Real Estate Focus: November 2020

Developers: Ignore restrictive covenants at your peril

It is not unusual for an investigation of title to land intended for development to disclose restrictive covenants of one type or another. What should a developer do if the restriction appears to stop the proposed development in its tracks?

In Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45, the Supreme Court has issued a stark warning, making it clear that the last thing that the developer should do is to carry on regardless.

The developer in this case was aware of restrictive covenants over its land in favour of the adjoining owner which prevented residential development. However, having obtained planning permission for social housing, it turned a blind eye and proceeded to build 13 units for affordable housing on the site. Having done so the developer then applied to the Upper Tribunal for the discharge of the covenants under Section 84 Law of Property Act 1925, which grants power to the Tribunal to discharge or modify restrictive covenants affecting land on certain limited grounds. The ground relied upon by the developer was that the covenant impeded the reasonable use of the land for social housing, that this was contrary to the public interest and that money would provide adequate compensation. The adjoining owner, a charitable children’s cancer trust, objected.

This is the first time that the Supreme Court had been asked to decide an appeal on Section 84. It took exception to the “cynical” conduct of the developer in deliberately committing a breach of covenant with a view to making profit and presenting the Upper Tribunal with a “fait accompli” in an attempt to force its hand. It held that such cynical behaviour should be taken into account when deciding whether or not to discharge or modify the restrictive covenant.

What is more, the developer could have chosen to lay out its development differently so as to honour the restrictive covenants. “It is important to deter a cynical breach under section 84 but it is especially important to do so where that cynical conduct has produced a land-use conflict that would reasonably have been avoided altogether by submitting an alternative plan”.

Given these unequivocal words it will come as no surprise that the developer’s application to discharge the restrictive covenants was refused.

It remains to be seen whether the adjoining owner will apply for an injunction to stop the housing units being occupied or to remove them, as an alternative to a monetary remedy. But to quote the Supreme Court “…it is only realistic to recognise that the impact of this decision will plainly be to strengthen the [adjoining owner]’s hands in relation to any financial settlement of this dispute.”

Real estate tax update: Consultation responses, Freeports and more

The Government has published a number of consultation responses, including draft legislation on certain measures which are expected to be included in the Finance Bill 2021. These include a response to the consultation on the Construction Industry Scheme (CIS) and amendments designed to tackle abuse.

The CIS measures, which are expected to take effect from April 6, 2021, include the following:

• Going forward, the intention appears to be that only the cost of materials directly incurred by a sub-contractor for the purpose of a contract is not subject to deduction under the CIS.
• Changes to the trigger requiring “deemed contractors” (broadly, entities who do not carry on construction operations as part of their day-to-day business, but who may engage a contractor to do works on their behalf from time to time) to register as a “contractor” under the CIS. Currently businesses spending over £1m on construction operations over three years may be deemed contractors. The draft legislation changes the definition of “contractor”, so that businesses will now need to consider their construction expenditure over the course of a rolling 12-month period and if this exceeds £3m, there is a requirement to register.
• Extending penalties for supplying false information and a power to amend the CIS deductions offset by companies against PAYE.

On November 16, 2020, the Government also launched the bidding process to establish new Freeports in England. Freeports will be designated zones within which favourable customs and tax rules may apply. A bidding prospectus has been published, setting out the Government’s objectives for Freeports as national hubs for global trade and investment across the UK, to promote regeneration and job creation.

The paper gives further detail on tax incentives, planning rules and provision of seed capital funding. Tax incentives include:

• An SDLT relief on qualifying land purchases within the Freeport site.
• Enhanced Structures and Building Allowances providing enhanced tax relief for firms constructing or renovating structures and buildings for non-residential use within the Freeport site, intended to allow firms to reduce taxable profits by 10 per cent of the cost of investment every year for 10 years (compared with the standard 3 per cent over 33 and a third years currently available nationwide);
• Employer National Insurance Contributions(NICs) relief, so that employers who operate in a Freeport site would pay 0 per cent NICs on the salaries of any new employee working at the site, for up to three years per employee, on earnings up to a £25,000 per annum threshold.
• 100 per cent business rates relief for certain business premises within Freeport sites for the first five years.

Bids are to be submitted by February 5, 2021. The Government is looking to establish 10 Freeports across the UK, with the first intended to go live during 2021.

The Government has also announced that the Annual Investment Allowance cap will remain at £1m for another year, until December 31, 2021 (it was due to reduce to £200,000 next year).

Please contact Tax Counsel Julia Lloyd if you would like to discuss any of these issues in more detail.

The latest on “right to rent” checks

The Immigration Act 2014 introduced a “right to rent” scheme in England which requires landlords of privately rented residential premises to check the immigration status of prospective tenants and other occupiers to establish whether they have the right to be in the UK.

The scheme allows the Home Office to issue civil penalties against landlords and letting agents who let property to people who are disqualified from renting as a result of their immigration status. However, a landlord can establish and maintain a statutory excuse against a penalty through undertaking specific document checks.

Amendments to the right to rent scheme came into force on November 2, 2020. These are intended to modernise the checks under the scheme, to make it easier for individuals to demonstrate their right to rent and to make checks simpler and more secure for landlords and letting agents. In particular, the changes allow landlords and letting agents to rely on right to rent checks conducted using a new Home Office online service to establish a statutory excuse against liability.

The changes are accompanied by a revised statutory Code of Practice on right to rent: Civil penalty scheme for landlords and their agents and a new Landlord’s guide to right to rent checks.

What is vacant possession?

Delivering “vacant possession” can be critical for a tenant at the end of its lease or when seeking to exercise a break clause that is conditional upon doing so. A recent case indicates that this may not be as straightforward as it sounds.

In Capitol Park Leeds plc v Global Radio Services Ltd [2020] EWHC 2750 (Ch), the tenant of commercial premises purported to exercise a break clause in its lease. One of the conditions for doing so was that the tenant “…[gave] vacant possession of the Premises to the Landlord on the relevant Tenant’s Break Date.”

The Premises were described in the lease as including “all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings, and all additions and improvements made to the Premises”.

Before vacating the premises the tenant stripped out not just the tenant’s fixtures but also other fixtures and features at the property including ceiling tiles, floor finishes, window sills, lighting, radiators, and pipework. The tenant’s intention had been to reinstate these in accordance with its repairing obligations but work stopped in anticipation of a dilapidations settlement with the landlord which never materialised.

The landlord claimed that vacant possession had not been given on the relevant date so that the break clause had not been validly exercised. The tenant countered that, while it might be in breach of its repairing obligations in the lease and liable for dilapidations, it had given vacant possession of the premises as it had left them empty of people and chattels and the landlord could take immediate possession.

The court held that vacant possession did not merely extend to the absence of people and the tenant’s possessions. By including fixtures and fittings and all additions and improvements in the definition of “the Premises” the landlord was ensuring that a tenant exercising its break option could not do so by handing back an empty shell of a building which was unoccupiable. The physical condition of the property was such that there was a substantial impediment to the landlord’s use of it, with the result that the tenant had not given the landlord vacant possession of “the Premises” and the purported exercise of the break clause failed.

A costly lesson for the tenant given that, as a result, it was locked into an unwanted lease until November 2025.