Real estate

Another messy breakup…
18 May, 2018

Goldman Sachs International v (1) Procession House Trustee (2) Procession House Trustee 2 Limited

Unlike most new relationships, landlords and tenants often begin theirs with a dose of pessimism.  Both parties know they may not go the distance.  Better then to agree a clear set of rules to be engaged if one party (usually the tenant) wants out early.  But despite those sensible intentions, break clauses continue to be amongst the most commonly litigated terms of commercial leases.  So, can any lessons be learned from this latest decision from the High Court on the subject?

The break clause in this particular lease was operable by the tenant at year 20 of a 25 year term.  If it ended the lease early, the tenant would save itself over £20m in rent over the remaining 5 years of the term.

The conditions attached to the break right, in clause 23.1 of the lease, looked deceptively simple.  The tenant should not be in arrears on the break date.  In addition, the break right was expressed to be:

“subject to the tenant being able to yield up the premises with vacant possession as provided in clause 23.2”

What does vacant possession look like?

You might expect clause 23.2 of the lease to have gone on to describe the circumstances of vacant possession that the tenant would be expected to adhere to in order to exercise its break right.  But where would be the fun in that straightforward approach?  Instead, the clause was drafted in this way:

“On the expiration of such notice the term shall cease and determine (and the tenant shall yield up the premises in accordance with clause 11 and with full vacant possession).”

So, the lease would end on the break date and the tenant would then give up vacant possession as described in clause 11.  In other words, the only conditions on the break right would be (a) for the rent to be paid up to date, and (b) for vacant possession of the premises to be returned to the landlord (within the general meaning of that phrase).  At least, that’s what the tenant understood the clause to mean.

But the landlord took a different view.  It considered that the lease would only come to an end on the break date if the tenant had given up vacant possession in accordance with the terms of clause 11.  So, who was right?

The £20,000,000 question

A lot was riding on the correct interpretation of the break clause.  If, as the landlord argued, the conditionality extended to the definition of vacant possession in clause 11, that would make matters far more difficult for the tenant.  It would have to remove any alterations and additions it had made to the premises and make good any damage caused in the process.  It would have to reinstate the premises to their original layout, and to the standard mentioned in a pre-existing schedule of condition.

The tenant issued proceedings in the High Court.  It sought a declaration to the effect that its right to break the lease was not conditional on the laborious requirements of clause 11.  The court agreed.  It said that, by referring to clause 11 in clause 23.2, the parties could not have intended to introduce another layer of conditionality to the break right.  In taking that view, the court was influenced by the fact that having to comply with clause 11 would make it difficult for the parties to know whether the break right had been exercised validly.  For example, it required the reinstatement work to be completed to the “reasonable satisfaction” of the landlord.

Falling into the right bracket

The court also accepted the tenant’s view that placing the reference to compliance with clause 11 within brackets reduced it to the status of a reminder to comply.  It should not be treated as a new, conditional obligation on the break right.

This was not to say the tenant did not have an obligation to comply with clause 11 at the end of the lease term.  It still did.  But the key point was that a failure to comply with the requirements of clause 11 would not result in the loss of the tenant’s highly valuable break right.

Summary

This case is an example of the long-established rule that the courts will construe any ambiguity in a contractual agreement against the party who is trying to rely on it (so the landlord in this case).  The landlord has been granted permission to appeal the decision to the Court of Appeal, so we may not have heard the last of the arguments over this particular break clause.  Even so, this case is a useful reminder for parties to a new lease to make sure that:

  • The conditions applying to a break clause in a lease (or any clause for that matter) are drafted clearly; and
  • The conditions are set out within the same clause of the lease (rather than through the use of linked clauses, which was the ultimate cause of the dispute in this case).

What does the future hold for shopping centres?
11 May, 2018

Shopping centres are entering a new chapter, partly as a result of change in the consumer experience.  In the UK, approximately 20% of all transactions are now conducted online, and when taking the end-to-end customer journey into account, the online channel influences 90% or more of purchases across many categories.  With these figures in mind, we explore what this means for the future of shopping centres who are innovating to enhance the customer experience by incorporating value-added elements, utilising technology and modifying centre layout.

Experience and convenience

Convenience is a key driver of change for shopping centres.  Amazon Go, which was recently launched, operates with payment for items simply collected by smart phones.  This is part of a growing trend with consumers; they want to pick up their purchase and go.  The centre:MK in Milton Keynes have recently opened a new guest services area which includes a desk to collect click and collect orders, a changing room so that you can try them on without leaving the centre, and then a returns facility to send back the bits you decide against.

Shopping centres are also incorporating experience as value-added elements.  Centres we work with have used various innovative marketing ideas to generate footfall and dwell time; centre:MK hold regular events at the centre to attract visitors, from ice skating and Christmas grottos to German Markets and Craft fairs, and Cwmbran in South Wales have used a pop-up beach and Christmas light switch-ons in conjunction with the local pantomime characters.

Bluewater is also exploring how they can increase dwell time by including experiences in their centre to attract a broader range of visitors, by introducing a trampoline park, adventure park and cinema.  Other centres have experimented with expanding their dining offerings to increase the use of the centre outside the core shopping hours.

Centres are also exploring how to use unused space for uses other than retail.  One example is to convert these spaces into gyms, for example The Gym Group, who have opened up in part of a former BHS in Walthamstow, North London.

Technology and multichannel

Retail Think Tank members predict the future of the store could be more akin to a show room, perhaps even leveraging the latest technologies, whether that be virtual reality, augmented reality, smart mirrors or even digital screens.

Westfield’s latest initiative is a great example of a centre leveraging the latest technology.  Its Westfield App product-search feature allows consumers to search for specific items, view product information and pricing, find out which tenants at their preferred Westfield centre carry the items and “click to call” the stores.

Location, Re-location and Layouts

Equipment has been introduced by shopping centres in the UK, for example, Lakeside in Essex and Manchester’s Trafford Centre, to track the movement of customers.  Big brother does indeed seem to be watching!  Although landlords insist the data is anonymous.

DOOH!  No, this isn’t a reference to Homer Simpson, it is an acronym for Digital Out of Home.  This advertising reaches consumers while they are outside their homes.  The American branch of Westfield shopping centres has recently rolled out over 200 digital out-of-home ad “pods” in shopping malls across the country.

The future of shopping centres may not even lie in individual innovations within centres which focus on Proptech.  Instead, the future may focus on enhancing a network of centres to share data and information.  Check out Westfield’s 300M PropTech Spinoff for more information.

Shopping centres are coming up with more innovative ways to compete or complement the online market.  We wait to see what they have in store for us next … no pun intended!


The gas may be safe but is the decision in Caridon Property Ltd v Monty Shooltz?
3 May, 2018

In February 2018, the county court appeal decision in Caridon Property Ltd v Monty Shooltz sounded a warning to all landlords of assured shorthold tenants.  The circuit judge, HHJ Jan Luba QC, found that the landlord’s failure to issue a gas safety certificate to an assured shorthold tenant before he moved into the premises meant the landlord could not rely upon Section 21 of the Housing Act 1988 (as amended by the Deregulation Act 2015) (“the HA 1988”) to terminate the tenancy and recover possession.

Background information

The claim was brought by a tenant of an assured shorthold tenancy.  Under Section 21 of the HA 1988 a court can make an order for possession of a property if the tenancy has come to an end and the landlord has served a valid Section 21 notice.  This case turned on the validity of the notice.

Under Section 21A of the HA 1988, a notice will be invalid if the landlord is in breach of a prescribed requirement.  Some of the prescribed requirements are found in the Assured Shorthold Tenancy Notices and Prescribed Requirements (England) Regulations 2015 (“the AST Regulations”).  Under the AST Regulations, landlords must comply with the Gas Safety (Installation and Use) Regulations 1998 (“the Gas Regulations”).

Under Regulation 36(3) of the Gas Regulations, landlords must make a record of any appliance or flue that is checked and maintained, and under Regulation 36(6) of the Gas Regulations:

  1. the landlord must give a copy of that record to each existing tenant within 28 days of the date of the check; and
  2. the landlord must give a copy to any new tenant of premises to which the record relates before they enter the premises (except where the tenant will occupy the premises for less than 28 days).

In this case, the landlord had not served the gas safety certificate before the tenant moved into occupation, but did provide a copy 11 months into the tenancy.  At first instance, DJ Bloom found that the landlord had breached Regulation 36(3) of the Gas Regulations, making the Section 21 notice invalid.  The landlord’s appeal was dismissed by HHJ Jan Luba QC, an experienced housing lawyer.  The judge decided that Regulation 36(6)(b) must be strictly complied with and a failure to do so within the stated timeframes meant that the landlord had lost the right to serve a Section 21 notice on its tenant.  Further, he considered that landlords have no ability to rectify this breach once the deadline had been missed.

Summary

HHJ Jan Luba QC interpreted the legislation very restrictively.  Whilst not generally binding as a county court decision, the likely effect remains that, in relation to assured shorthold tenancies that commenced after 1 October 2015, landlords who failed to give their new tenant a copy of the gas safety certificate before they entered the premises will not be able to serve a Section 21 notice.  It is yet to be seen whether the Government will consider this judicial interpretation as too narrow and not what Parliament could have intended.  We may therefore expect to see amendments made to the Gas Regulations.  Alternatively, there could still be an appeal to the Court of Appeal.  Any developments will no doubt be eagerly awaited by landlords of assured shorthold tenants.


Can developers take comfort from latest case on damages?
25 April, 2018

The recent Supreme Court decision in the case of Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 sheds some light on how the courts might deal with damages going forward.  This is important for anyone who is interested in how much compensation could be payable if someone trespasses on land, breaches a restrictive covenant or interferes with a right of way or right to light.

The court helpfully summarised the different ways in which compensation should be assessed in these cases as follows:

  • Damages calculated by reference to the value of the use wrongfully made (sometimes termed “user damages”) are readily awarded at common law for the invasion of rights.  The rationale of such awards is that the person who makes wrongful use of property, where its use is commercially valuable, prevents the owner from exercising a valuable right to control its use, and should therefore compensate him for the loss of the value of the exercise of that right.  He takes something for nothing, for which the owner was entitled to require payment.
  • Damages can also be awarded as a substitute to awarding an injunction.  Such damages are a monetary substitute for what is lost by the court withholding the injunction.  One possible method of quantifying damages under this head is by reference to the amount which the claimant might reasonably have demanded as a quid pro quo for the relaxation of the obligation in question.  The rationale is that, since the withholding of the injunction has the same practical effect as requiring the claimant to permit the infringement of his rights, his loss can be measured by reference to the economic value of such permission.  That is not, however, the only approach to assessing damages under this head.  It is for the court to judge what method of quantification will give a fair equivalent for what is lost by the refusal of the injunction.
  • Negotiating damages can be awarded where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached.  The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset.  The defendant has taken something for nothing, for which the claimant was entitled to require payment.
  • Damages should not be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances.

 

At first blush, this does not appear to signal a major change in approach but there is a message that the court will be less inclined to assess damages by reference to a percentage of a developer’s profit that is gained as a result of the breach.  The court may be more interested in assessing what the claimant has lost which may or may not take into account the hypothetical bargain (negotiating damages) that may have been struck between two willing parties in the shoes of the claimant and defendant.  It is possible that this case will signal a more realistic approach for the assessment of damages in cases where a developer breaches a covenant or interferes with a right to light where such action does nothing to diminish (and often enhances) the value of the neighbouring property.  Developers take heart!


The 2017 Telecommunications Code: the effect for operators and landowners
17 April, 2018

The 2017 Code (“the Code”) replaces the 1984 Code which has been considered outdated for some time now.  The new Code was brought in by the Digital Economy Act 2017 and came into force on 28 December 2017.  The new Code reflects the need to stay up to date with the modern world and the ever increasing need for access to a solid communications network for both individuals and businesses.  However, changes will also have an impact on those landowners where telecommunications equipment is based.  Both landowners and operators need to be swotting up on the new Code to consider the impact it will have on existing and new agreements.

The Code governs the grant of “Code Rights” to operators.  These include installation of electronic communications equipment and ongoing rights of maintenance, upgrade and renewal, entry to land and carrying out works on land in connection with maintenance and renewal.  Electronic communications equipment is widely defined and includes any apparatus for use in connection with an electronic communications network.  The Code Rights must be used for the purpose of providing the operator’s network and, if not acquired by entering into a written agreement with a landowner, can be imposed by court order.  It is unclear whether specific Code Rights need to be granted in individual agreements or whether operators will automatically be entitled to all the Code Rights by virtue of being granted the overall right to have the equipment on the land.

Main changes

Assignment and sharing:  One of the main changes that landowners should be concerned with in the new Code is that any restrictions on the operator assigning the agreement will be void.  This means that operators can transfer their agreement to any other operator without the landowner having a say in the matter.  Operators are also free to share use of the apparatus with other operators without consent of the landowner.  This means landowners may not know if representatives on site are from the original operator or not.

Upgrading:  Operators have a great deal of freedom to upgrade the equipment, which could involve attaching additional equipment.  Any attempt to restrict this right in agreements will be void.  The only caveat to this is that any changes must have no adverse impact on the physical appearance or no more than a minimal impact and no additional burden must be imposed on the landowner.  These conditions are broad and open to interpretation.  What is meant by “no more than minimal”, for example, is highly subjective.

Termination:  The right to security of tenure under the Landlord and Tenant Act 1954 cannot be excluded from a lease with an operator where the lease is primarily for the grant of Code Rights.  Some see this as a benefit as it provides clarity to the position on whether the Code or the 1954 Act regime applies to the agreement.  The Code provides that the rights will continue even when the term of the written agreement comes to an end.  Where a landowner is looking to include the relevant 1954 Act exclusion, it is worth considering whether the lease is primarily for the grant of Code Rights.  If there is any uncertainty, the landowner will want to consider whether it is worth including the 1954 Act exclusion.  If the exclusion is included and there is uncertainty, an operator could attempt to dispute this at the end of the lease.  This would create unnecessary hassle and costs for the landowner at the end of the lease.  There are of course still provisions in the Code dealing with termination of agreements, for example in the event of breaches by the operator or intention to redevelop.  In such a case the landowner will need to follow specified notice procedures.  This is another main change that landowners should be aware of as the notice period has been extended significantly.  Furthermore, removal of apparatus is now dealt with separately to termination.  There are set procedures in place for serving notices strictly relating to requiring an operator to remove apparatus.

Valuation:  We are seeing operators attempting to reduce the rent agreed in lease negotiations prior to 28 December 2017 where the lease is yet to complete.  However, consideration must be assessed as the sum representing the market value of the agreement to grant the Code Rights which is actually beneficial to landowners.

Finally, any attempt to contract out of the Code in a written agreement will be void.  Therefore, where any provisions in an agreement conflict with relevant provisions of the Code, the Code will overrule whatever has been agreed in the written agreement.

Landowners need to make sure they fully understand the implications of the new Code before entering into negotiations with operators and, where operators are already in occupation, so they can properly consider the impact of the new Code when making plans for their property.


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