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property law update, April-June 2015

6 July 2015

Cases

Kandola v Mirza Solicitors LLP [2015] EWHC 60 (Ch)

Facts
On a purchase for £425,000, the buyer agreed to pay to the seller a deposit of 22% on exchange to be held by the seller’s solicitors as agent for the seller. The buyer’s solicitors gave clear advice to the buyer about the risks of doing this and the buyer signed a written acknowledgment that he was proceeding against his solicitors’ advice.

Contracts were exchanged on 10 June 2010. The official copies supplied to the buyer’s solicitors were dated 18 May and so did not reveal a bankruptcy petition lodged against the seller on 1 June and a creditor’s notice registered against the title on 2 June (it was only when doing the pre-completion Land Registry search that the creditor’s notice was revealed to the buyer’s solicitors for the first time). Completion did not take place and the buyer lost his deposit (as the seller was made bankrupt).

The buyer sued his solicitors arguing that they should have checked the credit status of the seller before exchange.

Issue
Should the buyer’s solicitors have carried out a bankruptcy search or a Land Registry priority search before exchange (either of which would have revealed that the seller was on the verge of bankruptcy)?

Decision
The court held that the buyer’s solicitors were not liable to the buyer, as it was not generally a solicitor’s duty to check the credit status of another party to a transaction, unless specifically instructed to do so.

Points to note/consider

  1. This case confirms that as long as the normal pre-contract title investigations give no reason to doubt the solvency of the seller, a buyer’s solicitor does not generally have a duty to investigate further the seller’s solvency (obviously it would have been a different story had the bankruptcy entries already been on the official copies supplied before exchange).
  2. The Law Society’s Conveyancing Handbook does recommend that buyers should be advised of the risks of paying a deposit to be held as agent (which is what happened here). In this case, whilst the buyer claimed he had not understood that explanation, that did not by itself matter. All the mattered was that the explanation itself was adequate. The duty is to explain matters in terms that can be understood by the client (although the extent of that explanation will obviously vary depending on the identity and experience of the client).
  3. It is worth remembering that whilst under both the Standard Commercial Property Conditions (2nd Edition) and the Standard Conditions of Sale (5th Edition) (SCS), stakeholder deposits are the default position, SCS 2.2.5 does allow a seller to use all or part of the deposit as a deposit on a related residential purchase, as long as the deposit is ultimately held as stakeholder at the top of the chain (a hybrid agency/stakeholder deposit clause).

Wilson (liquidator of 375 Live Ltd) & 375 Live Ltd (in liquidation) v SMC Properties Ltd and others [2015] EWHC 870 (Ch)

Facts
A buyer bought a property for £850,000 and registered the transfer at the Land Registry. Completion took place on 4 April 2014. However, the buyer was unaware that HMRC had presented a petition to the court on 26 February 2014 to wind up the seller company. The seller company entered into liquidation on 14 April 2014.

Under section 127 of the Insolvency Act 1986, a disposition of a company’s property made after the commencement of a winding up (i.e. the date of the presentation of a petition) is void, unless the court orders otherwise. The buyer therefore sought a court order to validate the transaction.

Issue
Should the court exercise its discretion under section 127 in the buyer’s favour?

Decision
As the buyer had acted in good faith, without knowledge of the winding up petition and at arm’s length, and as the price agreed could not be said to be an undervalue (despite the liquidator’s argument to the contrary), the court exercised its discretion to validate the transaction.

Points to note/consider

  1. A transaction will normally be validated where a disposition is made in good faith in the ordinary course of business at a time when a buyer is unaware that a winding up petition has been presented. However, this may well not be the case if a transaction significantly depletes the assets of a company to the detriment of the general body of creditors. It goes without saying that it would be much better for a buyer to discover the presence of a winding up petition before completing a transaction.
  2. It is not clear from the case report what checks the buyer carried out against the seller. As well as checking the title at the Land Registry, best practice is also to check at Companies House to see if any insolvency procedures have been commenced against the company and to ring the Companies Court in London (which maintains a central index of winding up petitions). Ideally, this should be done before both exchange and completion.
  3. As the Land Registry does not itself carry out company checks, the transfer in this case was registered. Registration vests title in the new registered proprietor, even if the transfer itself is void under section 127. However, unless and until an order is obtained under section 127, the title is vulnerable to an application by a seller’s liquidator for rectification under Schedule 4 of the Land Registration Act 2002.

TBAC Investments Ltd v Valmar Works Ltd [2015] EWHC 1213 (Ch)

Facts
Receivers acting on behalf of the seller company served a notice to complete on the buyer after it failed to complete a purchase on the contractual completion date. The notice contained numerous errors, including the following ‘howlers’:it stated that the buyer had agreed to take a lease of the property (whereas it was buying the freehold)

  • it described the seller as a ‘landlord’
  • it referred to the wrong clauses in the contract
  • it required payment of the wrong amount for the receivers’ costs
  • it was not signed (although there is nothing in the Standard Conditions requiring a notice to complete to be signed, there was a space left blank which was clearly intended for a signature)
  • it was dated March 2012, rather than 2013
  • it required completion on 1 April 2012, instead of 3 April 2013.

Following non-compliance with the notice to complete, the receivers terminated the contract. 17(!) months later (when the receivers attempted to resell the property), the buyer at last queried the validity of the notice to complete.

Issue
Did the errors in the notice to complete invalidate the notice?

Decision
The notice was valid, despite the errors. The court applied the well-known ‘reasonable recipient’ test from the 1997 House of Lords case of Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd (i.e. viewed objectively, would a reasonable recipient, with all the background knowledge that would reasonably have been available to it at the relevant time, have been misled by the notice).

The reasonable recipient (with all the relevant background knowledge) would have understood the purpose and effect of the notice, namely that the server was intending to specify a date that was 10 working days into the future (a date that the reasonable recipient could easily have worked out for itself using a diary).

Points to note/consider

  1. Under the Standard Commercial Property Conditions (2nd Edition) (SCPC), at any time on or after the agreed completion date, a person who is ready, able and willing to complete can serve a notice to complete on the other party, requiring completion within 10 working days of giving the notice (excluding the day the notice is given) (SCPC 8.8). This makes time of the essence of the contact. If a buyer then fails to complete in accordance with the notice, the seller can rescind the contract, forfeit the deposit and claim damages (if its loss is greater than the deposit forfeited) (SCPC 9.5).
  2. Despite the outcome in this case, because of the complicated rules for working out when a notice is served under the SCPC, best practice is not to specify a date in a notice to complete for when completion must take place (i.e. just require completion within 10 working days of the notice being given).
  3. If actng for the recipient of a notice to complete, this case shows that you cannot assume that the notice is invalid (and can safely be ignored) despite the errors that it may contain.
  4. A further argument raised by the buyer was that the notice was invalid because it was not given by both the receivers who contracted to sell the property on behalf of the seller. This argument was dismissed by the court because a receiver acts as agent for the mortgagor under section 109 of the Law of Property Act 1925 (despite being appointed by the mortgagee), so the correct party to give the notice was the seller company either directly or through any relevant agency. The contract stated that the seller was ‘acting by its receivers’, but these words were merely descriptive (the buyer’s contract was with, and the notice had been properly given by, the seller).

Arnold v Britton and others [2015] UKSC 36

Facts
This case concerned the interpretation of a service charge clause in leases of 25 holiday chalets on a leisure park running for 99 years from 25 December 1974.

The service charge clause was not identical for each lease, but the common elements of the relevant clause provided for the tenant to pay to the landlord:

“----a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year thereof"".

In contrast, the tenants of the other 66 chalets on the park had a different service charge clause, which provided for a 10% compound increase only every three years (roughly equivalent to a compound rate of 3% a year).

Issue
Did the above clause really mean what it said (i.e. provide for a fixed annual sum payable as a service charge compounded each year at the rate of 10%)? 

The tenants argued that this would result in such an increasingly absurdly high annual service charge in the later years of each of the leases that it could not be right (it would mean that, for a lease granted in 1980, the service charge is already over £2,500 a year for the relatively limited services provided and will be over £550,000 by 2072!). They argued instead either that the compounded figure should be interpreted as a cap on the maximum amount that the landlord could recover each year (with the tenants paying a fair proportion of the landlord’s costs each year in providing the services) or that a term should be implied precluding the landlord from recovering more by way of service charge than was recoverable from the other tenants (with the 10% increase every three years).

Decision
The Supreme Court held that when interpreting a written contract, the court had to identify the parties' intention by reference to what a reasonable person (having all the relevant background knowledge) would understand the term to mean.

Here, the natural meaning of the clause was clear. The reasonable reader of the clause would have understood that the first part of the clause required the tenants to pay an annual charge to reimburse the landlord for providing the services and the second part of the clause identified how that service charge was to be calculated (i.e. a fixed sum with a fixed 10% annual increase). The fact that, in future, its quantum might substantially exceed the parties’ expectations at the time when the leases were granted was not a reason for giving a different meaning to the clause (even though the fixed annual increase looked likely to result in service charges for each of the tenants which exceeded the cost of providing services to the whole park).

Points to note/consider

  1. Most of the leases were granted in the 1970s and 1980s at a time when inflation was running at over 10% and there was an expectation of high inflation forever (so the tenants may have thought they had a good bargain at the time). However, this case shows the importance of drafting documents to cater as far as possible against unexpected eventualities (in this case, the significant decrease in the inflation rate). The tenants are now left with liabilities that will far exceed the values of the properties as a result of this (seemingly innocuous) clause.
  2. In recent times, the courts have made much of the importance of applying commercial common sense when interpreting agreements. This case, however, shows the limits of that approach. Where the wording of an agreement is clear, a party cannot rely on commercial common sense to rescue it from a bad deal (no matter how uncommercial that deal may have turned out to be). The tenants made a bad bargain and now have to live with the consequences. The mere fact that a contractual arrangement has worked out badly for one of the parties does not justify a departure from the natural meaning of the relevant contractual provision.
  3. Any clause that involves compound growth on a sum paid annually should always be treated with great care and it is invariably a good idea to work though some hypothetical examples to ensure the clause works as you think it should.

Orientfield Holdings Ltd v Bird & Bird LLP (unreported)

Facts
Bird & Bird (BB) were instructed on a purchase of a seven bedroom residential property in London for £25m by a British Virgin Islands company. Prior to exchange of contracts and the payment of a deposit of £2.5m, they obtained a Plansearch Plus report, which (amongst other things) lists planning applications affecting properties within the vicinity and which revealed that a nearby school site was to be redeveloped into a 1,400 pupil six storey academy. However, BB did not include any reference to this redevelopment in its report on title to the buyer.

The buyer became aware of the school redevelopment between exchange and completion and (through new solicitors) served a notice on the seller to rescind the contract on the basis of misrepresentation by the seller in its replies to pre-contract enquiries (the seller had previously objected to the school redevelopment, but it was not entirely clear that there had been a misrepresentation as the seller’s responses were rather ambiguous). Separate proceedings between the buyer and seller in relation to the deposit then settled, with the deposit being divided equally between them.

The buyer then sued BB to recover the balance of the deposit (plus interest and costs).

Issue
Had BB been negligent by not drawing to the buyer's attention the results of its Plansearch Plus report?

Decision
Having carried out the Plansearch Plus report, BB were under a duty to explain the results of the search to buyer. A reasonably competent solicitor with the Plansearch Plus report to hand would have adopted the position that any development within 100 metres of the property would be of significance to the buyer.

Points to note/consider

  1. The case has not yet been fully reported, so some of the facts are currently unclear. It seems that BB did not provide the client with a copy of the report (which begs the question why they obtained it in the first place). Presumably the outcome would have been different had BB just acted as a ‘post-box’ and made it clear to the buyer that they were doing just that (i.e. they had not considered the contents of the report or its potential impact on the client’s transaction).
  2. Plansearch Plus reports are not part of the ‘usual’ searches and enquiries. What is not clear is whether the outcome to this case would have been different had BB not commissioned the search in the first place.

Legislation

The Town and Country Planning (General Permitted Development) (England) Order 2015
This came into force on 15 April (and applies to England only). It replaces the old Town and Country Planning (General Permitted Development) Order 1995 by consolidating in one place the numerous amendments subsequently made to that order. It also introduces new permitted development rights authorising the following changes of use:

  • use as a shop, for financial and professional services, a betting office, a pay day loan shop or a casino to a restaurant and café
  • use as a shop to financial and professional services
  • use as a shop or for financial and professional services to assembly and leisure (but only up to 200 square metres of floor space)
  • use as a casino or an amusement arcade to residential
  • use for storage or as a distribution centre to residential (but only up to 500 square metres of floor space and, initially at least, only for three years).

Amongst other things, the order also introduces new permitted development rights allowing the provision of ‘click and collect’ facilities within the curtilage of a shop and allowing retailers to modify the size of shop’s loading bays by up to 20%. It also extends the right for current large rear home extensions until 30 May 2019 and allows for the installation, alteration or replacement of solar panels on the roofs of non-domestic buildings up to a capacity of one megawatt.

Significantly, the order does not extend the permitted development right which allows a change of use from offices to residential beyond the current deadline of 30 May 2016.

Home business tenancies
The Small Business, Enterprise and Employment Act 2015 amends Part II of the Landlord and Tenant Act 1954 (LTA 54) (from a date still to be determined) to exclude home business tenancies from the security of tenure regime. A home business is a business of a kind that might reasonably be carried on at home. A pub will not be regarded as a home business.

A home business tenancy is a tenancy of a separate dwelling let to one or more individuals. The tenancy must require at least one of those individuals to occupy the dwelling-house as a home, must permit a home business to be carried on in the dwelling-house (or for the landlord to consent to a home business being carried on) and must not permit a business other than a home business to be carried on.

In addition, where a tenant breaches a prohibition against use for business purposes by carrying on a home business, Part II of the 1954 Act will not apply to the tenancy, even if the immediate landlord (or its predecessor in title) consented to the breach or the immediate landlord acquiesced in the breach (currently, under section 23 of the LTA 54, protection would be available in those circumstances).

Assured shorthold tenancies
The Deregulation Act 2015 amends certain provisions of the Housing Act 1988 dealing with assured shorthold tenancies (ASTs). In particular, it concentrates on those clauses that allow a landlord to terminate an AST on giving two months’ notice (a section 21 notice).

Points to note

  1. Where a tenant has made a written complaint to his/her landlord about the state of repair of a property and the landlord has either failed to respond, given an inadequate response or responded by serving a section 21 notice, the tenant can defer eviction by contacting the local housing authority, which may then serve certain types of enforcement notice on the landlord (there will then be a six month ban on the landlord serving (or re-serving) a section 21 notice). This is to protect tenants against the practice of retaliatory eviction where they have raised a legitimate complaint about the condition of a property.
  2. A landlord cannot serve a section 21 notice within the first four months of a tenancy (to stop a landlord serving a section 21 notice right of the start of the tenancy).
  3. A prescribed form of section 21 notice will be introduced to reduce the scope for errors and to remove the need for a landlord to specify the exact date a tenancy comes to an end (whilst retaining the requirement to give two months’ notice).
  4. A landlord cannot serve a section 21 notice where he or she has failed to comply with certain legal requirements to be set by regulations (e.g. to provide an Energy Performance Certificate or a Gas Safety Certificate).
  5. A landlord cannot serve a section 21 notice where he or she has failed to comply with a new obligation to provide information about the respective rights and responsibilities of both landlords and tenants under ASTs.
  6. Tenants are given a statutory right to claim back rent paid in advance (calculated on a daily basis) for a period falling after a section 21 notice brings the tenancy to an end.

These provisions will apply in England only from 1 October 2015 (in the not too distant future, Wales will have its own separate regime for residential tenancies). They will not initially apply where the fixed term of an assured shorthold tenancy was entered into before 1 October 2015 (although they will broadly apply to all ASTs from 1 October 2018).

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

David Harris

David Harris

Professional Development Lawyer

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