Real estate case review 2011: part one

In the first of a two-part series, Richard Bedford and James Sutherland of Burges Salmon review the key real estate disputes of 2011. This article covers December 2010 to June 2011.

December 2010

Restrictive Covenants

Mr Churchill purchased a property with the intention of demolishing it and erecting a replacement. The land on which the property was situated was subject to a restrictive covenant, contained in a 1967 conveyance, which prohibited any structural alteration or addition to a dwelling-house “without the written consent of the vendors or their surveyor”.

Mr Churchill sought a declaration that this covenant was no longer enforceable. This was contested by his neighbours who claimed that their property still held the benefit of the covenant. The neighbours were not the original vendor under the 1967 conveyance but a successor in title.

The Court identified two main issues. Whether the wording related only to the original vendors or to their successors in title and, if it did relate only to the original vendors, whether their deaths had either made it impossible to obtain consent or discharged the covenant altogether. The Court held that the covenant should be looked at from the viewpoint of both parties. Accordingly, it made perfect sense to interpret the covenant literally so that the right to withhold consent only applied to the original vendors and not to successors in title. This represented a reasonable balance between both parties’ interests. The deaths of the original vendors served to discharge the covenant.

Churchill v Temple [2010] EWHC 3369 (Ch)

January 2011

Service Charges

The Court of Appeal held that a landlord will not be able to recover service charge costs if it fails to undergo a proper consultation process with its tenants. The Commonhold and Leasehold Reform Act 2002 paved the way for new legislation (Section 20 and 20ZA of the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003) that requires landlords to consult with long residential leaseholders before carrying out works above a certain value or entering into a long term agreement for the provision of services.

The landlord was the freehold owner of a mixed-used building comprising both shops and flats let on long leases. The landlord intended to carry out major works, but failed to comply with all the consultation requirements. In particular, the landlord failed to provide the tenants with the estimates given by the various contractors competing for the works until after a particular contractor had been selected.

The landlord applied to the Leasehold Valuation Tribunal under Section 20ZA for dispensation from the consultation requirements. This was refused on the basis that the  landlord’s breaches had caused significant prejudice to the tenants who had been led to believe that further representations would have been futile. The Court of Appeal dismissed the landlord’s appeal. The landlord was therefore only allowed to recover £250 from each tenant in accordance with Section 20.

Daejan Investments v Benson and others [2011] EWCA Civ 38

Split Reversions

The Court of Appeal gave a warning to landlords that suffer from split reversions. Should the tenant acquire a part of the freehold there is a danger that their lease will not come to an end.

EDF were the tenant of three areas of land (Plots 1, 2 & 3) pursuant to a business tenancy protected under the Landlord and Tenant Act 1954. The tenancy also granted EDF a right to lay and maintain cables under a fourth neighbouring area of land (Plot 4). Following the grant of the tenancy the freehold interests in Plots 1, 2 & 3 were sold to separate buyers so that the reversion expectant on the determination of the tenancy became severed and the landlord comprised three separate parties. Subsequently, EDF acquired the freehold to Plot 2, on which it had built an electricity sub-station. BOH purchased the freehold to Plots 1, 3 & 4. BOH contended that EDF had no right to enter onto Plots 3 & 4 in order to maintain underground cables that EDF had installed. EDF argued that they had such a right under the 1953 Lease, which was being continued pursuant to Part II of the Landlord and Tenant Act 1954. BOH submitted that the lease had been determined by a merger of the freehold and leasehold interests when EDF purchased Plot 2.

The Court of Appeal upheld the decision at first instance in ruling that no such merger had taken place. The ordinary rule at law was that the holding of a lease and its reversion by the same party would result in a merger and the extinguishment of the leasehold interest. However, equity had developed a principle that there would be no such merger if this was contrary to the intentions of that party. Moreover, in the absence of any evidence expressing such an intention, there was an equitable presumption against any intention of a merger if it would be against that party’s interests. It was in EDF’s interest to continue the lease to ensure they retained the ancillary rights to run cables to the sub-station and the lease was therefore continuing. A lease subject to a split reversion can only be ended if all the landlords serve the necessary notice under s.25 (Section 44(1A) Landlord and Tenant Act 1954). If EDF did not join in the service of such notice then their tenancy would continue on the same terms.

EDF Energy Networks (EPN) Plc v BOH Ltd [2011] EWCA  Civ 19

Break Notice

The tenant had a right to terminate the lease on six months written notice by special delivery post or by hand. The tenant served an invalid notice that was addressed and sent to the former landlord. On realising its error, the tenant sent an email to the new landlord attaching a copy of the notice. The new landlord asked the tenant to send the notice to its managing agents. The tenant duly emailed a copy of the notice to the managing agents, who replied stating that they ‘accepted’ the notice and were happy for the tenant to exercise the break clause. The managing agents asked that the tenant to re-address the notice to the new landlord. The tenant prepared a fresh, correctly addressed notice but this was never served on the new landlord, who subsequently contested the break. The tenant argued that the notice had been accepted by the managing agents despite the defects in its form and service.

The Court ruled in favour of the tenant. Applying the principles in Mannai Investment Co Ltd v Eagle Star Assurance Life Assurance Co Ltd it concluded that the new landlord had knowledge that the tenant was seeking to exercise the break. A reasonable recipient of the notice would not have been misled by the incorrect address and would have understood that the tenant was seeking to terminate the lease. The lease required service to be given to the landlord, this did not mean a notice had to be addressed to the landlord. Although the lease did not permit service by email, the managing agent’s reply ‘accepting’ the notice was sufficient to estop the landlord from challenging the validity of the notice, especially as the tenant had subsequently acted on the basis that there was no issue with effective service. Alternatively, the email acted as a waiver of the service requirements in the lease.

M W Trustees Limited v Telular Corp [2011] EWHC 104

February 2011

Collective Enfranchisement

In order to qualify for collective enfranchisement under the Leasehold Reform Housing and Urban Development Act 1993 the premises within which the flats are contained must be either the whole of a self-contained building, or a separate “self- contained part of a building” capable of being divided vertically from the other parts.

The tenants of a number of flats within a mansion block served an initial notice of enfranchisement on the landlord. The notice related to a separate self-contained part of the mansion block. The landlord contested the notice on the grounds that the part of the mansion block to which the notice related was capable of further subdivision into smaller self- contained parts. The landlord argued that a notice could only be valid if the property in respect of which it was given could not be further sub-divided.

The Court of Appeal rejected this argument and held that the phrase a “self-contained part of a building” did not require that self-contained part to be the smallest self-contained part of a property in respect of which a right of enfranchisement was being exercised. Tenants were free to choose whether to enfranchise a larger or smaller self-contained part of building provided they had the necessary majority. A combined majority of tenants in a larger self-contained part of a building can still enfranchise, despite not having the necessary majority within the smaller parts.

Craftrule Ltd v 41-60 Albert Place Mansions (Freehold) Ltd [2011] EWCA Civ 185

Adverse Possession and Rectification

The Court of Appeal ruled that where a title has been registered in a persons name pursuant to ten years adverse possession under Schedule 6 of the Land Registration Act 2002 an aggrieved party could invoke the remedy of rectification of the register.

In 2005 Mr Baxter applied to the Land Registry to be registered as the owner of a field belonging to Mr Mannion on the basis of having been in adverse possession of the field for a period of 10 years. Mr Mannion was given notice of the application, but never lodged an objection and Mr Baxter was duly registered as the new owner. Mr Mannion then made an application for rectification of the title under Schedule 4 so as to substitute his name for that of Mr Baxter. The application was made on the basis of correcting a mistake. The application was heard by a deputy adjudicator who found that Mr Baxter had not been in exclusive possession for the required 10 year period, nor had the necessary intention to exclude the world at large. The rectification was therefore made and Mr Mannion once again became the owner of the field.

In making its decision the Court of Appeal stated that it would be an invitation to fraud to see a successful application for adverse possession as final. A registration for adverse possession given to someone not entitled to apply for it would be a mistake and, accordingly, an application for rectification could subsequently be made.

Baxter v Mannion [2011] EWCA Civ 120

March 2011

Rescission

A developer entered into a complex conditional agreement for lease with a tenant relating to the construction of a hotel at a new motorway service station. It was a condition of the agreement that the developer use all reasonable endeavours to obtain, as soon as possible after the date of the agreement, certain permissions, licences and approvals upon which the development was contingent. If the developer had not complied with this condition by a long stop date either party could rescind the agreement. The developer failed to comply with the condition and therefore served notice to rescind the agreement. The tenant disputed the notice, arguing that the developer’s right to rescind was conditional upon it having used all reasonable endeavours to comply with the condition.

The court agreed with the tenant and held that, as a point of law, the developer should not be able to rely on its own breaches to its advantage. The right to rescind the agreement was conditional on the developer having not brought about its right to rescind by its own breaches of the condition in the agreement. Whether the developer was in breach was a question of fact to be determined by the court at a later date.

Extra MSA Services Cobham Limited v Accor UK Economy Hotels Limited [2011] EWHC 775 (Ch)

April 2011

Execution of Documents

The Court of Appeal warned that where an individual signs a document to which a company is a party, extra wording should always been added to state the capacity in which they are signing. Section 44 of the Companies Act 2006 provides that (in the absence of a common seal) a company can validly execute a document if it is (a) signed on the company’s behalf by two authorised signatories or by a director in the presence of a witness and (b) “it is expressed in whatever words to have been executed by the company”.

A contract for the sale of freehold land by a company was executed by two authorised signatories under the heading “SIGNED…SELLER”. The purchaser refused to complete the sale claiming that the contract was invalidly executed as the words “by or on behalf of” had not been included. The company had failed to comply with Section 44 as it had not been properly indicated that the company was executing the document. The Court of Appeal dismissed the purchasers objections and held that the contract for sale had been validly executed. The company had been defined as the “Seller” in the contract for sale. It would be absurd to say that the absence of the wording “by or on behalf of” the company meant the contract was not expressed as being executed by the company.

Redcard Ltd and others v Williams and others [2011] EWCA Civ 466.

Limitation

Mr Eagle employed Redlime Limited to construct the foundations for a kennel block at his property in 2000. In 2006 he became aware of subsidence problems. After initial repairs had failed to cure the problem, Mr Eagle asked Redlime to inspect and notified both his solicitors and insurers. Following the inspection Redlime wrote to Mr Eagle in October 2006 denying all liability. Mr Eagle subsequently instructed a firm of engineers to provide an opinion, which was provided in November 2006 and indicated that Redlime had been negligent. Although Mr Eagle’s solicitors wrote a letter of claim, proceedings were not issued until October 2009, nearly nine years after the foundations had originally been installed.

Mr Eagle argued that the claim fell within Section 14A of the Limitation Act 1980. This provides that, where knowledge of damage suffered by breach of contract or negligence is not apparent to begin with, the claimant has a further three years in which to bring a claim from the date at which it acquires the necessary knowledge to be able to pursue the responsible party. Mr Eagle contended that he had not acquired the necessary knowledge until he had been provided with the engineers opinion.

The court held that Mr Eagle was out of time. Prior to October 2006 he had already acquired sufficient knowledge of the problem to be able to bring a claim against Redlime. He was aware of the subsidence, he had contacted his solicitors and insurers and asked Redlime to inspect. All of this indicated that he had a reasonable belief that the damage had resulted from some failure or omission by Redlime. Mr Eagle had delayed too long and lost the opportunity to pursue a strong case.

Clinton Eagle v Redlime Limited [2011] EWHC 838 (QB)

May 2011

Deposit Protection Schemes

Where a deposit is paid by a tenant on the creation of a new residential assured shorthold tenancy the landlord must (a) protect that deposit in an approved tenancy deposit scheme within 14 days of receipt and (b) provide the tenant with information about the tenancy deposit scheme (Section 213 Housing Act 2004). Failure to comply with these requirements allows the tenant to make an application to court that, following a hearing, may result in an order that the landlord pay a sum equal to three times the amount of the deposit to the tenant (Section 214 Housing Act 2004). The Court of Appeal have previously held that the landlord has until the date of the court hearing to comply with Section 213. In other words, late compliance would result in a complete defence to the financial penalties imposed by Section 214.

In Potts v Densley and another the High Court ruled that the landlord was not liable to pay the penalty of three times the deposit even though the deposit was not protected until after the tenancy had ended. The tenant argued that once the tenancy came to an end the relationship of landlord and tenant ended. It was therefore impossible to comply with Section 213 as the obligations in that section were imposed on “the landlord”. The High Court disagreed and ruled that the ending of the tenancy had no impact. It was the payment of the deposit into the scheme that crystallised the landlord's position as “the landlord” for the purposes of Section 213. The landlord had still paid the deposit into the scheme before the hearing and therefore had a complete defence.

Potts v Densley and another [2011] EWHC 1144

Potts v Densley and another appeared to be directly contradicted by a Court of Appeal decision later in the same month. In Gladehurst Properties Ltd v Hasemi and another the landlord had also only protected the tenant’s deposit after the tenancy had come to an end. The Court of Appeal also held that no penalty arose, but gave different reasons to that of the High Court in Potts v Densley and another.

The Court of Appeal ruled that the landlord's compliance with Section 213 was enforceable at the option of the tenant, who could make an application to court under Section 214. Section 214 envisages a situation in which the requirements of the tenancy deposit scheme are still capable of being complied with. As the tenancy had come to an end the grounds for making an application had ceased to exist and the power of the court to exercise its discretion under Section 214 and impose a financial penalty had come to an end.

Gladehurst Properties Ltd v Hashemi and another [2011] EWCA Civ 604

Extent of Landlord’s repairing obligations

The Court of Appeal provided long awaited guidance as to the scope of a landlord's covenant to repair in respect of residential dwellings. Where a residential tenancy is for a term of less than seven years, Section 11 of the Landlord and Tenant Act 1985 imposes an obligation on the landlord to keep in repair the ‘exterior and structure’ of the dwelling. In a decision welcomed by tenants, the Court of Appeal held that internal plasterwork forming part of, or applied to the walls of, a dwelling was not merely a decorative finish but part of the structure and therefore fell within the scope of the landlord's repairing obligations. It is a well established principle that in order for there to be disrepair the subject matter of the covenant needs to have deteriorated from a pre-existing condition. Historically, this principle caused problems for residential tenants suffering from damp or condensation in properties that had been defectively designed. Defective design was not considered the landlord's responsibility, so that, in the absence of any disrepair, no remedy against the landlord was available.

In confirming that plasterwork forms part of the structure of a building the Court of Appeal have adjusted this principle and improved the remedies available to residential tenants. Where an inherent defect has damaged the plasterwork, the duty to make good this damage will now fall upon the landlord.

Grand v Gill [2011] EWCA Civ 554

June 2011

Vacant Possession - Break Notice

The tenant exercised a break that was conditional on giving vacant possession of the property on the break date. Towards the end of the notice period it became clear that the tenant did not have sufficient time to complete all the works that had been specified in a schedule of dilapidations served by the landlord. The tenant proposed that it remain in the premises after the termination of the lease as a licensee for the purpose of completing the works. There was no permission or any other correspondence from the landlord in respect of the tenant’s request. Despite this, the tenant’s contractor entered the premises the week after the break date in order to complete the works.

In upholding the original decision of the High Court, the Court of Appeal held that vacant possession had not been given and that the break was ineffective. After the break date the tenant had continued to use the property for its own purposes. The concept of ‘vacant possession’ required that the property must be empty of people and that the landlord must be able to assume and enjoy immediate and exclusive possession, occupation and control of the property. Furthermore, vacant possession would also not be given if there were any tenant chattels left in the property that substantially prevented or interfered with the enjoyment of the right of possession for the whole, or a substantial part, of the property.

Ibrend Estates BV v NYK Logistics (UK) Ltd [2011] EWCA Civ 683

Valuers Duty of Care

It is a long established principle that, in the case of domestic property, a surveyor instructed to provide a valuation report for a mortgagee also owes a duty of care to the purchaser of the valued property. The Court of Appeal held that this principle did not extend to buy-to-let transactions. In 2002 Mr Scullion acquired a buy-to-let property with the assistance of a loan from the Bank of Scotland. The valuation report prepared on behalf of the Bank valued the property at £353,000, with an achievable rental value of £2,000 per month. Mr Scullion purchased the property for £300,000 (following discounts from the initial price of approximately £50,000). Following the purchase the property remained vacant for several months and when a tenant did move in, a rental of only £1,050 was achieved. In 2006 Mr Scullion sold the property for £270,000 and brought a claim for damages against the valuer.

The High Court ruled in favour of Mr Scullion, holding that a duty of care was owed in respect of the valuation report which had negligently overstated both the capital and rental valuations.

The Court of Appeal reversed this decision. The valuation report has been prepared for the Bank of Scotland in its capacity as prospective mortgagee. Although Mr Scullion was responsible for the costs of the report, and it was probable that the report would be shown to him, it was nevertheless not foreseeable that he would reply on the report in deciding to proceed with the purchase rather than obtain his own valuation advice. A buy-to-let transaction was to be distinguished from the purchase of domestic property due to its commercial nature. The purchaser could be expected to be both wealthier and more commercially astute than the average home buyer and was therefore less deserving of protection against the risk of negligence.

Scullion v Bank of Scotland Plc ( t/a Colleys) [2011] EWCA Civ 693.

Richard Bedford is a partner and James Sutherland is a senior associate at Burges Salmon. Richard can be contacted on 0117 902 2749 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it.. James can be reached on 0117 307 6902 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..