Real estate case review 2011: part two

In the second of a two-part series, Richard Bedford and James Sutherland review the key real estate disputes of 2011. This article covers July to November 2011.

July 2011

Guarantors on Assignment

We previously reported on Good Harvest Partnership v Centaur Services Limited which confirmed that a tenant’s guarantor could not be called upon to provide a guarantee for an assignee under the Landlord and Tenant Covenants Act 1995 (“the Act”).

Under the Act outgoing tenants are automatically released from their obligations upon assignment but the Act also allows the landlord to seek a guarantee from the outgoing tenant under an Authorised Guarantee Agreement (AGA).

Good Harvest stated that the original tenant’s guarantor can not be called upon to enter into an AGA as it will fall foul of ‘anti-avoidance’ provisions under section 25 of the Act. This is because section 24(2) of the Act operates to release the tenant’s guarantor upon assignment and the Act only envisages the outgoing tenant entering into an AGA.

Good Harvest settled prior to appeal. Now, K/S Victoria Street v House of Fraser has dealt with the same question and confirmed Good Harvest. It has also confirmed that any form of direct or indirect guarantee by the outgoing tenant’s guarantor will be void. Landlords will need to be careful from whom they take guarantees and to check existing guarantee requirements are not void following these two cases.

K/S Victoria Street v House of Fraser (Stores Management) Limited [2011] 32 EG 56

Powers of equitable charge holder

A mortgagee advanced money to borrowers pursuant to a mortgage deed. However, the mortgage deed was not registered because a  prior mortgagee had not consented to the new charge. Failing registration, the mortgagee’s interest was noted against the title. The mortgagee exercised its power of sale but the Land Registry refused to register the transfer on the basis that an equitable mortgagee could not exercise the power of sale.

The High Court confirmed that the mortgagee was entitled to exercise the power of sale under the Law of Property Act 1925 section 104 because the mortgage had been executed as a deed and was therefore a legal mortgage under section 88 of the same Act. The Court ordered the transfer to be registered. Incidentally, the Court also confirmed that the sale had overreached two other existing charges which had been registered which would overcome any objections the prior chargees may have had.

This case has revolutionised the definition of “legal mortgage” which previously would only have been equitable until registered. It also confirms a more direct remedy for equitable charge holders, avoiding the need to seek a charging order and order for sale. It remains to be seen whether the Court of Appeal will agree.

Swift 1st Ltd v Colin [2011] EWHC 2410 (Ch)

August 2011

Odour Nuisance

Pervasive odours emitted from a commercial property may amount to a claim in nuisance for damages. Where the odour producing property belongs to an estate, these issues will usually be governed by any restrictive covenants relating to the use of the units on the estate. In this case, a food additive manufacturer operated on an estate adjacent to an office unit which also formed part of the same estate. The smell was a garlic/curry smell and the estate was a light industrial estate. The office owner issued a claim for nuisance and claimed damages for the cost of leasing alternative premises.

The Court of Appeal confirmed that the nature and character of the estate had a bearing on the types of permitted and expected use. The production of food additives was consistent with light industrial use and as a result there was insufficient interference with the office building to cause a nuisance. The smell would have to be ‘bad’ whereas food smells are often pleasant, even if overbearing.

Hirose Electrical UK Ltd v Peak Ingredients Ltd [2011] EWCA Civ 987

Damages for misappropriation

Where another party misappropriates part of another’s property, they may be liable to damages for (1) loss of profit from use of property or other connected property, (2) breach of trust arising from misappropriation, (3) mesne profits and (4) exemplary damages. Each type of damage is independent and not cumulative. However, it would be unfair to award all of them to the owner. The misappropriation meant that the owner lost use of part of the property which had been taken over and this consequently affected access to other parts of the property.

The Court of Appeal confirmed that it could elect to award whichever is the greater of loss of profit or breach of trust but not both. The Court can also award mesne profits even if the owner had no intention of using the property in the way that the other party used it. The purpose of mesne profits is to reverse the wrong-doer’s benefit but, as before, it cannot be awarded where damages for loss of profit are being awarded. The Court of Appeal also confirmed that the loss of profit can only be for the period which the owner could have used the property if he had control of it; the Court had to deduct any period of fit-out which the owner would have required. Exemplary damages may be available in addition to any other damages but this will depend upon the circumstances of each case.

Ramzan v Brookwide Ltd [2011] EWCA 985

September 2011

Negligent Valuation

The Court found the valuation of a factory outlet shopping centre to have been negligently prepared. The property had been valued at £62.85m representing an overvaluation of £18.05m which resulted in the purchasers overpaying by this amount. The purchaser had difficulty letting the retail units and rents were below the valuation forecasts. The value was dependent upon turnover as the tenants were liable to pay turnover rents. The purchaser claimed that the valuers lacked the requisite expertise to value this type of property and that the valuers should be liable for the over-valuation and also the losses suffered as a consequence of the purchase.

The High Court agreed that the valuers should have refused the instruction because the valuers did not have experience of factory outlet centres. However, the Court decided that the valuation had been provided to allow the purchaser to decide whether to proceed; the valuation did not go so far as to provide financial advice as to whether the purchaser ought to proceed with purchase. Therefore damages were limited to the overvaluation of £18.05m and excluded the losses suffered as a result of the purchase. This case demonstrates the importance of agreeing the scope of any valuation and the duty which the valuer will owe to its client.

Capital Alternative Fund Services (Guernsey ) Ltd v Drivers Jonas [2011] EWHC 2336 (Comm)

Interim Rent

Tenants protected by the Landlord and Tenant Act 1954 can serve notice under section 26 of the Act to renew the lease at the end of the term. Alternatively, the landlord can serve a notice under section 25 to either terminate the lease or state that he is not opposed to the grant of a new lease. If the parties cannot resolve the matter, either can apply to Court to determine whether the lease should be renewed and on what terms. This process can be lengthy and the landlord can apply under section 24A for interim rent to be paid, even if he does not wish the lease to continue, because the tenant will still be in occupation.

In this case the Court determined that the lease would not be renewed. The procedure took 3 years from the expiry of the landlord’s section 25 notice to determination. Under section 24D(1) and (2) the Court can determine the interim rent based on rent which it would be reasonable for the tenant to pay and also the passing rent under the existing tenancy. The Court confirmed that the interim rent would be the same as that under the existing tenancy. The tenant argued this was not fair and that it should be based on the much lower market rent.

The Court of Appeal disagreed because section 24D gave the Court wide discretion to ascertain a reasonable interim rent by reference to the passing rent and the market rent. The background to this provision was to protect the tenant from steep rent increases, but as there was no prospect of the rent increasing or any continuing lease, there was no need to protect the tenant.

Neale v Witney Electric Theatre [2011] EWCA Civ 1032

October 2011

Undue Influence

The tenant entered into a lease of a property in which a guarantee  was provided by one of the tenant’s directors. The tenant went into liquidation and the landlord sought to enforce the guarantee for rent arrears and damages for breach of repairing covenants. The guarantor defended on the basis that he did not know what he was signing, believing that he was only witnessing other signatures to a document. He also argued undue influence as he only signed the document as a result of misrepresentations from the other directors of the tenant company.

The High Court determined that the usual principles for undue influence were made out because the director was a particularly junior director and the circumstances indicated that he knew little of what he was being asked to do. The Court concluded that misrepresentation would amount to undue influence rendering the guarantee void. The Court also added that it was evident that independent legal advice should have been sought for the guarantor. The difficulty this case raises is when can a landlord know whether the guarantor requires independent legal advice. A prudent landlord may have to make direct enquiries of the guarantor and, if in doubt, request that he takes independent legal advice.

Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley [2011] EWHC 1380 (QB)

November 2011

Boundary Issues

Section 58 of the Land Registration Act 2002 provides that the Land Registry register provides conclusive title. If a proprietor suffers loss as a result of an error by the Land Registry he can apply for compensation. However, this does not apply to the title plan which only gives an indication of a boundary for illustrative purposes and therefore is not absolute. A boundary may be defined in any deed or document registered at the Land Registry which shows the property ‘more particularly delineated’ on a plan. Thick pen outlines and small scale maps mean that this may not resolve the problem. Parties can refer the matter to the Land Registry Adjudicator to determine the boundary but the process is often expensive and may depend upon interpretation of historic documents.

This was confirmed by the Court of Appeal recently which held that, despite the title plan at the Land Registry clearly indicating that the boundary was a hedge, the true boundary had receded by four or five metres to a wire fence. The appellant lost one and half acres of land without recourse for compensation from the Land Registry. The Court decided that the description by reference to acreage for the parcel of land was not determinative. In the absence of any real definition in the historic transfer, the Court had to interpret the requirement in an old transfer for the erection of the wire fence as indicating that the original parties had intended the boundary to be set at the fence.

Drake v Fripp [2011] EWCA Civ 1279

Adverse Possession

Boundary disputes may also manifest themselves as adverse possession claims. In similar circumstances to Drake v Fripp, the owners of neighbouring land claimed adverse possession against the registered owner over a strip of land between the original boundary and a hedge. The neighbours had been using the strip of land for more than ten years. The registered owner of the strip of land argued that the neighbour did not satisfy the requirement of exclusive possession under the Land Registration Act 2002 Schedule 6 because (1) the neighbour had been allowed to occupy the land by permission and (2) the neighbour’s exclusive possession was interrupted when the registered owner started to fence the area off.

The Court of Appeal dismissed the appeal and determined that (1) implied permission was not sufficient to defeat adverse possession and (2) interrupting exclusive possession required the registered owner to actually end the neighbour’s factual possession by reclaiming possession himself; starting to erect a fence was not sufficient. The neighbour had been in exclusive possession for over 10 years before the registered owner asserted his ownership.

Zarb v Parry [2011] EWCA 1306

Certainty of Term

In order to qualify as a tenancy, a tenancy agreement must state that it is for a fixed term or a term which is capable of being determined. The Supreme Court has held that where the term is expressed to be ‘from month to month until determined’ it is not capable of being a tenancy because the term is not sufficiently certain. The landlord argued that the term indicated that it was a periodic tenancy to which the first instance Court and the Court of Appeal agreed.

The Supreme Court overturned it on the basis that, although a tenancy could be granted from month to month, the term expressed in the agreement could not be a tenancy because of the uncertain term. The Court held that the tenant had instead been granted an equitable life interest which was converted by section 149(6) of the Law of Property Act 1925 into a term of 90 years determinable upon the tenant’s death or any set circumstances specified in the agreement. This decision is set against the background of a sale and rent back landlord and arose as a result of the landlord obtaining a possession order.

This case reinforces an important principle of certainty of term and landlords wishing to create a periodic tenancy will need to be particularly careful that drafting does not accidentally create a 90 year interest for the tenant.

Berrisford v Mexfield Housing Co-operative Ltd [2011] UKSC 52

Collective Enfranchisement

A tenant converted a property into four flats and then assigned his interest in the flats to two different people so that one assignee held flats 1 and 2 and the second assignee held flats 3 and 4. The assignees claimed rights of enfranchisement under section 13 of the Leasehold Reform Housing and Urban Development Act 1993. This provision allows 50% or more tenants to purchase the freehold property from the landlord. The landlord had not consented to the assignments and argued that the assignees did not qualify under the Act because the assignees should be regarded as tenants of all four flats.

The Court of Appeal disagreed and confirmed that the two assignees were qualifying tenants under the Act. This was because the original tenant’s lease was severed and rent apportioned just as the property had been physically severed. This meant that the two assignees were only liable for the rent and obligations arising from the flats which had been assigned to them. The assignees were therefore two separate tenants of specific parts who qualified to exercise their rights under the Act.

Smith v Jafton Properties Ltd [2011] EWCA Civ 1251

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..

The first part of this article can be viewed here.