Real Estate Focus – June 2023

Heads of Terms: beware the formation of a binding contract

In Pretoria Energy Company (Chittering) Limited v Blankney Estates Limited [2023] EWCA Civ 482, the Court of Appeal was asked to decide whether a document described as “Heads of Terms of Proposed Agreement” amounted to a binding agreement for lease.

The Heads of Terms provided, amongst other things, for the grant of a business lease of a site known as the Flax Factory for a period of 25 years, excluding the security of tenure provided by the Landlord and Tenant Act 1954, and at an initial annual rent of £150,000. The final paragraph stated that the Heads of Terms were agreed and signed on the understanding that a formal agreement would be drawn up within one month of planning consent being obtained for the construction of a plant on the site. It was also agreed that there should be a lock-out agreement of several months during which “the arrangements being negotiated are exclusive to both parties”.  

The Heads of Terms were not marked “subject to contract” and it was common ground that the lock-out provisions were legally binding. The lock-out period expired, the relationship between the parties soured and the landowner concluded arrangements with a third party.  The prospective lessee argued that the Heads of Terms created a contractually binding agreement for lease.

The Court of Appeal held that they did not, but the decision was by no means clear-cut. The label “Heads of Terms” was not in itself conclusive: the key issues were the contractual intention of the parties and certainty of terms. 

Looking at the facts of the case: 

• the existence of a binding contract for a 25-year lease was incompatible with the limited period of the lock-out agreement;
• the express understanding that the lease would not enjoy 1954 Act protection (which requires a statutory process to be followed before an agreement is entered into) was a “weighty pointer” against the conclusion that a binding agreement had been reached; and
• there were a number of important lease terms that were left wholly in the air, not least the term commencement date, which the law regards as essential to the creation of a binding contract for lease.

The judge concluded that “the more vague and uncertain an agreement is, the less likely it is that the parties intended it to be legally binding”. 

How much easier (and cheaper) it would have been to mark the relevant parts of the Heads of Terms “subject to contract”. The case illustrates the importance of being explicit about the legal status of documents particularly where some elements are intended to be legally binding (such as the lock-out period) and some are not.

When is a building occupied by a charity eligible for business rates relief?

In London Borough of Merton Council v Nuffield Health [2023] UKSC 18 the Supreme Court decided that a private members-only gym charging a substantial monthly fee was eligible for the 80% relief from business rates available to premises used for charitable purposes.

The Local Government Finance Act 1988 ("the LGFA") provides for a mandatory 80% relief from business rates where "the ratepayer is a charity or trustees for a charity" and the premises are "wholly or mainly used for charitable purposes". 

Nuffield Health is a registered charity whose purposes are "to advance, promote and maintain health and healthcare of all descriptions and to prevent, relieve and cure sickness and ill health of any kind, all for the public benefit." It pursues those purposes primarily through the provision of gym facilities and also operates private hospitals and clinics. 
Nuffield Health claimed the 80% relief for one of its gyms. The rating authority refused the relief arguing that the membership fees were set at a level which excluded persons of modest means from enjoying the gym facilities. In the rating authority’s view, this meant that the gym was not used for charitable purposes because the requirement for public benefit - which is an invariable condition of charitable status - was not satisfied.

Nuffield Health challenged the decision, and the case went all the way to the Supreme Court.

The Supreme Court unanimously held that Nuffield Health used the gym for its charitable purposes and was therefore entitled to the 80% relief, ordering the repayment of rates amounting to £930,823.95. 

Both conditions imposed by the LGFA for entitlement to the relief were met:

• The first condition - that the ratepayer is a charity or trustees for a charity - was satisfied as Nuffield Health is a registered charity and, under the Charities Act 2011, the ratepayer is then conclusively presumed to be a charity. 
• The second condition - that the premises are used wholly or mainly for charitable purposes - was a question of fact. The question is not whether the use of the specific premises is charitable, but whether the use is in fulfilment of the charitable purposes of the particular charitable ratepayer, looking at their activities in the round. From that perspective, Nuffield Health plainly used the gym for the fulfilment of its charitable purposes even if it was not within the reach of members of the public “of modest means”.

While a disappointment for rating authorities, the decision brings certainty to an area that was previously unclear. Given the number of properties occupied by charities and the amount of money at stake, the decision is a significant one and charities will be relieved that they will not have to analyse the use of every property they occupy on a case-by-case basis.

Business lease renewals: does a landlord’s redevelopment plan trump a tenant’s security?

Tenants occupying premises for the purpose of their business are entitled to a new lease on the termination of their existing lease unless the latter is “contracted out” of the security of tenure regime contained in the Landlord and Tenant Act 1954. If the terms of the renewal lease cannot be agreed between the parties, the matter can be referred to the court for determination.

In B&M Retail Limited v HSBC Bank Pension Trust (UK) Limited, the County Court was asked to decide whether the terms of a proposed renewal lease should contain a break clause for redevelopment.

The landlord had entered into an agreement for lease under which the prospective tenant was obliged to carry out defined redevelopment works on behalf of the landlord. The grant of the lease pursuant to the agreement was conditional on obtaining both planning permission and vacant possession of the premises in question. 

The obstacle to achieving the second condition was the incumbent tenant, whose original lease had expired but who was entitled to a renewal lease under the 1954 Act. In negotiations, the sticking point between the parties was the length of the term of the renewal lease and this was referred to the court for determination. The tenant sought a term of 10 years. The landlord, in order satisfy the vacant possession condition in the agreement for lease, proposed an 18-month term with a landlord’s redevelopment break clause operable on no less than six months’ notice.  

The tenant argued that a landlord’s intention to redevelop should not trump the tenant’s need for security and that the court should adopt a balancing exercise which, in this case, should be exercised in their favour.

The court disagreed. The weight of authority suggested that the court should only upset a landlord’s redevelopment ambitions if there is a “major factor that points the other way” and while a balancing exercise has to be undertaken, if anything, it is trumped if a landlord wishes to redevelop. 

The court was satisfied in this case that there was a very real possibility that planning permission would be obtained and saw no reason to prevent the proposed redevelopment, concluding that the renewal lease should be for a term of five years and contain a break clause operable on six months’ notice.

The decision is a welcome one for landlords, but it will be interesting to see if the tenant appeals.

Real Estate Podcast – Rights of light and the challenges they pose to developers

Welcome to our Real Estate Podcast series where we explore the themes and trends that our real estate clients are facing in today’s fast changing landscape. Our partners, together with clients and collaborators share their experiences and stories as well as providing market updates.

Our latest Podcast features David Stevens, Partner and Head of our real estate litigation team in the UK and Barry Hood, a Co-Founder and Senior Director in leading rights of light consultancy, Point 2 Surveyors.  David and Barry explore the thorny issue of rights of light and the challenges they pose to developers, particularly in built-up areas such as central London.

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