Real Estate Focus: November 2019

Introduction

In this edition we take a look at plans for higher energy standards in the PRS, Electronic Communications Code developments and Supreme Court decisions on forfeiture, and a landlord’s reasonableness.

Supreme Court decides whether a landlord acted reasonably

In Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47, the Supreme Court was asked to decide whether it was reasonable for a landlord to refuse consent to its tenant applying for planning permission for residential use.

The lease of a six-storey building in Soho allowed the tenant to use the premises for retail, office or residential purposes. A covenant in the lease stated that the tenant could not apply for planning permission without consent, such consent “not to be unreasonably withheld”. The building already had planning permission for retail on the lower two floors, office/ancillary on the middle two floors and residential floors on the top two floors. The tenant wanted to apply for planning permission to convert the middle floors to residential use. The landlord refused consent on the basis that such use would increase the risk of enfranchisement.

The Supreme Court (disagreeing with the courts below) held that this was reasonable.

The circumstances in which a landlord may be asked to give consent under such a qualified covenant were infinitely variable. The correct approach to deciding the question of reasonableness was to ask whether the landlord’s refusal served a purpose sufficiently connected with the landlord and tenant relationship, as at the time when consent was requested.

In this case, it could not possibly be said that seeking to avoid a significant increase in the risk of the tenant acquiring the freehold through the right to enfranchise was extraneous to, or dissociated with, the landlord and tenant relationship created by the lease. On the contrary, damage to the reversion was the quintessential type of consideration rendering reasonable the refusal of consent.

The case is welcome news for landlords, particularly as it was acknowledged that the reason for the tenant’s intended planning application was to improve its prospects of a successful enfranchisement claim. Landlords might also consider a more restrictive user clause when that is a potential risk.

Telecoms operators v. landlords

The Electronic Communications Code (The Code) governs the relationship between network operators and site occupiers in respect of access rights for operators to deploy telecommunications infrastructure. The Code encourages access by way of commercial negotiation and voluntary agreements, with the imposition of agreements by tribunal as a back-stop.

The government has identified several “barriers to deployment”. In particular, there is evidence that operators face significant difficulties in providing broadband services to apartment blocks as landlords ignore requests for access in about 40 per cent of cases.

As a result, the government published the Telecommunications Infrastructure (Leasehold Property) Bill on October 15, 2019. This proposes amendments to the Code to provide a right for telecoms network operators to apply to the court for the right to access “multiple dwelling units” to install, upgrade or maintain broadband connections. The right would apply where a tenant has requested an electronic communications service but the landlord has repeatedly failed to respond to an operator’s request for access.

We will be monitoring the progress of the Bill, but in the meantime, cases on the operation of the Code continue to proliferate. In the most recent, Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another [2019] UKUT 338 (LC), the Upper Tribunal was required for the first time to consider the relationship between the Code and the Landlord and Tenant Act 1954 (1954 Act) in the context of a tenancy granted before the Code came into force in December 2017.

The operator in this case occupied a rooftop site on which it had installed telecommunications apparatus. Occupation was under a tenancy granted in 2002. The contractual term had expired in 2012 but the operator was “holding over” under the 1954 Act. The operator requested a new agreement under the Code and in the absence of agreement with the landlord, referred the matter to the Tribunal.

The Tribunal held that it could not impose a new Code agreement on the landowner as the operator was already in occupation under a tenancy granted pre-Code and continuing under the 1954 Act. The Code was not intended to have such retrospective effect. In such a situation, the operator could not make use of the Code to obtain a new agreement but must apply to the court for a new tenancy under the 1954 Act.

The decision sheds light on an aspect of the Code that was previously unclear. Landlords in a similar position will be heartened, not least as the rent under a new Code agreement would have been considerably lower than that under a 1954 Act renewal tenancy, assessed as it is on a “no network” assumption.

Does relief from forfeiture apply to licences?

In Manchester Ship Canal Company Ltd (MSCC) v Vauxhall Motors Ltd (Vauxhall) [2019] UKSC 46, the Supreme Court considered whether there was a power to grant relief from forfeiture to a licensee, as opposed to a tenant.

Forfeiture is where a landowner takes back possession from a tenant due to a breach, and relief from forfeiture is the process by which the court can restore a tenancy and have the forfeiture set aside. Traditionally only tenants of leases could obtain relief from forfeiture.

In this case, MSCC granted Vauxhall a licence in perpetuity to discharge surface water and treated effluent into a canal through a drainage system that Vauxhall constructed on MSCC’s land. The licence fee was £50 per year with no provision for increase. The licence granted MSCC the right to terminate on non-payment of the licence fee.

In 2013, Vauxhall failed to pay the licence fee and MSCC served notice terminating the licence. The parties entered into negotiations to agree a new licence but the market rate was then estimated to be in the region of £300,000 to £440,000 per year, so Vauxhall issued a claim seeking relief from forfeiture instead. MSCC argued that relief should not be available because the licence did not confer any proprietary rights and, in the context of land, the courts can only grant relief from the forfeiture of proprietary rights.

The High Court disagreed and granted relief from forfeiture on the condition that Vauxhall pay the arrears together with costs, and the Court of Appeal upheld the decision. MSCC appealed to the Supreme Court on the issue of whether the court had jurisdiction to grant relief in the case of such a licence.

The Supreme Court rejected MSCC’s argument that, in the case of land, relief was only available for the forfeiture of property rights, concluding that the courts may also relieve against the forfeiture of a right to possession of land. On the facts, the licence granted possessory rights to Vauxhall who had virtually exclusive possession of the drainage system and a high degree of control over it and who was therefore entitled to relief from forfeiture of those rights.

This is the first case where relief has been available on forfeiture of a licence and it has therefore extended the principle to a possessory right over land, even where no proprietary rights exist. So what does this mean in practice?

The decision does not necessarily mean that relief from forfeiture of a licence will always be available, but care must be taken to ensure that possessory and proprietary rights are not accidently granted in a licence. Termination clauses that equate to a traditional forfeiture clause should also be avoided.

The case is also a reminder that landowners should consider including a mechanism for licence fee increases, particularly if the licence is renewable or granted in perpetuity.

Higher energy standards for the non-domestic PRS?

Since April 2018 and with some exceptions and exemptions, landlords of non-domestic private rented sector (PRS) properties have not been allowed to grant a new tenancy, or renew an existing tenancy, unless their property has an EPC rating of at least E. From April 1, 2023, this requirement will be extended to premises that are already let so that, again with some exceptions, all non-domestic PRS properties will need to have an E or higher EPC rating.

The government now wants to go further. In October 2019, it published a consultation seeking views on how best to improve the energy performance of non-domestic PRS buildings through tighter minimum energy standards. Two potential trajectories are identified:

• The government’s preferred trajectory is that all non-domestic privately rented buildings achieve a minimum B EPC rating by April 1, 2030, provided the measures required to achieve this are cost effective.
• The alternative is a minimum C EPC rating by April 1, 2030, if cost-effective.

The definition of “cost-effective” would be based on a seven-year “payback” test – this is met if the expected value of savings on energy bills over a seven-year period is equal to or greater than the cost of the measures taken.

The consultation sets out considerable detail on what might be achieved under each trajectory and asks a series of questions such as:

• Is 2030 the appropriate date to set as a target?
• Does that allow a long enough lead-in time for landlords and businesses to plan effectively?
• Should implementation be by way of incremental milestones?
• What is the best way of improving enforcement of minimum energy efficiency standards?

One potential problem is that, while the costs of installing energy efficiency measures typically fall on the landlord, it is the occupying tenant who would usually benefit from the resulting lower bills. Will higher rents for more energy efficient buildings be the answer?

The consultation closes on January 7, 2020.