A mural attributed to the elusive street artist Banksy has raised some interesting points about who owns what when a tenant leases a property from a landlord.
In the case of Creative Foundation v Dreamland Leisure Ltd and others, the tenant held a 20 year lease of a building which it used as an amusement arcade. The leased area included the structure and the exterior.
The lease included a standard form of repairing obligation requiring the tenant to keep the property in good and substantial repair, a decoration obligation requiring the painting of the outside of the property every 4 years and a prohibition on making alterations without the landlord’s consent – including an express provision against “maiming or injuring” the walls.
In September 2014, a mural was spray painted onto the flank wall of the building (Artwork), purportedly by Banksy.
The following month, the tenant removed the Artwork, re-placed the wall and shipped the Artwork to New York where it had been advised it could expect to sell the Artwork for up to £500,000.
The tenant argued that by removing the Artwork it was acting within its obligations in the lease and that once removed, the Artwork became the property of the tenant by virtue of an implied term of the lease.
The landlord objected and assigned its claim to Creative Foundation (Foundation) to seek the Artwork’s return for the benefit of the local Folkestone community.
Foundation argued that, in accordance with an established principle, the building was attached to and formed part of the land that belonged to the landlord and that once sprayed onto the wall the Artwork became part of the land. The tenant had no right to remove the Artwork by virtue of its repairing and decorating obligations and that by doing so without the landlord’s consent it had breached its alterations obligations.
On giving its verdict, the court firstly held that whilst the Artwork constituted disrepair, the tenant was only required to use prudent remedial methods to discharge its repairing obligations; there was no reason the Artwork could have not have been removed by a less intrusive method such as painting over or chemicalisation and the removal of an entire section of wall constituted interference with the fabric of the building.
Secondly, the court held that once the Artwork had been removed from the property it took on the status of a chattel, the ownership of which belonged to the landlord. Whilst the tenant might have a right to dispose of chattels removed whilst carrying out repairs, that was not the same as an implied term that ownership in such items transferred to the tenant. In any case, even if it could be established that chattels of no significant value belonged to the tenant, this did not necessarily extend to a term being implied for valuable items.
The court dismissed the tenant’s arguments and ordered the Artwork to be returned the Foundation.
Given the well established principle that a building is attached to, and forms part of the land, and the absence of any agreement between the parties to the contrary, the decision is unsurprising although no doubt there would also be public policy reasons against a finding in favour of the tenant. Practically, the immediate effect of the decision will no doubt be a strong deterrent to other tenants who might seek to cash in on street art appearing on their buildings.
A Tenant’s Guarantor recently unsuccessfully claimed that the Landlord’s actions meant the Lease it had guaranteed had been surrendered. If the Lease had been surrendered, the Guarantor would not have had to pay future arrears and take a new lease of the Property.
The Court reaffirmed some old decisions and clarified what would or would not constitute a surrender by operation of law (ending a lease early without a written document). Whilst the Judge emphasised that it is necessary to look at the Landlord’s conduct as a whole in deciding whether or not it had accepted a surrender by operation of law, the following specific actions were dealt with in the Judgment:-
1. At one stage the Tenant’s Administrators asserted that the Lease ended simply because the Tenant had vacated. The Court said absolutely not.
2. It is not uncommon for a tenant’s administrator to sell the tenant’s business and to grant a licence to the purchaser of that business allowing it to use the tenant’s property for a short while. This happened in this case. The purchaser of the business paid a licence fee (equivalent to the rent under the Lease) to the Administrators and the Administrators passed that sum on to the Landlord as rent. It seems the Landlord was fully aware of this arrangement and, although he did not object to the purchaser’s occupation (which was in breach of the alienation provision of the Lease), the Court was satisfied that the Landlord’s actions did not constitute an acceptance of a surrender of the Lease.
3. Once the purchaser had vacated, the Tenant’s Administrators returned the keys to the Landlord’s solicitors saying that if the keys were not accepted they would be thrown away. The Landlord’s solicitors accepted the keys but did so by expressly recording in writing that they were doing so for “security only and not as a surrender”. The Court said someone had to hold the keys and the Landlord’s solicitors’ actions were sensible and their statement as to the basis on which the keys were held was sufficient to defeat a claim that this constituted a surrender. If, however, the solicitors had counter-signed and returned a covering letter saying that receipt of the keys was an acceptance of a surrender the outcome would have been very different.
4. The Landlord became aware shortly after the purchaser had vacated that some of the doors to the Property had been left unlocked so the Landlord secured the Property. The Landlord’s Insurers initially required round-the-clock security for the Property which the Landlord had to arrange. Eventually, the Insurers agreed the Landlord could still maintain insurance if he boarded up the lower floor windows with steel screens and installed monitored intruder and smoke alarms. The Court said none of these actions amounted to an acceptance of a surrender, especially because the Tenant had said it was not going to take any steps to “protect” the Property. The Court confirmed that a landlord is entitled to take steps to protect and preserve its property. There was no evidence that the Property’s locks were changed to exclude the Tenant, nor to allow the Landlord to enter the Property for its own beneficial use. In such circumstances, the Court was satisfied that the Landlord had not gone beyond protecting its own interest in securing the Property.
5. The Landlord marketed the Property “with vacant possession” for a short while until its solicitors said such actions could prejudice its claim against the Guarantor. The Court confirmed that simply marketing did not amount to an acceptance of a surrender as the Landlord was only doing what, in the circumstances, was the best it could do.
6. During the time Property was vacant, the Police had asked if they could use the Property’s yard to kennel their dogs. At one level this must have appealed to the Landlord as the Property was being vandalised, but the Landlord declined on the basis that if he had authorised a third party to occupy this would have been seen as an acceptance of a surrender. Similarly, if the marketing exercise had found a new tenant, the Landlord would have had to have accepted/taken a surrender before it could grant the new tenancy.
Whilst every case will turn on its own particular facts, this case provides a number of useful lessons, most notably that the Landlord was absolutely right to constantly emphasise (in writing) that he had not accepted a surrender and that it is quite difficult for one party to successfully claim a lease has been surrendered by operation of law if the other maintains the lease is still in existence.
It is extraordinary that the practice of viewing a muddy hole in the ground (or just viewing computer generated schematics), entering into a binding contract with payment of a 10% deposit to purchase a flat which may, or may not, be built upon it at some point in the future, has grown to epidemic proportions in recent years. This is buying “off plan”. The reasons for this epidemic are obvious but, in particular, the availability of new properties is not keeping up with the apparent demand. There were many burnt fingers during the recent recession when purchasers who had, prior to the recession, exchanged contracts to buy off plan found that the value of their prospective flat fell dramatically during the recession and often with the subsequent inability to obtain the necessary mortgage finance to complete. Despite that, buying off plan, whether a flat or house, is now being pursued by UK and overseas buyers with great abandon. Therefore, some downsides and upsides to note below:
Some depressing downsides:
- Mortgage offers usually have a life of 3-6 months, depending on the lender, so if completion of the build is anticipated beyond that lifetime, there is no guarantee that the proposed mortgagee will extend the lifetime, on the same terms or grant finance at all. The mortgagee will re-value once the flat is complete and if the market has fallen during the construction period, the mortgagee may not grant a mortgage or may be happy to grant a mortgage but of an insufficient amount to complete the funding for the purchase price set out in the contract.
- The seller could go into liquidation during the construction period so the 10% deposit paid by the purchaser upon exchange of contracts may be lost. In addition, the construction may be incomplete as a result and possibly with no certainty as to when, if at all, the construction may be completed.
- If the property market falls and the purchaser fails to complete because of inadequate mortgage funds or, for example, there is a change in personal circumstances, such as unemployment, the seller will forfeit the 10% deposit paid by the purchaser upon exchange. The seller may also sue the purchaser for any loss suffered by the seller as a result of a re-sale of the flat by it at a price which is less than that stated in the contract.
- Completion of the construction is frequently delayed beyond the anticipated date in the contract and contracts often allow the seller to put back the completion date. Accordingly, it may be difficult to work to a definite date for the purchaser to take possession of the flat.
- On more aesthetic grounds, it can be very difficult to imagine the end result of the construction arising from the muddy hole, its surroundings, whether or not there will be any continuing annoying construction going on around the flat, the likely neighbours, etc.
Some uplifting upsides:
- Buying off plan should take place during a period when the property market is rising, so crystal ball time. If the market rises during the construction period, the price to the purchaser in the contract stays the same, so there may be a healthy increase in the value of the now completed flat.
- Certain sellers may require stage payments of the purchase price during the construction period and which some purchasers may find easier to manage.
- The mortgagee may be persuaded to lend a little more to the purchaser if the value of the flat has increased, which could be the next deposit on another flat to add to a fledgling property portfolio.
- If the contract permits it, the purchaser may be able to assign the benefit of his contract to a third party at a price which repays to the buyer his deposit paid upon exchange of contracts and a profit on top, commonly known as flipping the contract.
- The purchaser could end up with a beautiful flat, sometimes furnished to a high spec, with no on-going development around and about, beautiful landscaping and fun neighbours!
Essentially, buying off plan is a game of poker in predicting the rise and fall of the property market. As the purchaser steps through the front door, will there be a scowl on the purchaser’s face at the drop in value of the flat or a big smile and a pat on the back for reading the market correctly and enjoying the increased value of the flat? So, shuffle the pack of cards and polish that crystal ball, but make sure your lawyer is looking over your shoulder at the paperwork before you place that bet!!
As national, EU and international pressure to meet carbon emissions targets continues, in the last quarter we have seen our clients deliver some innovative renewables projects, with real estate playing a major role.
We recently advised on the infrastructure for a Solar Farm, which when completed will provide up to 50 megawatts of electricity – enough to supply electricity to 50,000 homes. Interestingly, the project was not located in the deserts of Africa or the plains of Spain, but in one of the Home Counties here in the South East of England – not a part of the world immediately associated with endless hours of sunshine! Our real estate team worked closely with the landowners, local residents and solar infrastructure specialists to create a workable property structure that gave the solar farm the requisite property interests, while balancing the needs of the local residents who live close by. A feature of the deal we found interesting was the completion of a “Mitigation Deed” between the community and the developer in which the residents, instead of opposing the development through the planning process, actually supported it in return for a contractual promise from the developer to cultivate and maintain the surrounding countryside, by the creation of a “buffer zone” around the solar farm. This area was designated as a wildlife and nature corridor for the mutual benefit of the residents and local flora and fauna for the life of the solar project.
When construction is complete the project will be the largest solar farm in the UK.
Separately, we have also recently acted for a renewable energy business in relation to a large-scale installation of its biomass boilers for one of the largest poultry producers in the UK. Biomass is a sustainable, clean, low carbon energy source that produces 90% less carbon emissions than are produced using fossil fuels. Our real estate team carried out an extensive due diligence review of the installation sites for the company, which will now operate the boiler systems on an “Energy Supply Company” basis.
Last year proposals were revealed to open Charles Dickens’ country house, Gads Hill Place, in Higham, Kent as a museum. Dickens first saw the house as a child and dreamt of living in the “wonderful Mansion” later in life. Years later he did precisely that and purchased the house for £1790 in 1856. In that house Dickens wrote one of my favourite books, Great Expectations, published in 1860. What of the expectations for mansions in 2014 and beyond? Well, it seems taxation may be on the agenda.
An update on the Mansion Tax. If introduced, this will be a tax which will target high value residential properties – current speculation is properties which are worth more than £2 million. The tax may be payable annually on a “per property” basis on the additional value over and above £2 million – so a property valued at £3 million would see a proposed annual tax of 1% on £1 million worth of value. A banding system may be introduced for higher value properties, much in the same way as applies currently for the Annual Tax on Enveloped Dwellings (“ATED”). Some concessions may be available – for example for those who are asset rich but cash poor, such as a retiree with a modest pension owning a central London property purchased many decades ago.
Turning to ATED, this annual charge is payable where UK residential property has been “enveloped” – i.e. ownership is by a company rather than an individual. This situation might have occurred where a buyer purchased the shares of the company owning the property rather than the property asset itself. This would have incurred a 0.5% stamp duty charge on the shares of the company, whereas the purchase of the property asset would have attracted the higher Stamp Duty Land Tax rate. The useful link below details the rates applicable for the current financial year and the timeframe for the reduction in the current £2 million threshold down to £500,000 by 1 April 2016. The perception is the tax will affect an increased number of properties in 2016:-http://www.hmrc.gov.uk/ated/basics.htm#2
Finally turning to Capital Gains Tax, a recent change to the CGT regime is worth mentioning and applies to non-UK residents. As from April 2015, UK CGT will be payable on the disposal of UK residential property by non-UK residents and companies, thereby bringing them into alignment with the CGT rules which affect UK residents.