Real Estate Focus: August 2020

Introduction

In this edition we take a look at a new Code for Leasing Business Premises; new Permitted Development Rights; a Supreme Court decision on a restriction on use in a retail lease; and proposed reforms to leasehold home ownership.

New Code for Leasing Business Premises

A new Code for Leasing Business Premises in England and Wales, published by the Royal Institution of Chartered Surveyors (RICS), comes into effect on September 1, 2020.

The aims of the new Code are to improve the quality and fairness of negotiations on lease terms and to promote the use of comprehensive heads of terms, not least to make the legal drafting process more efficient. It applies to most lettings of premises in England and Wales to tenants who will carry on trade, professional or other business activities in them, but notably not to premises that are intended to be wholly sublet by the tenant or to premises being let for a period of six months or less.

There is already a Code for Leasing Business Premises, the current edition of which was published in 2007. However there have been concerns that the existing Code, which is voluntary, has not been widely adopted. The most significant change introduced by the new Code is its status – it is an RICS Professional Statement and elements of it are mandatory for RICS members acting as agents or advisers on the grant of a lease.

In addition to the mandatory provisions, the Code contains “negotiation best practice” on the key elements of a lease, which RICS members must observe – departures are only permitted in exceptional circumstances that they may be required to justify. A failure to do so may have disciplinary consequences and may also result in a finding of negligence in the event of legal proceedings.

The Code comprises four elements:

• The Code itself.
• Template heads of terms.
• A checklist for use when a landlord or agent prefers to use their own form of heads of terms.
• A supplemental guide – effectively a useful summary of the main issues that the parties need to consider when agreeing a lease.

In terms of the mandatory requirements, the most significant is that the agreed terms must be recorded in written heads of terms covering, as a minimum, 16 specified key areas. As to the best practice, there is no major overhaul of the equivalent provisions in the existing Code but amendments have been made, including changes to reflect recent case law, new legislation and market practice.

It will be interesting to monitor whether landlords and tenants will generally issue Code-compliant instructions to their RICS-regulated advisers and, if they do not, how the resulting tensions will be resolved in practice.

Supreme Court decision on retail lease covenants restricting use

When does a lease covenant restricting the use of land fall within the common law doctrine of restraint of trade (the doctrine)? Such was the question for the Supreme Court in Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (Northern Ireland) [2020] UKSC 36.

If a covenant falls within the doctrine, it is unenforceable against the covenantor unless it is reasonable. In this case a developer of a shopping centre granted a 999-year lease of part to a well-known retailer as an anchor tenant in consideration of a premium of £50,000 and a nominal ground rent. The developer covenanted with the retailer that he would not allow any substantial shop to be built on the rest of the centre in competition with the retailer. The developer subsequently assigned his interest in the centre to a company. The company considered that the centre was ailing and that the covenant was stunting its ability to revive it. The company therefore sought a declaration that the covenant engaged the doctrine, that it was unreasonable and that it was therefore unenforceable.

The Supreme Court applied the “trading society” test, rejecting the alternative “pre-existing freedom” test. Under the trading society test a covenant restraining the use of land does not engage the doctrine if it is of a type which has “passed into the accepted and normal currency of commercial or contractual or conveyancing relations”.

Application of the trading society test to the facts of this case was straightforward for it had long been accepted and normal for the grant of a lease of part of a shopping centre to include a restrictive covenant on the part of the landlord in relation to the use of other parts of the centre. It followed that the covenant in this case did not engage the doctrine.

The decision will undoubtedly come as a relief to anchor tenants who have successfully negotiated similar restrictions to protect their commercial position.

New Permitted Development Rights

The Town and Country Planning (Permitted Development and Miscellaneous Amendments) (England) (Coronavirus) Regulations 2020, which came into effect on August 1, 2020, inserted a new Part 20 into Schedule 2 of the Town and Country Planning (General Permitted Development) Order 2015. Developers now have the right to construct up to two additional storeys of new dwellings immediately above the topmost residential storey of a “purpose-built” detached block of flats (subject to prior approval and certain conditions).

Below are the types of permitted works which may be required for such development:

• Engineering operations reasonably necessary to construct the additional storeys and new dwellinghouses.
• Works for the replacement of existing plant or installation of additional plant on the roof of the extended building reasonably necessary to service the new dwellinghouses.
• Works for the construction of appropriate and safe access and egress to the new and existing dwellinghouses, including means of escape from fire, via additional external doors or external staircases.
• Works for the construction of storage, waste or other ancillary facilities reasonably necessary to support the new dwellinghouses.

The new Permitted Development Rights can only be used on buildings constructed before July 1, 1948 or after March 5, 2018 which are purpose-built, detached blocks of flats. Therefore, mixed-use buildings are unlikely to benefit from these new rights.

Additional restrictions on the new development rights include (amongst others) that:

• The existing building must not be less than three storeys.
• The extended building must be no more than 30 metres in height.
• The floor to ceiling height of any additional storey must be no more than three metres.
• The overall height of the roof of the extended building must be no more than seven metres higher than the highest part of the existing roof.
• There are to be no visible support structures on or attached to the exterior of the building upon completion.
• The site must not be within a site of special scientific interest or have a listed building or scheduled monument within its curtilage.
• The height of any replaced / additional plant must not exceed the height of any existing plant.
• Construction of appropriate and safe access and egress to the new and existing dwellinghouses and storage, waste or other ancillary facilities that are reasonably necessary must not extend beyond the curtilage of the existing building.

Before commencement of the permitted development, the developer must apply to the local planning authority (LPA) for prior approval. In practice this will mean providing a transport statement; a daylight, sunlight and overshadowing report assessing both external and internal effects; elevations (and possibly CGIs) and an overarching statement to deal with all the remaining issues. The developer must also provide the LPA with a form of construction management plan.

The development must be completed within three years starting with the date prior approval is granted and the developer must notify the LPA as soon as reasonably practicable after completion.

While the new Permitted Development Rights allow developers more flexibility in property development, the limitations, conditions and procedural steps that developers must undertake as outlined above collectively show that, in reality, substantial tick-boxing must be done before developers can claim such rights.

For further information please contact Head of Planning Sarah Fitzpatrick or Planning Associate George Sismey-Durrant.

“Millions of leaseholders to benefit from Law Commission reforms”

On July 21, 2020 the Law Commission of England and Wales published recommendations to transform home ownership in England and Wales.

It is estimated that there are at least 4.3 million leasehold homes in England alone and the recommended reforms, which are set out in three reports, seek to tackle some of the well-publicised problems faced by existing leaseholders.

The reports are:

• Leasehold home ownership: buying your freehold or extending your lease (Law Com No 392). In this the Law Commission recommends changes to make it easier, quicker and cheaper to exercise leasehold enfranchisement rights (leaseholders’ rights to buy their freehold or extend their lease) and to shift the balance of power in favour of leaseholders. Key recommendations include extending the scope enfranchisement so that buildings with up to 50 per cent non-residential space would qualify and also giving leaseholders the right to buy the freehold of multiple buildings at once.
• Leasehold home ownership: exercising the right to manage (Law Com No 393). This contains detailed recommendations to make it easier and cheaper for leaseholders to take over the management of their building by exercising the right to manage (RTM).
• Reinvigorating commonhold: the alternative to leasehold ownership (Law Com No 394). Fewer than 20 commonhold developments have been established since its introduction in 2002, despite the fact that commonhold enables flats to be owned on a freehold rather than leasehold basis. This is in part because it is seen by developers as inflexible and by lenders as unattractive from a security perspective.
  
  This report makes numerous recommendations that seek to make commonhold not only workable, but the default form of home ownership in place of residential leasehold. The Law Commission comments that: “It is… for Government to decide whether [commonhold] should be compulsory (in all or some circumstances), incentivised, or left optional”.

The ball is now in the Government’s court, although when it will have the time to take things forward is anyone’s guess.