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Real Estate matters - July 2016‏

25 Jul 2016
The Collyer Bristow review of Real Estate issues
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JULY 2016
The Right to Rebuild versus Quiet Enjoyment – what should landlords be aware of?
A right to rebuild land is of paramount importance to a property owner, particularly if it wishes to enhance the commercial value of its property. In the landlord and tenant context, a landlord is under an implied obligation to give its tenant “quiet enjoyment” of premises, meaning that it must ensure that the tenant is able to possess and enjoy the property without interference. Normally, a covenant for quiet enjoyment is expressly included in the lease. The covenant has some overlap with a landlord’s implied obligation not to derogate from its grant, meaning that the landlord cannot do something that would take away from the tenant enjoying the property that has been let to it.
Property Fund Suspensions – What are the legal issues about “gates” preventing investors making withdrawals?
One of the key areas likely to be affected by Brexit is the financial services industry. Although the full effects will not be known for months, if not years, the referendum result has already produced immediate concerns of FX derivative misselling claims and potential disputes arising from the suspension of trading in UK property funds.

Property Fund Suspensions

Several of the biggest UK property funds have closed the gates on investors attempting to withdraw their money following a sharp rise in redemption requests since the Brexit vote. This has led to a number of issues between funds and their investors. Some investors are unhappy because they are being prevented from moving their money out of the fund when they want to reduce exposure to UK Real Estate. Conversely, other investors are unhappy because, in their view, gates were not closed quickly enough to avoid the need to sell assets to pay out to those redeeming, resulting in a loss of value of their stake – avoiding such losses being the purpose of the gates sold as an “enhancement” to protect investors in times of market turmoil.

This gives rise to a number of legal questions about the contractual mechanisms relating to the suspension mechanisms, for example:
  • What can investors do to challenge the way in which the use of the gate mechanism has affected them?
  • Who decides when to close the gates and on what basis?
  • What duties are owed by the fund manager when deciding whether and when to close the gates and to whom?
  • How long should the gates remain closed and who decides when to reopen them and on what basis?
  • Have the assets been valued fairly and accurately when pricing redemptions?
  • What happens when the suspension is lifted? Can the fund revalue the assets to reflect a fire sale price and give investors the option to redeem at that level?
Determining the rent under the 1954 Act – getting it right
Settling the rent for a Landlord and Tenant Act 1954 (“1954 Act”) protected lease is almost always the most difficult part of any renewal. Section 34 of the 1954 Act provides a court with the power to determine the rent to be paid under a renewal lease in the absence of agreement between the parties. Two recent cases highlight the crucial importance of providing relevant comparable evidence to the court or risk suffering the financial consequences.

In the case of Britel Fund Trustees Limited v B & Q Plc (2016) (unreported) HHJ Mitchel was asked to determine the rent payable for the renewal of a retail warehouse lease. The renewal lease terms had mainly been agreed (save for rent) and included a mutual rolling break option. The rent being paid by the tenant, B&Q, at the end of the old lease was £776,139 per annum or £20 per sq ft. The landlord proposed an annual rent for the new lease of £696,500 per annum (equivalent to £18.90psf) and B&Q argued it should be £281,000 per annum (or £7.60 psf).

There was clearly a considerable difference in opinion between the parties which the court was tasked with deciding. When determining the correct level of rent the court had to focus in particular on: (a) whether any allowance for a 3 month rent free period should be made; and (b) the open market rent level for this warehouse lease with the inclusion of the break option.
Break Clauses: Will you be paying too much or refunding money that you do not need to?
Are you just about to serve a break notice or have you just received one?

If so, it is probably a good time to remind yourself of the case of Marks and Spencer plc v BNP Paribas Securities. This case has provided welcome clarity on the issue of rents paid in respect of a period falling after a break date in a lease, where such break has been validly exercised.

Marks and Spencer plc (the “Tenant”) v BNP Paribas Securities (the “Landlord”) was an appeal case decided in early December 2015. Briefly, the facts of the case related to various leases held by the Tenant in an office building in Paddington. These leases gave the Tenant the right to break on two separate occasions, the first of which was 24 January 2012. The break right was subject to the following conditions:

“on the break date there are no arrears of Basic Rent or VAT on Basic Rent; and…..on or prior to the First Break Date the tenant pays to the landlord the sum of £919,800 plus VAT.”

The latter condition was not applicable at the second break date in 2016.
A Licensor’s Liability for Nuisance

In the well-known case of Lawrence v Coventry [2014] UKSC 46, the Supreme Court held that to be liable for a nuisance committed by its tenant, a landlord must have authorised the nuisance, either by participating actively or directly in the nuisance or by letting the property in circumstances where there was a very high degree of probability that the letting would result in the nuisance.

The Court of Appeal in the recent case of Cocking v Eacott [2016] EWCA Civ 140, had cause to consider whether a licensor was liable for a nuisance committed by her daughter, to whom she had granted a bare licence to occupy a residential property that she owned but did not herself occupy.

Take notice; case provides some reassurance for landowners

In Winterburn & Anor v Bennett & Anor[2016] EWCA Civ 482 the Court of Appeal confirmed that a landowner can prevent prescriptive rights being acquired over its land simply by erecting clear and visible signs.

The Conservative Club Association (“the Club”) had owned the disputed land (part of its car park) until 2010, at which time it was purchased by the Bennetts in this case. The Winterburns own and operate a fish and chip shop sitting adjacent to the entrance to the car park and throughout their time of operation, their suppliers and customers used the disputed land to park. In 2012 the Bennetts let the Club building and car park to a tenant who obstructed vehicular access to the car park, leading the Winterburns to bring a claim for prescriptive rights over the land belonging to the Bennetts, for themselves and others using their premises.

Liability for disrepair - buy-to-let landlords give thanks to the Supreme Court

In May this year the Supreme Court handed down judgment in the case of Edwards v Kumarasamy [2016] UKSC 40 concerning a landlord's responsibility under section 11 of the Landlord and Tenant Act 1985 (“the 1985 Act”) for injuries caused to his tenant. The legal obligation for landlords under section 11 is to keep the ‘structure and exterior’ of rented properties in repair together with any area in which the landlord has an “estate or interest”.

Mr Edwards was the sub-tenant of a second floor flat pursuant to an assured shorthold tenancy granted by his landlord, Mr Kumarasamy. Mr Kumarasamy himself was the head lessee of the flat and did not own the block of flats or the exterior area. There was a pathway leading between the front door of the block of flats and the communal bins, over which Mr Edwards would walk in order to take his rubbish out. On one such occasion, Mr Edwards tripped on an uneven paving stone and injured himself. He then sued Mr Kumarasamy and the question arose as to whether Mr Kumarasamy was in breach of his implied covenant to keep the structure and exterior of the property in repair, pursuant to section 11 of the 1985 Act.
For further information, please contact:
Stephen Gawne
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Paul Henson
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John Rochman
+44 (0)20 7468 7212
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Jonathan Wiese
+44 (0)20 7468 7274
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Michael Grace
+44 (0)20 7468 7360
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Janet Armstrong-Fox
+44 (0)20 7468 7221
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Alex O'Connor
+44 (0)20 7468 7259
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Rory Macpherson
+44 (0)20 7470 4582
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Jonathan Pawlowski
+44 (0)20 7470 4422
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