With disputed break rights, restrictive covenants and an anticipated burst of activity in the residential property market, due to the temporary SDLT reductions, there is plenty to report on this week. Our Insight section also considers the future for the restaurant sector (What's on the menu for 2020 and beyond?). If there are topics you would like to see covered in a future bulletin, do let us know.
"Give me a break" - GKN Aerospace Services Ltd v Duncan Investments Ltd [2020] 7 WLUK 56
In the current financial climate, disputes around break clauses are likely to become commonplace. Tenants may be keen to exercise break options, where available, in order to rationalise their property interests and landlords will be looking to challenge invalid notices, or a tenant's failure to comply with break conditions, in order to avoid leases coming to an end wherever possible.
In this case, the tenant sought to serve a break notice to terminate the lease of a flat. At first instance, it was found that he had failed to validly exercise the break option, but the tenant successfully appealed that decision in the High Court.
The flat had been let for a 12 month term commencing on 24 October 2015. The lease contained an option to renew and an option to break, upon the tenant giving at least two months' notice, at any time after 23 February 2016 (i.e. after the first 4 months of the term). In the event that the term was extended, the break notice could be served at any time during the second term. The lease also contained provisions regarding service of notices and timescales for deemed delivery.
The tenant exercised the option to renew for a second year and the parties subsequently agreed to a further extension of the lease, until 23 October 2019. This further extension was documented by an addendum, which changed the provisions of the break clause to state the "tenant may for this addendum only serve notice at one point, being three months prior to the anniversary of the first year".
The tenant served a break notice on 1 June 2018. The landlord rejected the notice as not being served in accordance with the break clause and the County Court Judge found for the landlord, agreeing that the wording of the addendum meant that the break notice had to be received on a specific date, namely 24 July 2018, in order to terminate the tenancy on 23 October 2018.
The tenant successfully appealed. Fancourt J held that a determination of the proper construction of the lease required a consideration not only of the language used, but also the context in which the addendum was signed (following Arnold v Britton [2015] and Wood v Capita Insurance Services Ltd [2017]). Under the lease and the first extension, the tenant had a rolling break requiring 2 months' notice. The addendum changed that, by extending the notice period to 3 months and by limiting the break option to a fixed point in time. The issue to be determined was whether the break clause also restricted the tenant to only being able to give notice on a specific date. The commercial purpose was to give the tenant the right to terminate the lease subject to reasonable notice being given to the landlord, and to provide clarity to both parties as to whether the break option had been validly exercised. The Judge held that requiring notice to be served on a particular day served no commercial purpose and would, in any event, require more concise wording in the tenancy agreement.
A disputed break notice leads to uncertainty for both landlords and tenants, along with the unwelcome delay whilst the matter is resolved. A tenant seeking to exercise a break right must strictly comply with any requirements as to serving notice and any break conditions. If you are a tenant considering exercising a break right, or if you are a landlord in receipt of a break notice, you should consider taking advice on the specific requirements in the lease.
Neil Sheppard v Martin Grant Holdings Limited (1) and Roger Turner (2) [2020] UKUT 171 (LC), 2020 WL 03268956
The Upper Tribunal (Lands Chamber) has the power to modify or discharge a restrictive covenant on a number of grounds, for example if the discharge will not cause injury to the beneficiaries. In such circumstances, the Tribunal may require the applicant to pay compensation to the beneficiaries, under s84(1) of the Law of Property Act 1925, due to the restrictive covenant having reduced the sale price of the burdened land.
In this case the applicant was the owner of a house built in 1985 as part of a development. He bought the property in 2010 subject to the restrictions on title, imposed by a conveyance dated 16 September 1985, between the developer and the original buyer.
One of the restrictive covenants prevented the applicant from erecting more than one 'private dwelling house' on the land. The applicant sought modification as he had the required planning permission to demolish the existing garage and build an additional house.
The first respondent was the holding company in which the developer's remaining assets were vested; these assets included estate roads and areas at the boundary of the estate where access to adjoining land could be gained. The first respondent was entitled to the benefit of the restrictive covenant. The second respondent was a neighbour to the applicant. Both objected to the proposed works and consequently the applicant applied to modify the restrictive covenant in order to permit the second dwelling.
The first respondent accepted that the value of its retained land would not be affected by the modifications of the restrictions; there was no basis for an award under subsection (i) of section 84(1). The price paid in 2010 was for the newly built house, garage, drive and garden and therefore the question was how much more, than the £52,500 paid, should the purchaser have paid in 1985 if the restriction had been removed to allow the proposed second dwelling.
It could not be assumed that planning permission for a second dwelling was in place in 1985; instead, it was the hope of permission and of not being prevented from implementing this that was the subject of the valuation.
The application was granted and it was held that the 1985 purchaser would have been willing to pay a maximum of 5%, or £2,625, in addition to the purchase price for the benefit of such modification. Consideration was given to whether the sum should be adjusted to allow for inflation, as the instant Tribunal had made such an adjustment in some cases but not in others, whether the movement of retail prices index would suggest an increase, and whether regard should be given to actual house prices in accordance with the Nationwide index.
Judge Peter McCrea FRICS held that the amount that would represent a 'just' reward was a matter of judgement, and it was for the objector to provide evidence in support of the suggested impact. The first respondent failed to provide evidence of this, perhaps unsurprisingly due to the unavailability of records given the passage of time, meaning that there was no firm evidential basis for assessing the appropriate sum of compensation. The Judge ordered the applicant to pay £4,000 in compensation to the developer.
Stamp Duty Land Tax temporary reduced rates
On 8 July 2020 the Chancellor announced a temporary reduction in stamp duty land tax (SDLT) as part of a package of measures aimed at boosting the economy. The nil rate band for SDLT has been increased to £500,000 on the purchase of residential property in England and Northern Ireland from 8 July 2020 until 31 March 2021 inclusive. The temporary SDLT rates will apply as follows:
- No SDLT on the first £500,000 for a first time buyer or those without a second home; a saving of up to £15,000. The next £425,000 (the portion from £500,001 to £925,000) will have a SDLT rate of 5%, the next £575,000 (the portion from £925,001 to £1.5million) 10% and the remaining amount 12%.
- 3% SDLT on the first £500,000 of purchases of additional dwellings; again a saving of up to £15,000. The next £425,000 has a rate of 8%, the next £575,000 a rate of 13% and the remaining amount 15%.
- In respect of new leasehold sales and transfers, the nil rate band, which applies to the 'net present value' of any rents payable for residential property, is also increased to £500,000. Over £500,000 the rate is 1%.
On 1 April 2021 the rates will revert to those in place prior to 8 July 2020. The legislation implementing this change is currently being debated so it is not yet certain whether the reduction in rate will be available for contracts entered into on or before 31 March 2021 and which complete after this date or only for purchases which complete before that date. It is prudent to assume that completion or substantial performance of the relevant land transaction will need to occur before April 2021 in order to benefit from these changes.
The temporary reductions in Wales and Scotland
The Welsh Government has confirmed that the rates will also be reduced for the Welsh Land Transaction Tax from 27 July 2020. The 0% threshold will be increased to £250,000 from £180,000 and will be in force until 31 March 2021. The reduction in rates will not apply to the additional dwellings rate (unlike the SDLT rate cut).
The Scottish Government has also confirmed that the rate cut will apply to the Land and Buildings Transaction Tax between 15 July 2020 and 31 March 2021. As with Wales, it will only apply to the normal residential rates, and the 0% threshold will be increased to £250,000.
Land Registry to start accepting electronic signatures
'Wet-ink' signatures have become problematic since so many people have been forced to work from home, and the Land Registry has responded to increased demand from customers that e-signatures be accepted on documents such as deeds to transfer land.
On 9 July 2020 the Land Registry announced that it will soon start accepting witnessed electronic signatures provided certain conditions are met. It will also take steps to accept Qualified Electronic Signatures, where a party can sign without a witness where that party's identity is verified electronically at the point of signing.
The draft practice guidance is available on the Land Registry's website and they are welcoming comment before 18 July 2020.
Insights from around the firm
- Is the Government's announcement of a cut in VAT enough to revive the hospitality sector?
- What's on the menu for 2020 and beyond?
- Helping the economy get back on its feet: employment measures
Positive News
- A primary school is to showcase "quirky" sculptures after an artist's widow decided to give them away. Tony Hillier created hundreds of steel figures and animals, with several displayed in his garden in Histon, near Cambridge.
- Care residents at Sydmar Lodge Care in Edgware have been keeping busy during in lockdown by recreating classic album covers while their loved ones are unable to visit.
- England has lost an estimated 97 per cent of its wildflower meadows since the second world war however the The B-Lines initiative is looking to change that by creating a network of wildflower highways across England to help bees and other pollinators.
