Real Estate Legal Update

Enforceability of guarantees - bad news for landlords

Richard C. Nicoll — Tue, 02 Mar 2010 06:10:41 -0800

This post was written by Richard Nicoll, Catrin Phillips and Siobhan Hayes.

A decision by the High Court on the liability of a guarantor has just been published and is already causing concern and consternation in the market.

The case involved a lease granted to Tenant A whose obligations were guaranteed. When Tenant A assigned its lease to Tenant B the landlord granted consent and relied on the lease clause requiring that both Tenant A and its guarantor enter into an authorised guarantee agreement. The Court decided that when Tenant B defaulted and the landlord tried to enforce against the guarantor that it could not do so. The guarantee was held to be void because of the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995. Leave to appeal has been granted and we expect the appeal to be lodged.

This case has serious implications for landlords granting new leases with guarantors, to investors where covenant strength and value depend on such a guarantee and to potential buyers of those investments. Here are some initial thoughts -

Granting a new lease involving a guarantor - consider now making the guarantor a joint tenant rather than a guarantor. This will avoid the dilution of covenant strength that all too easily happens on assignment. If your tenant is taking separate leases of a number of floors think again about whether this should be a single lease deal. We have a number of options for changing the lease assignments clause and suitability depends on the market place so needs individual advice.

Assignment of a lease involving a guarantor - review any applications for consent being processed to require other security for the assignee to compensate for not being able to call on the original guarantor to guarantee the liabilities of the assignee. These cases often turn on the wording of the lease and we are working with our clients to adopt appropriate solutions to manage individual risk in a situation where tenants have number of statutory rights.

Buying an investment - check that the potential impact of this case is factored into the valuation where an AGA has been given by a guarantor.

Investors suing AGA guarantors - expect some robust defences from guarantors like the one in this case. Consider all your enforcement options.

Please contact your usual Reed Smith attorney for advice.

Bribery Bill Update

Siobhan Hayes — Fri, 26 Feb 2010 08:06:01 -0800

This post was written by Mark Hargreaves, Emma Parsons and Catrin Phillips

Following on from our original blog on the Bribery Bill there have been some changes to the Bill during its speedy passage through Parliament. We have no doubt that this Bill will be enacted before the General Election. Agents, investors and developers do need to be aware of the new law and will be required to review internal procedures and contracts with those supplying services to them to ensure they minimise any risks of a criminal sanction.

In relation to the offence that a company can commit by failing to prevent bribery (reported on in our original blog) setting up suitable internal procedures and training, and auditing these, remains the crucial element to having a defence. The latest draft of the Bill specifies that guidance on these adequate procedures will now be statutory. We expect the guidance to be published in the summer. We will be updating you on this in due course as more information becomes available as to the expected content of the guidance. Remember, this can affect agreements with people who provide services to you as well as your own organisation. As mentioned previously, there will, however, be time to comply before the law is in force. It is now believed that the strict liability offence for corporates will come into force in the autumn of this year although the rest of the legislation is expected be in force force early in the summer.

Directors of companies will be interested to know that there is individual criminal liability under the Bill. Where the offence of giving or receiving a bribe is committed by a company, the Bill includes an offence where a senior officer consents or connives with that act of bribery. This is a separate, individual, offence. A senior officer means a director, manager, company secretary, or other similar officer. The offence covers those who have a close connection with the UK. This includes British citizens and anyone resident in the UK. Any senior officer who is a British citizen is therefore caught, even if the act is committed abroad and they do not reside in the UK!

You may be wondering how this should change the way property people do business here and abroad. Our “finger in the air” test when offering hospitality or other facilities to people with whom you’re doing business is to ask yourself “will what I’m doing make this person feel beholden to me?” If the answer is yes, you need to stop and think about the activity some more, to decide if it gives you an improper advantage. And if you are unsure, get in touch and we’ll be happy to advise you further.

Bribery Bill and the Property Industry

Siobhan Hayes — Wed, 27 Jan 2010 08:52:37 -0800

This post was written by George Brown, Mark Hargreaves and Emma Parsons

Can the Bribery Bill, which we are told will become law before the General Election, affect property investors, agents and buyers?

It is well over a decade since the UK Government started consultation on the future of the law controlling bribery. The new Bribery Bill was introduced to Parliament in November 2009 and is now at the Committee stage. Although the Government is keen to ensure that this is enacted before the General Election there will be time before the law is in force. However those in the property industry need to think now about how to react and what new internal procedures they will need as a result.

The Bill will introduce a new offence, “the failure of a commercial organisation to prevent bribery”. That can be avoided if proper procedures are put in place.

MAIN OFFENCES

Generally the aim of the Government is not to change the basic understanding as to what is corrupt but the Bill does contain a statutory definition of bribery.

It will be an offence to give/or receive a bribe. Bribery can be committed by individuals or companies.

Also there is a new strict liability offence for corporates who will be liable for the actions of those providing services for them or on their behalf. This could include, not only employees but also agents and JV partners. In these relationships, the corporate may have very little control over the behaviour of the third parties particularly in relating to pre-existing arrangements. The Government has made clear that lack of control will not be seen as an adequate defence to the offence, so how can that be avoided?

ADEQUATE PROCEDURES

The strict liability offence can be defended where the corporate can show that they have put adequate procedures in place to seek to prevent persons within the corporate from participating in bribery. The Government has confirmed that non-statutory guidance as to what will amount to ‘adequate procedures’ will be provided after the Bill has been enacted but before the new law is enforced. The guidance is required to cover all types of commercial endeavour and as a result will be very general but it is likely that a combination of risk assessment, codes of practice, clear policies on gifts/hospitality, whistle blowing facilities and procedures to monitor all of these will form a part of what is considered good practice in this area. Moreover, ‘adequate procedures’ will need to be seen not only to have been created but also implemented through training and regular checks to ensure that the system works. Our specialists in compliance are well aware of the issues that will have to be covered and how the guidance is likely to be framed. For that reason corporates will need to start devising and implementing these procedures now so that they know that there is an effective and active procedure in place when the a new law comes into force.

ISSUES IN THE PROPERTY WORLD

The new offence which will be introduced by the Bill means that the actions or activities of individuals might give rise to the prosecution of the corporate who employs or contracts with them. One example of such an action might be the hospitality offered to agents or third parties, or the promise of further business or a favour in another transaction. Whether an offence is committed would be based on a whole matrix of facts but it would be important to focus on the intention of those providing the activity or arrangement. Where it can be shown that the activity or arrangement was made either to get favourable treatment or as a reward for having received such treatment then the individual involved may fall foul of the general bribery offences. Equally, the corporate would also be liable under the new offence.

We will be monitoring the passage of the Bribery Bill and will provide further comment in subsequent client alerts. In the meantime, if you would like any advice, in particular, about the proposed ‘adequate procedures defence’ or would like to make a comment, please contact Mark Hargreaves, George Brown or your usual client partner. George has experience of a vast range of compliance issues and can provide additional advice. Mark has experience of many property transactions.

Mark and George’s contact details are as follows:

George Brown
Partner, London
+44(0) 203 116 2849

Mark Hargreaves
Partner, London
+44(0) 203 116 2959

Payment of Rent by Tenants in Administration: good news for Landlords

Siobhan Hayes — Fri, 15 Jan 2010 07:45:01 -0800

This post was written by Clare Whitaker, Katherine Campbell and Siobhan Hayes.

A decision by the High Court in December has strengthened the position of landlords who sometimes do not get paid during the administration even where the administrator is running the business from the property.

Certain categories of expense which may be incurred by the company after it has gone into administration, and which an administrator has to pay are known as "expenses of the administration" and the assets of the company in administration must be applied towards payment of these expenses ahead of any payment to creditors under floating charges or to unsecured creditors.

The categories of expense include "expenses properly incurred by the administrator in performing the functions in the administration" and "any necessary disbursements by the administrator in the course of the administration". These two categories of expense in fact rank ahead of the administrator's own remuneration.

In December, the Court decided that, if a leasehold property is occupied by a company in administration for the benefit of creditors, the administrator must pay the rent under the lease as an administration expense because it falls into one of the two categories mentioned above. The rent is payable whether or not the landlord demands it.

Before this case, there had been no decision about whether rent could be claimed by a landlord as an administration expense for the period following the administrator's appointment. The moratorium which arises on administration prevents landlords (and other creditors) taking action against a company in administration. This means that landlords are unable to take forfeiture proceedings to recover rent without the consent of the administrators or the permission of the Court.

In practice, many administrators were paying rent on the premises the company occupied but had a discretion about what and when to pay and since landlords were considered to rank as unsecured creditors, prospects of recovering arrears were poor even for the rent that accrued during the administration only.

In the case under discussion, the company in administration was only in occupation of a small part of the premises and argued that the liability for rent should be assessed by reference to the floor space which they were actually occupying. On the particular facts, the Court felt that the administrator should pay the full rent following evidence from the landlord's surveyor that, as long as the company remained in occupation, there was no realistic prospect of maximising the return from the premises. Clearly, this might not always be the case.

A factor which is not in the landlord’s favour is whether the assets of the company are sufficient to enable the administrator to pay the rent as it arises. If the sufficiency of the assets to meet the rent, together with other priority claims, is in doubt, the administrator will be justified in deferring payment until he leaves office. As such, landlords do not have a right to immediate payment, but they are entitled to know that the accruing rent is being treated as an administration expense with appropriate priority for as long as the company is making use of the premises and that, subject to the assets being enough, it will be paid at the end of the administration. This is not ideal but there is nothing else that can be done.

Where, as in the case decided in December, the assets are acknowledged to be sufficient to meet the rent as it arises, the administrator had no justification for not paying the rent quarterly in advance in accordance with the lease for as long as the company continued to occupy any part of the premises for the purposes of the administration.

Sadly landlords facing pre-packs will not gain from this as the process involves the new company taking occupation immediately the administration and sale have been set up. The landlord is often simply left trying to negotiate the terms of the new company’s occupation. In that situation it can be helpful to agree a surrender with the administrator and to have a direct relationship with the new company and the ability to recover something for the occupation of the property direct without involving the administrator. If that is not the case then under some pre-pack sale agreements the new company is required to pay the administrator rent and landlords so sometimes claim that successfully from the administrators.

Action Points for Landlords:

1. When you know the tenant is in administration but the premises are being traded from contact the administrator to persuade him to pay rent as an expense.

2. Where there is an asset sale of the business by the administrator to a new company who is trading from the premises put the administrator under pressure to cover the rent until a formal assignment is completed. Our experience is that sometimes this can be successful.

Service of Notices, Deadlines and the Post Strike

Siobhan Hayes — Mon, 26 Oct 2009 09:52:19 -0800

This post was written by Siobhan Hayes and Richard Nicoll.

Every Tenant’s worst nightmare is to miss a break date in a Lease of unwanted space! With rental demand currently weak, Landlords are likely to take any technical point they can to defeat a Tenant’s break notice and the rental void it would trigger.

Often the decision to serve break notices is left until close to the deadline and with the current disruptions caused by the post strike the risks of slip ups are increased. Tenants need to plan ahead to avoid last minute panics. Also because of the law relating to service, Landlords may not be able to assume that non receipt of a formal notice by the deadline means that the lease continues.

When formal notices have to be served, there is often a significant event that will happen as a result. It can be vital that the formalities of the clause specifying how notices are to be served are observed because as one case famously said if the clause had said that the notice had to be on blue paper it would have been no good on pink paper!

Three different statutes affect the service of notices in the property world and all of them will be overridden by any specific provisions written into the document under which the notice is to be served. The technicalities of this would not make interesting blog reading although they exercise real estate lawyers' minds when notices have to be served.

Taking the example of the break notice the well advised tenant will be asking:

What does the lease say about how a notice is to be served? Is the specified method for service mandatory or is it just a permission to serve as specified? Old leases often specified that documents could or should be served by registered post which no longer exists. What is the appropriate method today?
Am I likely to have a dispute about whether notice has been validly served and if so how can I go about proving I served properly?
What is the up-to-date address for the landlord? If you now have an overseas landlord how can notice be served on it validly and how long will it take?
Does the notice have to be received to be effective?
Will the notice be deemed to have been received even if it does not come to the attention of a specific individual by the deadline and if so how soon is it deemed to be received?
What deadline am I working to?

For Landlords the alarming message is that non receipt by the deadline is not necessarily the end of the story. Notices may still have been served validly even if never received, depending on how the notice is or has to be served. There is no easy solution to this for Landlords.

The current postal strikes add further complications. The News is all about the backlog of mail and fears that some of it may never be delivered. We have recent experience of a break notice sent by recorded delivery taking over a week to arrive.

Here are a few practical tips which might help when serving break or other kinds of notice:

Check carefully what the document says about service and if the required method is mandatory, stick to it by the letter and serve it in plenty of time - so much time that you could do it again before the deadline if something goes wrong!
If you suspect that strict compliance with the service requirements will result in the notice not reaching the recipient by the deadline (whether because of the post strike or for other reasons) then consider ways of minimising the risk of future disputes. One approach will be to make contact by more practical means to make sure the right person knows what is happening within the deadline e.g. serve by post if that is the required method but also deliver a copy/duplicate by hand.
Make sure you can prove service of your notice.
Ask for an acknowledgement of receipt and chase for it if not given promptly.

Extra service might entail a bit of expense, time and effort but the costs are likely to be far cheaper than paying rent and other outgoings for unwanted space until the end of the term or until the next break date!

We know, of course, that this is a time where legal spend is being watched by many but not instructing your solicitor to serve notice could be a false economy.

Contested lease renewal continues despite landlord's administration

Siobhan Hayes — Mon, 19 Oct 2009 02:59:56 -0800

This post was written by Siobhan Hayes and Clare Whitaker.

We have spent a lot of time thinking about landlords being affected by tenants going into administration over the last year. This posting is about a court case where the landlord’s administrators were trying to postpone the tenant’s application to Court for the grant of a new tenancy under the 1954 Act.

The administrators failed in their attempts to defer the 1954 Act proceedings even though it severely affected the value of the property in question and the amount that was going to be paid out to the secured creditor.

The case in question was Somerfield Stores Limited v Spring (Sutton Coldfield) Limited. Somerfield as tenant had applied for a new lease under the 1954 Act and the landlord had objected on the grounds that it was intending to redevelop the property. The tenant made its Court application and then the landlord was put into administration.

As is usual the administration meant that ongoing court proceedings could not be progressed without the consent of the administrators or the leave of the court and this was the application for leave to continue the lease renewal application.

The only creditor likely to receive any money out of the administration was the bank as secured creditor. The preferential creditors and unsecured creditors were unlikely to be paid anything out of the administration whether or not the landlord company redeveloped the property.

There was no prospect of the landlord company being rescued as a going concern.

The administrators could not prove sufficient intention to redevelop at the time of this hearing and were likely to be unable to prove that even after a delay of six or even 12 months. It is common for landlords to use the period of time between serving the 1954 Act notice (objecting to a new lease and specifying an intention to redevelop) and the court hearing date getting evidence of their intention to redevelop and the courts have always required a clear and settled intention to redevelop to be proved. The tenant however wanted a new lease and had its own refurbishment plans it was keen to implement.

The High Court allowed the lease renewal application to progress. They said that the rights of third parties (in this case the tenant) should not be prejudiced by the administration. For the administrators to succeed the administrators would have to have shown that the prejudice to the tenant’s rights was truly necessary to achieve the administration objective and in this case it wasn’t. The tenant had a legitimate interest in having the court application heard and the court balanced that against the right of the administrators to conduct an orderly administration, the objective of the administration.

Tenants caught by their landlords insolvency may take comfort from this judgment which shows that the landlord’s administration need not necessarily frustrate their business plans.

Administrators of companies with investment properties cannot assume that the moratorium on court proceedings will give them the ability to defer any lease renewal cases indefinitely. In the absence of ‘fire sales’, we may start to see more situations where administrators and banks are holding properties and are prepared to invest in their redevelopment. If so, administrators may want to think about more imaginative solutions than simply pursuing the strategy of the landlord company, such as short term leases to existing occupiers whilst the redevelopment market picks up.

As ever the solution to each problem will depend on the detailed facts but administrators cannot have it all their own way.

Land Agreements come under the Competition Law Spotlight

Siobhan Hayes — Tue, 13 Oct 2009 07:31:06 -0800

This post was written by Siobhan Hayes and Lesley Davey.

At the beginning of October the UK’s Competition Commission (CC) recommended to Government that introduces as “competition test” in planning decisions for large grocery stores. This follows on from the CC’s 2008 supermarkets’ investigation where it found that the planning regime helped larger supermarkets restrict competition in local markets. Whether or not the Government takes up the recommendation remains to be seen, however the CC’s investigation has also brought all land agreements under the competition law spotlight.

The Government is currently consulting on whether land agreements generally should continue to be exempt from competition law. At the time the exemption was introduced it was thought that the majority of land agreements would not have a negative impact on competition in markets. However the CC’s supermarkets’ investigation highlighted that provisions in land agreements could impact on competition. If the exemption is removed, landlords and tenants would have to review carefully provisions that we currently think of as quite usual to ensure they do not breach competition law.

This posting considers what effect a removal of the exemption would have on landlords and tenants?

It is quite usual for tenants who are taking on big commitments in terms of fitting out costs and lease rents and term, to require a covenant from their landlord not to let to a competitor. With the existence of the Land Agreements Exclusion and Revocation Order 2004 it has been assumed that such provisions are exempted by competition rules. What the supermarkets’ investigation showed was that these types of provision could be anti-competitive, depending on the relevant market. If the exemption is formally removed, land agreements will have to be assessed to ensure compliance with the Competition Act 1998. Consequently parties to quite usual pre-let agreements would have to assess whether or not their agreement was going to restrict competition, check their market share and know whether their market is affected by similar agreements.

The Government’s preferred option is to repeal the exemption and expose land agreements to the full effect of competition law. While many pre-let agreements would not have a significant impact on competition, in some markets they could have anti-competitive effects. If the exemption is removed, potential anti competitive effects will need to be taken into account when drafting such agreements. Similarly if the exemption goes, existing agreements will become vulnerable to challenge if they contain anti-competitive provisions that could have an effect in their particular markets. Some clients might want to review any vulnerable agreements now to try to maximise the chances of re-negotiating agreements before the law changes.

If the exemption is repealed the Office of Fair Trade will be required to produce guidance on how land agreements should be assessed under competition law. This Guidance would aim to help businesses assess whether or not their agreements were anti-competitive.

The consultation deadline is 4 November and it remains to be seen whether there is support for the Government’s preferred option. However given that it comes on the back of the CC’s in-depth investigation of the supermarkets and the planning process, it seems likely that the proposal will go ahead.

Anyone wanting to read the consultation in full can link to it here and anyone wanting to reply to the consultation should note that the deadline is 4 November 2009.

CVAs and their effect on landlords

Siobhan Hayes — Wed, 26 Aug 2009 07:06:56 -0800

This post was written by Siobhan Hayes and Katherine Campbell.

This week we have seen the headlines about the Focus DIY Corporate Voluntary Arrangement (CVA). It is reported that landlords have accepted the CVA and that will enable Focus to continue a significant part of the business and to retain a large number of jobs. Welcome news in many respects.

CVAs can have a significant impact on a property investment so this posting considers how CVAs work and their impact on leases?

A CVA can be used by a company in financial difficulty to make an arrangement with its creditors to cover the payment of all or part of its debts. It is a powerful tool if used correctly as it can bind individual landlords and vary lease terms even where a landlord did not approve the CVA or did not know of it at the time.

A CVA can only be put in place if it has been approved following a formal process governed by the Insolvency Act 1986. Each CVA has to be approved by a simple majority of the shareholders and by 75% (or more) in value of the company’s creditors who attend the relevant meeting and vote. Once approved by the relevant majorities, the CVA creates a binding contract that affects all the creditors referred to in the CVA. Individual landlords can find themselves with no say over how the terms of their lease are affected. The impact on investment value can be significant.

Leases can be varied by a CVA. Rent can be reduced and the lease term can be shorted. Some leases may just be brought to an end. The landlord is bound by the changes.

The 2007 case of Prudential v Powerhouse created the recipe for CVAs effectively releasing a parent company guarantee where its subsidiary is a tenant and is in difficulty although the CVA in that case failed because it unfairly prejudiced the landlords of stores that were closed when compared to landlords of stores that were to continue trading. As long as there is no unfair prejudice to a group of creditors, lease guarantees can effectively be removed by a CVA leading to falls in investment value.

This year we have seen a case involving the surrender of a lease following the tenant, Cotswold Company’s CVA. The landlord needed to mitigate its loss and to re-let the premises. The deed of surrender specified that the landlord could still claim for any payment due to it under the CVA even though the lease was brought to an end. If Cotswold’s landlord had not clearly reserved the right to make a full claim under the CVA then the deed of surrender would have ended the lease liabilities as normal and removed the landlord’s right to claim for loss of future rent.

All landlords need to consider the terms of any CVA presented to them very carefully to see what claims they may make and to vote accordingly. Some unfortunate CVA wording about future liabilities under any leases may have unfortunate consequences.

Recovering Rent From Sub-Tenants

Siobhan Hayes — Wed, 29 Jul 2009 04:31:08 -0800

This post was written by Siobhan Hayes and Katherine Campbell.

Many landlords use an old remedy to recover unpaid rent from sub-tenants where tenants have gone into default. This is set out in Section 6 of the Law of Distress Amendment Act 1908. The remedy pre-dates the rescue culture intended by administration by nearly a century. Given the increasing number of tenant companies in administration, landlords are asking whether the old Section 6 right survives the moratorium that administration gives to the administrator whilst he tries to restructure or sell the company or its business.

This is an area where there is some legal debate at present. We are of the opinion that landlords can use this remedy but it is untested by case law.

What is the effect of Section 6 of the 1908 Act? It creates a right for a landlord to receive rent from a sub-tenant when the tenant is in arrears by service of a notice. Technically, it deems the sub-tenant to be the immediate tenant of the landlord.

What does the moratorium protect? The moratorium prevents steps being taken to enforce security over the property of the company in administration (except with the consent of the administrator or an order of the court). It also prevents the start or continuation of any legal process against the company in administration.

Can Section 6 be used when the company is in administration? The answer to this question hinges on whether Section 6 operates as a method of ‘enforcing security over the company’s property’ or constitutes the initiation of legal process against the company. There does not seem to be any reason for it to fall into the category of being the start of a legal process.

There are some interesting technical legal arguments around the issue of whether this constitutes enforcing security but no case law. Our view is that it probably does not constitute enforcing security over a company’s property and any landlord would be well advised to try the remedy where the tenant is in arrears and the sub-tenant is solvent, whether or not the tenant is in administration.

It will be interesting to see whether in this market there is an administrator who finally challenges a landlord who takes such a step.

Can section 6 be used against unlawful occupiers? Sadly for landlords we think not as Section 6 cannot be used where the underlease was granted in breach of the terms of the headlease. A retrospective consent to a short underlease (rather than a tolerated breach by the grant of a licence to occupy) could be considered coupled with notice of the intention to use Section 6. In the messy world of Administration, where pre packs mean third parties are in possession with the tacit consent of the administrator before you know it, this could help the landlord negotiate for payment of rent as an expense of the administration whilst the building is being occupied by Newco for the purposes of completing the administration.

Break Notices - Grounds for a Dispute

Siobhan Hayes — Wed, 24 Jun 2009 12:15:07 -0800

This post was written by Katherine Campbell and Siobhan Hayes.

Tenants exercising break clauses in their leases are creating plenty of work in the property disputes field at the moment. Many tenants who have the opportunity to break the term of their lease are seizing it, and landlords in return want to find any way possible to challenge the validity of those notices. This posting identifies some of the topics arising on lease breaks.

Broadly speaking, the issues that arise when a break notice is served are:

1. Was the notice validly served on the correct person, at the correct address, and by the correct method?

2. Was the break validly exercised in terms of any conditions that the tenant had to comply with in order to break it?

As to #1, the examples we see include notices addressed to managing agents, previous landlords, or simply addressed to the wrong address. The lease may be specific and direct service at the landlord's registered office address, for instance. It is imperative that the notice provisions of the lease are closely looked at before any notice is served. Many leases will also contain reference to section 196 of the Law of Property Act, which lays down specific methods of posting notices: ordinary first class will not do and, at the other end of the spectrum, service by courier will also be challenged.
The break clause itself must also be scrutinised. Not only will it provide for the period of notice that has to be given (and you'd be surprised how often that is ignored), but it will also set out any conditions to the exercise of the break right. This could be simply to have paid the rent up to the date of the break, or it could be to have complied with all covenants under the lease. Some clauses even require compliance as of the date the break notice is served. Some add confusion by specifying “material compliance,” which is another area where disputes can easily arise.

Courts currently seem inclined to treat a notice as validly served if in fact it came to the attention of the correct person at the time it was served or shortly thereafter, especially if an agent held itself out as having authority to accept service of notices on the landlord's behalf. A presumption toward the reality of the situation seems to be favoured. It is unlikely, however, to get you past specific provisions in the lease as to service at a particular address.

There is no such pragmatism, however, in terms of the effectiveness of the notice to terminate the term where conditions have to be complied with. Here, you may expect strict compliance with the terms of the lease, and this is where landlords can and do challenge. Was vacant possession actually given when not all of the tenant’s goods were removed by the break date? Was all rent, service charge, insurance, etc., paid up to the break date if it was apportioned up to the break date and not the next quarter day? Perhaps the biggest killer is, was the repairing covenant complied with or materially complied with, and this is often specified as a pre-condition to any break?

For the tenant's part, no tenant should be exercising a right to break where the repairing covenant is to be complied with, without entering into an agreement with the landlord as to exactly what is required in terms of repair at least six months before the termination date if possible, to allow work to be done. For the landlord's part, you have no obligation whatsoever to tell the tenant what it needs to do to comply with the covenant if you don't want to.

The subject is a minefield, and this is the barest of overviews. We can help if you need specific advice.

Welcome (A/K/A Why You Should Spend Time Here)

Siobhan Hayes — Tue, 16 Jun 2009 15:52:53 -0800

Welcome to The Real Estate Legal Update from Reed Smith's Real Estate Group based in London!

We know that some of you are clients of Reed Smith, and have been pointed to the blog because the lawyers with whom you work suggested it would be of interest. We hope this is a useful resource for you, and if you have ideas for the blog that would help you, then please do contact us.

We know that some of you found us through Google or another search engine, and have not worked with us in the past. We, of course, hope that you will do so in the future, and invite you to contact any member of our group.

However you found us, we hope you will find our updates useful. We plan to update this blog regularly with our latest thoughts on the impact of changing real estate law in England and Wales on the commercial property market. We will review case law, statute, and regulation from the perspective of landlords, tenants, owner occupiers, lenders and developers.

Please go ahead and browse, and as we said, don't hesitate to drop us a line with suggestions about how we can make this site more useful to you.

Can landlords carry out environmental surveys during the lease term?

Siobhan Hayes — Tue, 16 Jun 2009 15:50:06 -0800

This post was written by Siobhan Hayes and Richard Nicoll.

Landlords/investors involved in selling or refinancing tenanted properties may need to carry out intensive environmental tests to satisfy the buyer/lender. Can landlords do these without the tenant’s co-operation, for which a tenant may seek a high price? Leases of commercial property reserve specific rights of entry for landlords. Can these be exercised to allow an intrusive environmental investigation during the lifetime of a lease whilst a tenant is in occupation? Without an express reservation, it is highly unlikely that any commercial property lease would be interpreted to permit an environmental survey that would disrupt the tenant from carrying out its normal business.

Kwik-Fit has tested this in the past year in both England and Scotland, and the result was the same. In the case heard by the English High Court Heronslea (Mill Hill) Ltd v Kwik Fit Properties ltd, the Kwik-Fit unit had been a petrol filling station at one time, so the potential for soil contamination was high. The landlord wanted to drill 13 boreholes to a depth of five metres and one 20-metre deep borehole. The potential for disruption was high so Kwik-Fit refused access.

The lease granted in 2000 reserved for the landlord a right to enter onto the premises to inspect and make surveys and drawings. The landlord hoped this would cover its intrusive environmental survey. The High Court held that it could not, saying:

No reasonable person would have thought that a right granted in the year 2000 to enter to survey would have expected that to cover the drilling of boreholes and taking of samples
The ordinary meaning of a right to enter ‘on’ to property to ‘survey’ dating back to 2000 did not include a survey of what was under property
The tenant had a right to quiet enjoyment, which the investigations would disrupt

Given the significant due diligence now required when potentially contaminated land is sold or financed, landlords of land that may be contaminated need to think ahead. Do they want to keep quiet when granting a lease and hope that the usual tenant covenants cover any liability for historic contamination; or do they want to raise the issue and reserve the right to carry out environmental investigations? If they do that, they will have to expect the tenant to exclude liability for historic contamination.

In our opinion, it is appropriate for landlords to reserve rights and consider all the issues at the outset. Hoping that contamination is covered by implied lease terms may be simplistic and might lead to trouble if a tenant cannot pay the costs in any event.

Tenants of leases drafted some time ago may receive requests from their landlords to allow them onto the property to investigate, but do not have to consent unless they have a very unusual lease covering the point. Tenants may be able to use this as a bargaining chip. They certainly should require the work to be undertaken in line with a pre-agreed method statement containing provisions to minimise disruption, consider requiring a rent cesser, and obtain an indemnity from their landlord for loss or damage suffered as a result of the investigation. They may want an exclusion for any historic contamination discovered there (unless they caused it).

Landlords facing a refinancing requirement to produce environmental investigations before a loan can be made, may have some difficult negotiations either with the lender or the tenant.

Risk to developers of Common Land/Village Green claims

Siobhan Hayes — Tue, 16 Jun 2009 15:49:17 -0800

This post was written by Siobhan Hayes and Richard Nicoll.

This is a hot topic in that a number of developments are currently being delayed/called into question by claims that the site is common land or is a town or village green. Developers need to take care when they plan to develop land that has been used by the public for their recreation.

Why? That land may turn out to be a town or a village green that cannot be built on in perpetuity. The land that the town or village inhabitants have been using for their sports and pastimes is regarded as belonging to that community for the benefit of that community.

‘Sports and pastimes’ can include informal activities like dog walking and frisbee throwing. Sites particularly at risk are areas of unfenced open land close to communities that have been using the land without permission.

The Commons Act 2006 regulates greens and common land, and is slowly being brought into force. It will not operate in a way to make life any easier for developers. It is replacing the Commons Registration Act 1965.

Common land is not particularly controversial, but the new laws for town and village greens are already proving troublesome for developers. Land owners hoping to sell for development and potential developers need to be aware of a number of risks arising for land that has been used for recreation by the locals.

A group of individuals can apply to register any land as a town or a village green where that land has been lawfully used for sports or pastimes for at least 20 years by a significant number of people in the locality of that land.
The group does not need to have had permission to use the land for their use to be lawful.
Even if the group has been stopped from using the land in the past two years, they may still have the right to register the green. There are some very complex transitional provisions giving a longer period to people who had their recreational use stopped before 6 April 2007.

We have seen a reported case on the subject Lewis, R v Redcar and Cleveland Borough Council involving a proposed development by housebuilder Persimmon on a former Council golf course that was also used by locals for dog walking, and whose children played there—although they deferred to the golfers golfing. Although the developer won in this case and the land was not registered as a green (because the locals’ rights as a result of deferring to the golfers was limited or qualified), it took many years of litigating the old and new law to get to that conclusion; and during that time, the market for housing development has changed radically!

We have been involved in acquisitions of development land that have been held up by unanswered questions over informal use of the land, and whether it is at risk of being registered as a ‘green’.

Can developers do anything to avoid the uncertainty? It is not easy to avoid the uncertainty of knowing whether a group of local people will apply to register a green on land that a developer wants to build on, but:

When buying development land, carry out full investigations as to land use
Consider whether any title insurance policies could help back off some of the risk if land has habitually or sporadically been used for sports or pastimes
If the use of the land for sports or pastimes is recent, it may be wise to fence the land off to prevent the use long before the sale, although this may not be a guarantee that the land will not be registered as a green. However, users of the land have two years to register a green (unless use ceased before 6 April 2007, when they have five years).

As ever, the facts of any specific case will determine the best course of action, but this is a problem that cannot be ignored.

Risk to building owners - Remember to Notify Your Insurers

Siobhan Hayes — Tue, 16 Jun 2009 15:18:54 -0800

This post was written by Siobhan Hayes and Richard Nicoll.

The duty on investors and other owners to notify building insurers and keep them updated of all material circumstances should not be under-estimated. Failure to do this may result in cover being prejudiced.

An unusual case that reached the Court of Appeal earlier this year made us think about whether property investors have got more to disclose to their buildings insurers in this market. They probably have.

First of all, the case: Ansari v New India Assurance Ltd. The facts are unlikely to be repeated, but a less extreme set of facts could cause a similar problem.

The building owner took out insurance declaring that the building had a sprinkler system
The occupier turned the sprinkler system off to avoid water damage to his goods, and ‘fixed it’ by jamming a filing cabinet under the control handle so it could not be turned back on
The water supply to the building was later cut off
The owner saw the building at regular intervals
The use of the building changed from the storage of kitchenware to mini-motorbikes without the insurers being made aware
The building was damaged by fire
The owner claimed on the insurance
The insurers rejected the claim and cancelled the policy
The Court of Appeal agreed with the insurers. The owner was not entitled to any compensation for the fire damage.

As ever with insurance, the insurer has to be provided with all material facts that might influence its decision to insure or the amount of the premium. There was a clause in the insurance policy obliging the owner to notify the insurer of any change to the facts stated in the proposal form, and to give notice to the insurer if it became aware of any act or neglect that increased the risk of destruction or damage.

The owner did not notify the insurers about the new use or the non-functioning sprinkler system.

How is this relevant to well-organised property investors in this market? Insurance contracts containing these clauses are common. Sadly, we are seeing an increase in the number of tenants vacating premises as businesses go under in this economic climate. Sometimes the leases are brought to an end in an orderly way, but often there is a legally untidy situation where no tenant occupies or pays the rent, but the landlord is not in control of the premises. Landlords would need to notify the insurers that the property had been vacated, as this could increase the risk of damage to the building by trespassers.

How many landlords are checking that no other material changes need to be notified once premises are vacant, like the disconnection of a water supply to a sprinkler system by a tenant who has failed to pay its water bills (as well as the rent)?

Agents inspecting properties on behalf of landlords need to provide their clients with clear reports of any issues that need reporting to the insurers. Investors need to ensure that they know enough to do this.

Where leases remain, even though the tenant is not in occupation, the landlord may think it can rely on the lease clause requiring the tenant to notify them of anything that could invalidate the insurance. But the tenant may be away from the property for a long time, may not know themselves, and ultimately may not be worth suing for any loss that their landlord suffers if the insurer fails to pay out.

So landlords:

Do make sure the tenants you have know what they need to notify you about to keep the building insured
Brief your agents to notify you of any concerns they have following inspections
If in doubt, notify the insurers of what you think might be a material change in circumstances

Leases: Risks to tenants when serving Break Notices

Siobhan Hayes — Tue, 16 Jun 2009 15:13:09 -0800

Effecting a lease break can be vital to a tenant’s business plans. There are a vast number of reported cases on the question of whether notices have been validly served. There are many more property lawyers’ files where the operation of a break is challenged. Tenants need to take great care and seek legal advice to ensure they have exercised their break-right correctly. Failure to do so may result in the tenant having to pay rent on a surplus property until lease expiry or until the next break date.

In the most recent case on the subject – Orchard (Developments) Holdings PLC v Reuters Ltd (2009) – some bad luck and an unusual break clause meant that the tenant was bound to its lease for a further five years.

The bad luck was that the person who served the formal notice on behalf of the tenant posted them through the wrong letterbox!
The unusual break clause allowed for informal service of notice by fax if receipt was acknowledged. The landlord did not acknowledge receipt until the litigation started.
The break notice was held by the Court of Appeal not to have been validly served.

What can tenants do to avoid break notice pitfalls?

Review all of the terms of the lease relevant to the break and the termination of the lease well in advance of the break date. This will be particularly important to check if the break is conditional on any matters – see below.
Check the notice provisions in detail (again in plenty of time) and comply with all the details
Check who the landlord is (e.g., by reference to the Land Registry title), and where and how notices may be served. If the investment was sold to an offshore investor, service may be difficult and may take a week or more.
Never leave any decisions to the very last minute so that there is time to serve a break notice and get confirmation of receipt (re-serving if necessary)
Take legal advice early as it could save a fortune later. If break clauses are conditional on compliance with, e.g., the tenant’s covenants in the lease, a new set of issues will have to be dealt with, and these will be the subject of other postings.