by Hardwick Legal | Aug 26, 2015 | Purpose Built (LexisNexis)
The problem:
In some cases, a construction project intended to be sold as a single unit is ultimately divided into one or more parts. Upon the sale of such a part, how does one deal with collateral warranties originally granted in respect of the entire site?
The question:
Can a purchaser take a legal assignment of only part of a collateral warranty?
The likely answer…
This will depend upon the terms of the warranty in question.
If the underlying building contract or consultant appointment (and any associated warranties) are based on industry standard forms and/or reflect the market norm, it would be unusual for assignment of part of the warranty to be permitted.
Possible solutions?
Ask for a new collateral warranty…
In such cases, the purchaser of part of a site might ask the original warrantor for a new collateral warranty in its favour. This is unlikely to be forthcoming unless there is some financial or commercial benefit to the warrantor.
Ask for the existing warranty to be held on trust…
An alternative, would be to ask the holder of the existing collateral warranty to hold it on trust for the purchaser and enforce its terms in the purchaser’s name should any defects arise in the purchaser’s part of the development. Any agreement of this nature would need to be documented in a deed.
Prevention is the best medicine…
If there is any suggestion at the start of a project that the completed development may be split and later sold or let in parts, it would be advisable to:
- obtain separate collateral warranties in respect of the relevant parts of the works, or
- address the possibility of assignment of part of the benefit of the warranty in the building contract/consultant appointment and form of collateral warranty.
Don’t miss our free checklist (available from the free downloads area):
Reviewing a Funder Collateral Warranty
This checklist sets out the key issues to consider when reviewing a collateral warranty on behalf of a funder. The term ‘funder’ is used throughout to refer to any party that is providing finance in connection with a project. Download your copy here.
Source: LexisNexis Purpose Built
Can you assign part of the benefit of a collateral warranty?
by Hardwick Legal | Aug 24, 2015 | Purpose Built (LexisNexis)
Be careful what you leave open to interpretation!
A run of recent service charge cases has highlighted the perils of bad drafting and signing up to contracts without reading them thoroughly.
Together, they spin a sanguine tale of the importance of being earnest with the written word - both in putting it to paper and in understanding it at the time of signing.
Where such failings do arise, to what extent will a court or tribunal will be willing (or able) to “rescue” a party from their consequences? The answer, as ever, largely turns on the individual facts of each case. In this post, I look at three interesting cases where varying approaches were taken.
The interpretation of “curious” drafting
In Mark Skelton v DBS Homes (Kings Hill), the Upper Tribunal (Lands Chamber) (UT) came to the landlord’s rescue despite a catalogue of ‘errors and curiosities’ in the drafting of the lease.
The service charge provisions were variously described by the UT as ‘unusual’, ill-drafted’ or and ‘curiously drafted’.
This case, unusually in service charge disputes, was not about whether the service charge had been reasonably incurred but rather whether it was payable at all.
Key issue:
Whether the on account demands for payment of service charge based on an estimate (not actual expenditure) served a couple of years after the close of the relevant accounting period- were in fact valid demands.
Held:
The UT held that the service charge was payable.
Reasoning
- The paragraph of the lease supposedly dealing with how the tenant was to be liable for the service charge was omitted from the. The UT looked to the general purpose of the service charge provisions –enabling the landlord to recover from each tenant their share of expenditure which it incurs in undertaking its obligations. They held that it was clear that the parties intended the landlord to be able to recover (even though the lease may have been less than clear).
- Time was not of the essence nor was there a penalty for late preparation of the service charge accounts.
- The landlord’s obligations to provide services was not qualified or conditional on the tenant making service charge payments
- The lease did not make provision for the landlord to claim any shortfall between what it spend and what was received by way of interim payment from tenants- it could only demand a supplemental charge if it had omitted an item from a service charge account- but only during a service charge accounting period if it appeared that the interim charge would be too little
- The demand in question was made in accordance with a properly prepared estimate even though the landlord did not send the tenant the estimate as it was required to do.
- Even so -the landlord did not need to re-issue a demand–but the tenant was not obliged to pay it until it received the estimate.
- Section 20B of the Landlord and Tenant Act 1985, requiring demands for charges to be made within 18 months of incurring the expense did not apply as the landlord’s demand on-account rather than for costs actually incurred
- As the landlord could not claim any shortfall in the service charge but had to provide the services, the UT could not read the landlord’s service charge obligations as requiring strict compliance or otherwise go without any payment at all.
Practical tip(s):
Check; check; (and re-check) documents to make sure that clauses are not missed, ambiguous - or indeed curious! A tool like LexisDraft can take off some of the strain and help you get the job done quicker.
Distinguishing between rent and service charges
The Gateway Leeds Management v Naghash concerned the interpretation of service charge provisions in lease and whether or not costs of providing the gym, the concierge office and the state of the art CCTV system in the building could be classed as service charges within the meaning of the Landlord and Tenant Act 1985, s 18 (LTA 1985).
Key issues:
Section 18 of the LTA 1985 limits the amount that may be recovered from residential tenants of long leases by way either of service or administration charges. In both cases the landlord may recover no more than is ‘reasonable’, as the amount is:
- a payment for services, repairs, maintenance etc.
- variable in whole or in part, in accordance with the costs the landlord incurs
Were the rent payments made by a Management Co. (Manco) in connection with providing the gym, concierge office and the CCTV system services, costs within the meaning of section 18 of the LTA – even though they were not services or repairs and did not vary in accordance with expenditure but were set and only escalated in accordance with the retail prices index?
If they weren’t service charge costs the first tier tribunal had no jurisdiction to determine the dispute.
Held:
The Manco was not obliged to provide the gym but if it did the costs associated with providing the facility would be recoverable as service charge
The fact that part of this cost was renting the facility for the gym did not convert the payment from service charge to rent- it was enough that the cost to the tenant could vary as indeed they might when the current lease of the gym premises comes to an end and the Manco, to continue to provide the facility, may then be required to pay an additional rent.
The same reasoning could be applied to the fixed charges for the CCTV equipment at that point the cost could no matter be capable of being varied from time to time.
Reasoning:
- The flat leases did not require tenants to contribute to the rent paid for the concierge office or gym or to the finance costs paid for the CCTV equipment.
- The Manco could charge for the provision of the gym, concierge facilities and the CCTV.
- The lease did include the CCTV and concierge office costs as those which could be recovered as service charge but was less clear on the gym.
- Two of the leases did not include the standard wording for the rest of the leases making reference specifically to the gym as one of the services to be provided but nonetheless in these leases the Manco was still required ‘To carry out all such other services and to make all payments necessary in respect of the Estate Common Parts in the interest of good estate management and as determined from time to time by the Company…’.
Practical tip(s):
Where services which are likely to require the landlord or Manco to make fixed payments- such as rent or financing costs- service charge provisions should make it clear that these fixed payments are part of the recoverable costs of providing the service.
No rescue from this bad bargain
Arnold v Britton concerned 99 year leases of ‘modest’ holiday chalets entered into in the 1970s onwards. The lease made provision for service charge starting at £90 in the first year (or first three years) which were then increased by 10% per annum compounded. In the last year of term, on current rates, the service charge would be in excess of £1m.
Key Issue:
The lessees applied to court to cap remedy this ‘absurd’ result arguing that the service charge clause was supposed to mean that the charge was capped at £90 in the first year and thereafter to a cap rising by the rate of 10% per annum.
Held:
Whilst recognizing that a service charge of £1m for a chalet occupied for 8 months of the year is somewhat extreme, the Court of Appeal (CA) refused to imply such a cap holding it was not the court’s function to rewrite the lessees out of a bad bargain. The lessees ought to be right- but in order to hold that they were, the meaning of the lease would need to be subverted.
Reasoning:
The case is a good example of the application of the law to interpreting the facts-finding for the tenants would mean:
- Distorting the proper construction of the language would rewrite the parties’ bargain
- There was no mention of a ‘cap’ in the lease nor was it necessary to imply a cap to make sense of the clause in question as written
- the lease could not be changed into one which it was not- the landlord was not limited to recovering no more or less than his expenditure
- the parties had agreed formula for calculation of the service charge and could not then complain that what they were required to pay had no relation to what the landlord had outlaid or received
- the provisions were analogous with pre-agreed liquidated damages clauses and in any event, the parties knew up front where they stood
- There may have been surrounding circumstances which could be taken into account in interpreting the clause- inflation was high at the time the leases were made, and the parties could objectively be expected to want to deal with it in the lease.
- The lessees knew what bargain they were making and it was not for the court to mend a bad bargain where there is no claim for rectification
Practical tip(s):
Consider carefully the implications of referring particular market forces or practice at the time of drafting escalation clauses as these may become out of date or, as in this case, have absurd consequences. Consider rather providing for increases by reference to recognized and adjustable economic indices.
Source: LexisNexis Purpose Built
‘Curiouser and curiouser!’ cried the judge…
by Hardwick Legal | Aug 20, 2015 | Purpose Built (LexisNexis)
In an earlier blog post, I looked at the principal areas in which the Infrastructure Act 2015 (InA 2015) would affect fracking. A key question was the extent to which certain designated areas were to be kept free from fracking:
calls for a moratorium were rejected and instead a suite of amends were inserted into the then Infrastructure Bill… Certain areas, like Areas of Outstanding Natural Beauty, National Parks, Sites of Special Scientific Interest and Groundwater Special Protection Zones were to be free from fracking.
A crafty last minute amend in the House of Lords, however, has seen the safeguarding provisions at IA 2015 section 50, tweaked enough to remove their bite. The legislation now states that fracking can’t take place within:
- ‘protected groundwater source areas’ or
- ‘other protected areas’.
The catch? These areas are yet to be defined – but this must be done through regulations by 31 July 2015. This means the hot potato has been thrown to the incoming government to clarify and in the meantime we have no moratorium and no clear protection.
In the end, it was the Conservatives who returned to catch their own hot potato. On 17 July 2015 - the draft Onshore Hydraulic Fracturing (Protected Areas) Regulations 2015 were published, providing the anticipated definitions.
Protected groundwater source areas
‘Protected groundwater source areas’ are set out as within 50m at the surface of an abstraction point used for domestic or food production purposes or within the 50-day ground water travel time for such an abstraction point. This effectively corresponds with what is known as Source Protection Zone 1.
Other protected areas
‘Other protected areas’ have been narrowly defined as National Parks, the Broads, Areas of Outstanding Natural Beauty (AONB) and World Heritage sites, but notably does not include Sites of Special Scientific Interest (SSSIs), contrary to earlier statements made by Ministers.
Safeguards apply to a depth of 1,200m
The safeguards for ‘protected groundwater source areas’ and ‘other protected areas’ only protect to a depth of 1,200m. So rather than the outright ban for protected areas, originally promised by government, fracking will still be permitted under these areas.
In practice what this means is that there will be a ban for ‘protected areas’ and ‘protected groundwater source areas’ from the surface down to a depth of 1,200m. This really only provides a 200m extension to the universal 1,000m depth restriction on any land in England and Wales, already contained in InA 2015, s 50.
For SSSIs, however, there is no additional protection, so subject to applicable consents, fracking could take place at surface level and below 1,000m.
‘Associated fracking’
What’s more, just because there may be a ban on constructing fracking operations in certain ‘protected areas’, the regulations do nothing to prevent these areas from being accessed below the 1,200m threshold, by setting up operations outside of the banned areas and drilling horizontally through the fissures.
Although the regulations are still in draft form, given the recent announcements made by Secretary of State Amber Rudd concerning new government measures to fast track fracking planning applications, it looks like the present government will stop at nothing to ensure any measures that could hold back fracking development are kept to the very minimum.
Source: LexisNexis Purpose Built
Safeguards against fracking: all bark and no bite?
by Hardwick Legal | Aug 13, 2015 | Purpose Built (LexisNexis)
How will the Deregulation Act 2015 (DA 2015) impact the property sector? James Main, solicitor at DMH Stallard, explores the provisions and suggests that in some cases they will add to the regulatory burden, particularly for landlords of residential property.
What does DA 2015 mean for property lawyers?
The purpose of the Deregulation Act 2015, as the name suggests, is to try to clarify and simplify a number of areas of law, cut red tape and repeal obsolete legislation. From a property perspective, it is questionable whether this has been achieved and arguably the provisions of DA 2015 add to the regulatory burden for landlords of residential property in particular.
What were the key features of DA 2015 that property lawyers should be aware of?
The most widely publicised change is in relation to the provisions governing the management and termination of assured shorthold tenancies. The tenancy deposit regulations contained within the provisions of the Housing Act 2004 (HA 2004) and extended by the Localism Act 2011 were far from straightforward and have resulted in a number of cases coming before the courts. The provisions of DA 2015 have brought some clarity and a degree of common sense to the law surrounding the treatment of tenancy deposits, which is particularly welcome in cases where the deposit was received before the regulations came into effect.
DA 2015 also introduces provisions that prevent a landlord serving a notice under HA 2004, s 21 (section 21 notice) in certain circumstances where disrepair has been reported. It also gives the Secretary of State power to prescribe the form of notice to be served, and to impose certain minimum requirements on landlords in relation to:
- the condition of the dwelling house or their common parts
- the health and safety of occupiers, and
- the energy performance of the dwelling house
Some of the less well-publicised changes include:
- shortening the qualifying period of residence before local authority housing association tenants may exercise their right to buy under the Housing Act 1985 from five years to three years
- relaxing the current restrictions on short-term lets in London, which require permission for change of use for residential lettings for less than 90 nights
How has DA 2015 affected the following?
Tenancy deposit provisions
Superstrike Ltd v Rodrigues [2013] EWCA Civ 669, [2013] All ER (D) 135 (Jun) and Charalambous and another v NG and another [2014] EWCA Civ 1604, [2014] All ER (D) 175 (Dec) highlighted some of the problems landlords face due to a lack of clarity in the initial regulations. The regulations caught out many landlords who, often in all good faith, would place a deposit in a personal bank account, or would correctly protect the deposit at the outset of the tenancy but fail to re-protect it when the tenancy became periodic.
DA 2015 restores a measure of common sense while trying to maintain the protection provided by the tenancy deposit regulations in the first place. The decision in Superstrike in particular was surprising in that it arguably went beyond what was intended by the tenancy deposit regulations. It is not uncommon for a situation to arise where the fixed term of an assured shorthold tenancy will expire and the tenant may ask for a couple more months in the property. The decision in Superstrike meant that in this situation, if the landlord allowed the tenant to stay on for a period of time but did not withdraw and re-register the deposit, they would not be able to serve a section 21 notice unless the deposit was returned to the tenant.
The tenancy deposit regulations were designed to protect the tenant from the unscrupulous landlord who had no intention of returning the deposit from the moment it was handed over. It is difficult to see why all of those landlords who, in good faith, took a deposit at the outset and protected it in accordance with the regulations at their own cost, should be punished because the deposit was not re-registered upon expiry of the contractual term of the tenancy.DA 2015 addresses this imbalance by clarifying that once the deposit has been received and correctly protected, it will not need to be re-protected upon expiry of the contractual term.
Section 21 notices
The question of whether a section 21 notice expires on the correct date has been a ripe area for dispute for quite some time. The decision in Spencer v Taylor [2013] EWCA Civ 1600, [2013] All ER (D) 230 (Dec), while unexpected, widened the scope for reliance on HA 2004, s 21(1)(b) which was generally considered to be easier to use and less prescriptive than HA 2004, 21(4).
The decision in Spencer v Taylor has been extended by DA 2015 to tenancies which were periodic from the outset, to which HA 2004, s 21(4) would apply. From 1 October 2015, therefore, whether the tenancy is for a fixed term initially or is periodic from the outset, the section 21 notice will no longer need to specify the last day of a period of a tenancy. This should reduce the scope for dispute over the validity of a landlord’s section 21 notice. In an attempt to balance the interests of landlord and tenant, DA 2015 also includes an express provision that the tenant will be entitled to a refund of any overpaid rent where a tenancy comes to an end mid-way through a period.
However, to prevent us getting carried away with the idea that deregulation means what it says, DA 2015, s 38 allows the Secretary of State to introduce more ‘prescribed legal requirements’ in relation to the condition of the property generally. While it is a little difficult to make an exact comparison until these prescribed requirements have been published, the wording of DA 2015, s 38 suggests that the requirements could be quite wide-ranging and onerous for a landlord. If a landlord is in breach of the requirements, it will be prohibited from serving a section 21 notice—which brings into question the need for further protection for tenants, which is provided by DA 2015, s 33 regarding retaliatory evictions. However, we will have to wait and see what the extent of the ‘prescribed legal requirements’ is before that comparison may be taken too far.
Retaliatory eviction
The provisions in relation to retaliatory evictions are troubling. DA 2015 provides little guidance as to the substance of an ‘adequate’ response from the landlord. Clearly, much will turn on the tenant’s perception of the severity of the condition of the dwelling, and there is every possibility that the landlord and the tenant will disagree about:
- the cause of the condition that brought the complaint
- the extent of the disrepair
- the appropriate course of action, and
- the timescale for carrying out works
The nature of the accelerated possession process is that the section 21 notice is non-fault based and ought to provide a swift, cost effective solution for a landlord who needs to recover possession of a property. It is quite possible that if a property is genuinely in disrepair, the landlord will be precluded from serving a section 21 notice in any event in view of the prescribed requirements that will be introduced under the powers vested in DA 2015, s 38 on the Secretary of State. However, even if the property was in disrepair and a landlord was able to proceed with the eviction process, the order for possession and subsequent eviction does not affect a tenant’s right to claim compensation for disrepair where the landlord is in breach of its contractual and statutory duties.
That being so, I am not sure these new provisions are either appropriate or necessary. I anticipate a significant increase in the number of hearings being listed as a result of this provision, where there is dispute over the validity of the tenant’s complaint and the extent of the landlord’s response. It potentially allows a streetwise tenant to extend the possession process by months, if not years, and ultimately even if the landlord is entirely vindicated there will be little prospect of recovering any unpaid rent or potentially significant court costs.
With DA 2015 slowly bedding down, what will be the challenges for property lawyers?
Lawyers, whether for landlord or tenant, will need to ensure they are on top of the detail in relation to tenancy deposits—when they were taken, when they were protected and when the prescribed information was served. Landlords will need to ensure they respond to complaints promptly and thoroughly and tenants need to ensure they make their landlord aware of any concerns regarding the state of the property. For lawyers, whereas one could say with a degree of certainty whether a possession claim under a section 21 notice was likely to be successful, in some cases it will now be far more uncertain. There may often be cases where, if one of the grounds of The Housing Act 1988, Sch 2 can be made out, the merits of proceeding with a HA 1988, s 8 notice and conventional possession proceedings will outweigh the benefits of using the accelerated possession process.
The next three years will be something of a transition period, as the new rules will apply only to those assured shorthold tenancies that commence after the relevant provision came into effect. However, after three years, going forward the provisions will apply to all assured shorthold tenancies, irrespective of the date they were entered into.
Interviewed by Nicola Laver.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Source: LexisNexis Purpose Built
Deregulation Act 2015 – summary for property lawyers
