Commercial Real Estate

slaughter and may october 2011 ISSUE NO. 79 Commercial Real Estate Legal and regulatory developments in commercial property Landlord and Tenant Plan...
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slaughter and may october 2011 ISSUE NO. 79

Commercial Real Estate Legal and regulatory developments in commercial property

Landlord and Tenant Planning and Environment Our recent transactions And finally

If you require further information or advice, please speak to your usual contact at Slaughter and May or any of the following real estate partners at our London office: Steve Edwards, Dermot Rice, Edward Keeble, David Waterfield, Jane Edwarde and John Nevin.

Landlord and Tenant Please release me Court of Appeal confirms Good Harvest decision K/S Victoria Street v House of Fraser (Stores Management) Limited and others: [2011] EWCA C1V 904 The Court of Appeal has issued its judgment in relation to the respective appeals of the landlord and tenant. The first issue concerns whether the reasoning of Newey J in Good Harvest was correct in relation to whether a guarantor could be required to guarantee the obligations of an assignee. The second issue concerns the interpretation of a provision in the alienation covenant allowing intra-group assignments without consent. The parties had entered into a sale and leaseback transaction in relation to the former Beatties department store in Wolverhampton. The lease was originally granted to House of Fraser (Stores Management) with House of Fraser plc (now Limited) providing a parent company guarantee. Stores Management was not a good covenant and the agreement required the lease to be assigned to House of Fraser (Stores) with House of Fraser plc providing a further guarantee. A provision in the alienation covenant permitted the lease to be assigned within the House of Fraser group without landlord’s consent provided that House of Fraser plc acted as guarantor. The alienation covenant also contained a number of conditions including a financial standing test, which applied on an intra-group assignment. The landlord sought specific performance of the obligation to assign the lease to Stores. The tenant argued that, following Good Harvest, the obligation to renew House of Fraser’s guarantee was void, and also that an order for specific performance was pointless because Stores could immediately assign the lease back to Stores Management. The Court of Appeal has confirmed that a guarantor cannot be required to guarantee the liability of a future assignee. Any such obligation is rendered void by the antiavoidance provisions in S25 of the Landlord and Tenant (Covenants) Act 1995. House of Fraser could not be required to renew its guarantee on an assignment to Stores. It has also been confirmed that a guarantor cannot guarantee an immediate assignee in any circumstances. Accordingly, a guarantor cannot choose freely to provide such a

Landlord and Tenant Planning and Environment Our recent transactions And finally

guarantee, even if there are good commercial reasons to do so, such as on an intra-group reorganisation. A guarantor can, however, validly choose to guarantee a subsequent assignee provided there has been at least one complete assignment period before the fresh guarantee is given and there was no requirement to provide it. Lord Neuberger MR also confirmed that a guarantor can guarantee the obligations of a tenant under an authorised guarantee agreement given in respect of that tenant’s assignee. The decision has brought welcome certainty to the issues raised in Good Harvest. Although landlords should continue to be concerned about retaining parent company guarantors on intra-group assignments, the certainty provided in relation to the validity of sub-guarantees is to be welcomed. In relation to the second issue, the Court of Appeal decided that the provision allowing assignment within the House of Fraser group and the financial standing test were cumulative in effect. Stores could not assign the lease back to Stores Management without satisfying the financial standing test. A copy of a briefing note on this decision is provided with this edition. Pretty vacant Tenant had failed to provide vacant possession on break date NYK Logistics (UK) Limited v Ibrend Estates BV: [2011] EWCA Civ 683 This case concerned whether the appellant tenant had validly exercised a right to break its lease of warehouse premises. The break was subject to the tenant delivering up vacant possession of the premises. The respondent landlord contended that this condition had not been complied with and sought a declaration that the lease was still in place and that it was entitled to continue to receive rent. The tenant had served a valid notice to terminate the lease on the break date, 3rd April 2009. The landlord instructed surveyors to produce a schedule of dilapidations and discussions took place concerning the extent of the works required. The tenant was in the process of

COMMERCIAL REAL ESTATE october 2011

carrying out the works of repair and a meeting was held at the property just before the break date. It was accepted that there were some outstanding wants of repair that it would not be possible for the tenant to complete by the break date. On the break date, the list of outstanding works was circulated. On 6th April, the tenant’s contractors entered the premises to carry out the works and remained there until 9th April. In addition, some chattels had been left at the premises and the tenant had retained its security. The Court of Appeal confirmed the first instance decision that vacant possession had not been given on the break date. The Court of Appeal also did not accept the tenant’s contention that the landlord had waived the vacant possession requirement as a result of the discussions that had taken place about the extent of the wants of repair. The landlord had not been required to decide whether to affirm or deny the continuance of the lease. The tenant’s appeal was dismissed and the original attempt to break the lease had not satisfied the vacant possession condition. The case serves as a reminder that a tenant must comply strictly with all conditions to the exercise of a right to break. Welcome home Landlord had intention to occupy demised premises Humber Oil Terminals Trustee Ltd v Associated British Ports: [2011] EWHC 2043 (Ch) The claimant was the tenant of four separate leases of land at the Immingham Oil Terminal. The leases were for a term of 40 years expiring on 31st December 2009 or 1st January 2010. The tenant began negotiations with the defendant landlord for the grant of renewal leases. The landlord served S25 notices opposing the grant of new tenancies on the basis of its intention to occupy the demised premises for the purposes of a business under S30(1)(g) of the Landlord and Tenant Act 1954. The court was required to consider whether the landlord intended to occupy the premises for the purposes of a business to be carried on by it.

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Landlord and Tenant Planning and Environment Our recent transactions And finally

The court considered the meaning of “intention” when construing S30(1)(g). Intention was to be given its ordinary and natural meaning and included an ability to implement the decision to occupy. The defendant intended to re-occupy the premises to provide port services. It was likely that the landlord would occupy the premises and the claimant would pay ship and cargo dues under some form of commercial arrangement. Even if that did not occur, it was likely that the landlord would occupy the premises to provide port facilities to third party oil companies. The landlord could establish the necessary intention to occupy for the purposes of S30(1)(g). The concrete and the clay Structure of building included plaster finishes Grand v Gill: [2011] EWCA Civ 554 Section 11 of the Landlord and Tenant Act 1985 imposes repairing obligations on landlords of short leases of residential properties. Under S11, the landlord is required to repair the structure and exterior and installations for supplying water, gas and electricity and drainage. The tenant had taken a short lease of a residential flat granted by the landlord. A water leak from the roof had caused damage to the plaster on the wall and ceiling of the flat. The issue was whether the plaster formed part of the structure for the purposes of the Act and the landlord’s implied repairing obligations. The Court of Appeal ruled that the plaster on the walls and ceiling was part of the structure of the flat and therefore the landlord was required to repair it. Plasterwork was in the nature of a smooth constructional finish to walls and ceilings, to which decoration could then be applied, rather than a decorative finish in itself. In a commercial or longer residential lease of part, plaster and other finishes will generally be included in the internal demise and fall under the tenant’s responsibility for repair.

COMMERCIAL REAL ESTATE october 2011

Planning and Environment Changes Government has announced proposals to simplify CRC On 30th June 2011, the Minister of State for Energy and Climate Change released a statement setting out the initial conclusions on how to simplify the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. The CRC Energy Efficiency Scheme is the mandatory scheme aimed at improving energy efficiency and cutting emissions in large public and private sector organisations. The statement announced the publication on the same day of a paper that sets out “the main simplifications that [the Government] would like to propose for formal consultation early next year”. The statement follows an informal consultation process that focused on a set of discussion papers published in January 2011 covering a range of topics including the supply rules, qualification criteria and private sector organisational rules. The Government is proposing to dispense with the cap and auction aspect of the scheme; simplify the organisational rules to make it easier for large business groups to disaggregate; reduce the number of fuels covered by the scheme to four (electricity, gas, kerosene and diesel for heating); and reduce the overlap with the Climate Change Agreement scheme and the EU ETS (Emissions Trading Scheme). More controversially, the Government does not propose reforming the rules relating to landlords and tenants, which state that where landlords are responsible for supplies of energy to their tenants, the landlords are responsible for accounting for that energy under the scheme (tenants are responsible if they arrange and receive the supplies themselves). The Government intends to draft legislative measures this autumn or winter to put these proposals into effect.

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Landlord and Tenant Planning and Environment Our recent transactions And finally

What a waste Landowner not liable for moving waste dumped by a third party Milton Keynes Council v Fuller and another: [2011] EWHC 1967 (Admin) This case related to enforcement action taken by the local authority against the respondents in relation to controlled waste deposited by the entrance to a field contrary to S33(1)(a) of the Environmental Protection Act 1990. The controlled waste had been deposited across the entrance to the first respondent’s field. The first respondent had reported the waste to the local authority and asked for it to be removed. The first respondent then instructed the second respondent to move the waste to allow access to the field to spray crops. The justices decided that the respondents, by moving the waste from the field to the public verge, had not permitted controlled waste to be deposited without a waste management licence. The waste had already been illegally deposited by a third party. The local authority argued that, by deciding to move the waste, the respondents had exercised control over it and the movement constituted a further deposit of controlled waste. The local authority’s appeal has been dismissed. The word “deposit” was to be given its broad, ordinary meaning. There could be cases where a second movement of waste would also amount to a deposit for the purposes of the Act. The justices had found as a fact that the waste had been deposited by someone else. The movement of controlled waste from the entrance to the first respondent’s field to allow him to gain access did not amount to a further illegal deposit of waste.

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Our recent transactions We advised Arsenal on the sale of a development site at Queensland Road to the south of the Emirates Stadium. The property will be developed as residential housing and Arsenal will take a leaseback of commercial space. We acted for NTT Urban Development Corporation on the purchase of 1 King William Street, London for £67,500,000. 1 King William Street, which comprises approximately 90,000 square feet, is the London headquarters of Rothschild. We advised Lend Lease Europe Limited on the agreements with The Olympic Delivery Authority for the facilities management of the Olympic Village and the Olympic Park infrastructure. We acted for Bourne Leisure Limited on the surrender of its existing lease and the grant of new leases of its headquarters at 1 Park Lane, Hemel Hempstead. We advised Punch Taverns plc on the operational and structural separation of its Spirit business, comprising approximately 800 managed pubs and 550 leased and tenanted pubs, by way of a demerger.

And finally From court records Defendant (representing himself): Did you get a good look at me when I stole your purse? Victim: Yes, I saw you clearly. You are the one who stole my purse. Defendant: I should have shot you while I had the chance.

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Published to provide general information and not as legal advice. © Slaughter and May, 2011. For further information, please speak to your usual Slaughter and May contact. www.slaughterandmay.com

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slaughter and may BRIEFING October 2011

Guarantees on assignment

The recent case of K/S Victoria Street v House of Fraser (Stores Management) and others provides important guidance in respect of the circumstances in which the Landlord and Tenant (Covenants) Act 1995 (the “Act”) permits a tenant’s guarantor to accept liabilities in respect of an assignee of a new lease. The overarching principle is that the tenant’s guarantor should be released to the same extent as the tenant and, if the guarantor were to remain liable after the tenant is released, this could undermine the purpose of the Act. Set out below are four scenarios, together with diagrams, which help illustrate the points made by the Court of Appeal. Scenario 1 The compulsory guarantee – based on K/S Victoria Street v House of Fraser (Stores Management) An existing or contracting guarantor cannot validly be required to commit itself in advance to guarantee the liability of a future assignee. G1 cannot be required to guarantee T2 and G2 cannot be required to guarantee T3 etc.

Scenario 2 The voluntary guarantee of an immediate assignee A guarantor of a tenant cannot voluntarily guarantee the liability of that tenant’s immediate assignee. G1 cannot freely agree to guarantee T2 and G2 cannot freely agree to guarantee T3 etc.

L

T1

Guarantee

T2

x (whether offered voluntarily or otherwise)

G1

Guarantees on assignment

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Scenario 3 The ‘sub‑guarantee’ or ‘GAGA’ A guarantor can guarantee the obligations of its tenant under an AGA. G1 is not guaranteeing T2, but is sub‑guaranteeing T1’s AGA of T2. L

T2

T1

Guarantee

GAGA



G1 Scenario 4 The voluntary guarantee of subsequent assignees Although a guarantor cannot guarantee an immediate assignee, it can validly choose to guarantee a subsequent assignee. G1 can choose to guarantee T3 and G2 can choose to guarantee T4 etc. There must be at least one complete assignment period before the guarantor can provide a fresh guarantee and no obligation to provide it. L

T2

T1

Guarantee

x

T3

 (in the absence of any obligation)

© Slaughter and May 2011 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact.

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