the purchase or development of the building occupies up to 10% of the building; or

- The occupation by a bank is merely by means of its ATMs.

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Budget 2011

Readers will be aware of the recent Budget.

Points of note for the real estate sector include proposals to simplify the planning process.

The default answer for development should now be “yes” and all applications should be processed within 12 months.

The use classes order is to be reviewed, with a view to removing the need to obtain permission to change from B1, B2 and B8 (business, general industrial and storage) to C3 (residential).

National policy targets for previously developed land are to be removed and there should be more flexibility for new housing on greenfield sites.

How all this will translate into real and useful change on the ground remains to be seen.

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