The Law Commission has issued a call for evidence on commonhold law to understand why commonhold as a form of ownership has proved to be so unattractive to the property market.
This aligns with the government’s announcement in December 2017 to look at whether and how it can reinvigorate commonhold law, following the widely publicised criticisms of leasehold, and reflects one of the Law Commission’s projects announced in its 13th programme of reform launched in December last year.
Commonhold – a false dawn
Introduced in 2002, commonhold was set to become a new form of property ownership that would address the difficulties faced by leaseholders and other landowners. Similar systems have operated successfully in a number of other countries including Australia and the USA. However, the take up rates in England and Wales have been low. There are currently only 20 commonhold developments in England and Wales.
Commonhold allows an individual to own a freehold “unit”, such as a unit on an industrial estate or a residential flat. Property ownership can be divided vertically or horizontally. Each unit holder is a member of the Commonhold Association (CA), a limited company, which owns and manages the common parts. The CA determines the financial contribution to be paid by each unit holder for the management of those common parts.
An attractive proposition to property owners?
There are a number of benefits to commonhold over straightforward freehold or leasehold ownership, which include:
Freehold ownership – interests in the units are held on a freehold basis, so there is no depreciating leasehold asset;
Common objectives – the objectives of the unit holders and the CA should be aligned. The unit owners can actively participate in decisions on repair and maintenance rather than having these decisions imposed by a landlord;
Standardised documents – commonholds have standard rules and regulations and so there is no discrepancy between each unit’s rights and obligations. In addition conveyancing should be simpler and cheaper;
There is a simple procedure for adding or removing land from commonhold.
It is often the case that on a sale and purchase transaction, where the asset itself is relatively straightforward, issues can arise from the management of the estate which causes delays. These can range from lost share certificates and defective restrictions on title to purchasers being unable to appoint directors to the management company. Commonhold ownership would remove those issues at a stroke.
Concerns in the property market
Despite the clear benefits, commonhold has not established itself within the property market. There has generally been a low take up rate by property developers, who have been unwilling to take the risk on untested structures and procedures. In addition, there has been a reluctance for mortgage lenders to lend on commonhold properties, with one contributing factor being a nervousness of the effects of liquidation of the CA.
The Law Commission’s call for evidence is open until 19 April 2018. They will then examine how to make the existing commonhold system a more attractive and workable alternative to current ownership structures. The purpose of this call for evidence is to obtain views and evidence which will guide a future consultation on the detail. Whilst at this stage, the Law Commission is not making proposals for reform, could this herald the first step of a new dawn?
We are planning to respond to the call for evidence, and so if you have any views please feel free to let us know via the contacts page on this blog. Details of the call for evidence can be found here.
Collapsed retailer British Home Stores cannot challenge its own company voluntary arrangement as an unenforceable contractual penalty and must repay rental discounts to its landlords, the High Court in England and Wales decided yesterday.
The case, in which Hogan Lovells represented the successful landlord, provides important guidance on the operation of company voluntary arrangements (CVAs), particularly after termination, and the payment of rent as an expense of a company’s administration in priority to other debts.
A CVA is an insolvency process that allows a company to settle its unsecured debts with creditors, or come to an arrangement with them over its affairs. They have become a popular tool for struggling retailers and restaurant chains to improve their financial position by reducing rents and off-loading unprofitable leases. If approved by three quarters by value of creditors voting on the CVA, it binds all creditors regardless of how or whether they voted.
Background to the case
In 2016, BHS entered into a CVA with its creditors, reducing rents by up to 75%. The CVA provided that, if it was terminated, these discounts would be deemed never to have happened so that all landlords would have the claims against BHS that they would have had if the CVA had never been approved.
Just a month later, BHS entered administration. The administrators traded from the BHS stores whilst looking to sell the business, paying the reduced rents under the CVA. When no buyer was found, the company was liquidated and the CVA terminated.
The liquidators sought directions from the High Court to determine whether BHS was obliged to honour its agreement to pay full contractual rents to its landlords dating back to the approval of the CVA, arguing that this would amount to a contractual penalty. The rule against penalties makes unenforceable any contractual provision which imposes liabilities on a party for breaching their obligations that is out of all proportion to the other party’s interest in the contract being performed. It provides relief, as a matter of public policy, against oppressive contracts where there was an imbalance of bargaining powers.
The High Court’s decision
Finding for the landlord, the High Court decided that the rule against penalties did not apply to CVAs, and BHS had to pay the full back rent as an expense of the administration. The Court held:
A CVA is a hypothetical contract to which it is unnecessary and inappropriate to consider the usual principles of contract formation.
It was impossible to see how the rule against penalties could apply where there was no negotiation, or how a company putting forward a CVA could subsequently claim to have been oppressed by it.
There are limited statutory grounds for challenging a CVA, and a strict 21 day timescale. There is no room in that process for separate grounds of challenge.
The landlords had a legitimate interest in the CVA’s success or failure and it was not exorbitant, extravagant or unconscionable for them to be returned to their pre-CVA position if it should fail.
The clear intention of the CVA was to ensure that landlords were not disadvantaged if the CVA was terminated, by being forced to accept a concession which was expressed only to apply while the CVA remained in force.
Administrators had to pay amounts accruing in respect of any period during which they used premises for the purposes of the administration. This included sums that were only contingent or yet to be ascertained at the time, such as an uplift under a rent review that had not been determined
Anthony John Wright and Geoffrey Paul Rowley as joint liquidators of SHB Realisations Limited (formerly BHS Limited) (in liquidation) v The Prudential Assurance Company Limited 
A management company’s refusal of consent to keep a pet in a flat gives us an opportunity for bad puns and gives landlords ‘paws’ for thought.
After Mr and Mrs Kuehn bought a leasehold flat in East London, only one thing stood in the way of their dream home: a leasehold covenant not to keep pets without the consent of the management company, Victory Place Management Company (VPMC). Applying what it called “a blanket ban” on dogs except in special circumstances, VPMC refused consent for the Kuehns to keep Vinnie the terrier in their new flat. When the Kuehns refused to remove Vinnie, VPMC issued proceedings in the County Court, where the judge found in VPMC’s favour, ordering an injunction for Vinnie’s removal. The Kuehns appealed, arguing that VPMC’s refusal of consent was unreasonable.
But the covenant in the Kuehns’ lease that prohibited any “dog bird cat or other animal or reptile” from being kept in the flat without the consent of VPMC, didn’t require VPMC to act reasonably, so why was the reasonableness of VPMC’s decision in question here?
The answer is that, in order to prevent the abuse of contractual discretion, the courts may imply terms into a contract where a decision making power lies in one party’s sole discretion. Here, the parties accepted that there was an implied term that VPMC must take into account relevant considerations, and ignore any irrelevant factors. The judge also suggested that he would have implied a term that the decision itself must not be irrational or unreasonable, had he been asked to consider that question in the appeal.
The Kuehns argued that VPMC had failed to consider the relevant factors, having made a pre-determined decision, but this argument found little favour with the judge. The policy reflected the views of the majority of the tenants, an entirely relevant factor, and VPMC had shown willing to consider any evidence of the Kuehns’ alleged exceptional circumstances (evidence which they had failed to provide). The appeal was dismissed: VPMC had acted reasonably and so Vinnie must go.
This case may have been about one couple’s canine companion, but commercial and residential landlords should take note: the same principles could be applied to applications for consent to assign, underlet or alter. Not only will landlords need to bear in mind the specific statutory duties in relation to acting reasonably, but landlords may also find courts implying additional reasonableness requirements. Regardless of whether they are required to act reasonably under the terms of the lease or their statutory obligations, landlords should always ensure that they follow a due and proper process for considering applications for consent, taking all relevant factors into account, else they may risk having their decision overturned in court.
Case: Victory Place Management Company Ltd v (1) Florian Kuehn (2) Gabrielle Kuehn 
Do you have an asset that’s proving difficult to let? Would you just like to maximise marketability? A “flexible” or “dual-use” planning permission might be able to help.
A flexible planning permission allows occupiers to switch between specified planning uses without the need for multiple planning permissions. The right to switch lasts for ten years and the use in operation at the end of the ten year period becomes the lawful use of the property from that date onwards.
In order to qualify as a flexible planning permission, the permission should explicitly state that the uses are flexible in the description of development. Ideally, the permission should also reference Class V of the General Permitted Development Order 2015, to remove any uncertainty over whether the right to switch uses is intended to apply.
The accurate wording of the description of development is crucial. Planning permission which grants consent for “commercial accommodation including A1 – A5, B1, C1 and D1” would not usually be considered to be a flexible planning permission as it makes no reference to flexible use. In this example, a switch to any of the other uses listed could constitute a material change of use requiring a fresh permission.
An application for a flexible planning permission should make it clear that the uses applied for are intended to be used flexibly. The right to switch does not apply to changes to a betting office or a pay day loan shop, but otherwise there are no restrictions on the combination of uses that may be sought. Nor is there a limit on the number of times you can switch between uses during the ten year period. You will, however, need to ensure that no planning conditions or Section 106 obligations restrict the uses in any way.
In today’s modern world, where tenants want more fluidity to adapt and reform their businesses, offering a space that better suits their changing needs is vital. Flexible permissions are therefore a useful planning tool that can make space much more attractive to occupiers. Flexible workspace and co-working spaces are now “hot topics” and so developers may see more local authorities willing to engage in flexible permissions. The significant cost and time saved by not needing a new permission each time there is a change in use, means that flexible permissions can be good for all.
Some might say that the community infrastructure levy (“CIL”) is just a tax on developers to fund infrastructure, but a recent appeal case showed that it’s also a handy yardstick with which to measure human ingenuity…
In an attempt to get out of paying CIL on a scheme in Northamptonshire, a developer argued that its development was unlawful because a pre-commencement condition hadn’t been complied with. The developer’s case was that CIL wasn’t payable because lawful development hadn’t yet commenced.
This argument received short shrift from the Secretary of State’s decision officer (who had presided over a previous appeal brought by the same developer along similar lines). The decision officer concluded that CIL isn’t concerned with whether or not a development is lawful, just with whether the development has started – or as the CIL Regulations put it, when a “material operation begins to be carried out”.
The CIL Regulations include a list of exclusions– but unlawful development isn’t one of them. Somewhat surprisingly (for the developer at least), the definition of development doesn’t require the material operation to be carried out in accordance with a planning permission. A material operation is a material operation whether or not the works involved have planning permission.
This meant that the developer’s case failed and the appeal was dismissed. The lesson here? It is possible to be a little too cunning – CIL doesn’t care whether or not your development is lawful – if it’s liable for CIL, you’ll need to cough up.
Just before Christmas, the Law Commission announced plans to develop laws to support the safe development and use of driverless cars in the UK. The aim is to develop legislation which may be ready as early as 2021.
The Law Commission is an independent law reform watchdog for England and Wales and this review is one of 14 new project areas unveiled as part of its 13th Programme of Law Reform. Amongst the other projects announced by the Law Commission, the laws on smart contracts (which are self-executing contracts written in computer code), electronic signatures and certain residential leasehold topics (namely commonhold, enfranchisement and the regulation of managing agents) will also be getting attention. The Law Commission Chair and Court of Appeal judge Sir David Bean said that this programme of law reform “attracted unprecedented interest across a broad range of areas.”
“The Commission has now refined these ideas in what I believe is a highly relevant and important series of law reform projects. We want to help tackle injustices by making the law simpler, clearer and fit for the future. We will also be making sure the law supports cutting edge technical innovation such as automated vehicles and smart contracts.”
The aim of the Law Commission’s three year project will be to “promote public confidence in the safe use of automated vehicles, and to ensure the UK has a vibrant and world-leading automated vehicles industry”.
Driverless technology continues to develop rapidly around the world. There have been a number of recent announcements from major players in the market which bring the prospect of driverless cars closer, with self-driving vehicles now being tested on public roads in the UK and US. In the longer term, their development is likely to result in changes to the design of prime urban locations, for example reducing the requirement for parking in town centres and out of town shopping destinations.
The government has already stated its intention to make the UK a world leader in driverless car technology and has predicted that the automated vehicle industry will be worth £28 billion to the UK economy by 2035. This announcement supports the government’s pledge made in the Autumn Budget 2017 to have fully driverless cars on the road by 2021.
Earlier this month, the government also published its 25 year plan for the natural environment, confirming its commitment to invest in electric vehicle infrastructure and new charging technologies.
In our view, the announcement of this review by the Law Commission is a welcome step. It is essential that new laws are developed to deal with automated vehicles, which do not readily fit within the existing legal framework. The Automated and Electric Vehicles Bill is currently at the report stage in the House of Commons and establishes certain rules around liability for accidents involving driverless vehicles. It remains to be seen how the Law Commission review will tie in with the contents of the Bill but we expect it to consider ways in which driverless cars will be regulated and further clarify the difficult question of who should be liable for accidents.
The technology surrounding automated vehicles is racing ahead and it is essential that the law keeps up.
The government has confirmed to parliament its timetable for the introduction of a public register of beneficial ownership of UK property by overseas entities.
This follows on from the government’s consultation in April 2017 on establishing such a register which we blogged on last year (see here).
In December 2017, the government confirmed that it would be going ahead with the proposed register by committing, in its UK anti-corruption strategy 2017-2022, to publish a draft bill for the establishment of the register.
In his written ministerial statement published earlier this week (on 25 January 2018), Andrew Griffiths (Parliamentary Under-Secretary of State for the Department for Business, Energy and Industrial Strategy) announced that the government intends to publish a draft bill before the summer parliamentary recess (before late July 2018), and will introduce the bill to parliament early in the autumn. The government intends the register to be operational in 2021.
The register will require overseas legal entities to provide information on the beneficial ownership of property that they own or purchase in the UK or where they participate in central government contracts.
In the meantime, we await a full government response to the April 2017 consultation although according to yesterday’s statement, that is now expected shortly. It will be interesting to see whether that response fleshes out the detail, failing which we will have to wait for publication of the draft bill later in the year.
The New Year has started off with a bang as changes to the Community Infrastructure Levy (CIL) Regulations 2010 were laid before Parliament. The draft 2018 Regulations correct an unintended defect in the current legislation. The error had resulted in millions of pounds of extra CIL being charged, even where no extra floorspace or change in use had been applied for.
Out with the old…
The current legislation is supposed to provide that where planning permission is granted before CIL comes into force in the area (Permission A) and a later S73 permission amending Permission A is granted after CIL comes into force in that area (Permission B), no CIL is payable unless extra floorspace or a change of use under Permission B is authorised. However, indexation within the complex CIL formula meant that a CIL can be charged solely due to an indexation change from Permission A to Permission B even where there is no uplift in floorspace. Developers are currently facing this in the Nine Elms Opportunity Area.
This error was highlighted in an appeal to the Valuation Office Agency relating to Peabody’s St John’s Hill development where the valuer interpreted the legislation in a way that corrected the error.
… in with the new
The draft 2018 Regulations provide the much needed clarification. Ultimately, when calculating the amount of CIL payable on Permission B, the same index figure is to be used for Permission A and B. As such, any CIL payable will be based on extra floorspace or a change in use brought about by Permission B and not any indexation changes.
New Year’s Resolution
While the clarification will be welcomed by developers, the draft 2018 Regulations do not address various other technical problems with CIL, such as where a S73 permission is granted in respect of a permission for which CIL has already been paid. It is hoped that the Ministry of Housing Communities and Local Government will correct these as part of the forthcoming CIL consultation.
There was much fanfare when Chelsea Football Club secured planning permission for redevelopment of Stamford Bridge last year. However, one family’s fight against the new stadium’s impact on its right to light had the potential to bring the redevelopment to a standstill. Hogan Lovells’ Planning and Development specialists, Hannah Quarterman and Paul Tonkin consider the implications of rights to light on development, and how even a goliath-like Chelsea FC can become unstuck at the hands of a local family
When the Club secured permission for the state-of-the-art stadium it knew that the new stadium would potentially infringe rights of light enjoyed by neighbouring owners. This is by no means an unusual situation and Chelsea, like other developers, tried to negotiate financial deals to release the rights in return for cash.
In most cases, this strategy succeeds and it appears to have worked for Chelsea in the case of all of its neighbours other than the Crosthwaites.
Developers seeking to negotiate away rights of light should, though, be aware that ultimately adjoining owners can seek an injunction from the court to prevent the development. Whilst the court has a discretion over whether to grant an injunction (and it is a broad discretion) the legal position remains that an injunction is the primary remedy for infringement of property rights (including rights of light). An adjoining owner armed with an injunction is a formidable opponent indeed, as Chelsea have no doubt discovered.
So, what can developers do to minimise the risk?
The first stage is to get the strategy right. The once-favoured approach of “hoping to get away with it” will not find favour with the courts and developers must be open and reasonable in their dealings with affected neighbours. Developers are also increasingly looking at flexible insurance cover for rights of light claims, which enables them to negotiate whilst providing a financial payout if those negotiations stumble. However, whilst insurance may compensate for losses, it will not get a scheme built in the face of an injunction.
Using local authority powers may also be an option. For Chelsea, the London Borough of Hammersmith and Fulham may be its knight in shining armour. It has resolved to exercise statutory powers which would enable Chelsea to continue with the development, notwithstanding the interference with the relevant rights.
Section 203 of the Housing and Planning Act 2016 permits developments to be carried out even though they would interfere with third party rights. The party with the benefit of those rights can no longer secure an injunction but, instead, has a right to statutory compensation for the loss in value to their property caused by the interference.
In order to benefit from these provisions:
• there must be planning permission for any relevant building work;
• the work must be carried out on land which has been held by the Council;
• the Council must show that they could acquire the land compulsorily for the purposes of those works; and
• the work must be for purposes related to the reasons for which the land was acquired.
In Chelsea’s case, the Council has never owned the land and so a lease and leaseback arrangement is needed, so that Chelsea can derive title from the Council, and benefit from the relevant power.
The process is further complicated, as an LPA cannot acquire land willy-nilly and must do so for a particular purpose, complying with the relevant tests for that acquisition. The stadium land is to be acquired for planning, so the Council had to demonstrate that the acquisition would promote the improvement of the economic, social or environmental wellbeing of its area and that the redevelopment would justify interference with private rights. Whilst it may seem obvious that a housing development would meet those tests, there is more of a question mark over a football stadium. Nonetheless, the Council has concluded that redevelopment of the stadium would deliver significant benefits, not only for its area, but for London generally, and has resolved to follow the process to allow Chelsea to complete its redevelopment.
But the story may not end there. The Crosthwaites have already made it clear that they don’t think the tests have been satisfied, and that they will challenge the Council’s decision to follow this process.
All this serves as a timely reminder that any potential infringement of rights to light should be addressed early on to avoid scoring an own goal in your development timetable.
Business occupiers (and particularly small business owners) welcomed the announcement in the Autumn 2017 Budget that the government is putting an end to the so-called “staircase tax”.
The “staircase tax” acquired its name from the 2015 Supreme Court decision on assessment of business rates in Woolway (VO) v Mazars, which held that a tenant who occupies separate floors in a building is only entitled to treat the floors as part of the same rateable occupation for business rates purposes (known as a hereditament) if it is possible to move between those floors without leaving space that exclusively belongs to the tenant. As a result, where a tenant moves between floors using a common parts staircase or lift, the Mazars test is not met.
If there are two separate hereditaments, the tenant is less likely to be able to claim an allowance for size (quantum relief) to reduce its liability for business rates. Whilst the Mazars decision was not new law, it differed from the practice previously applied by the Valuation Office Agency. That practice was to treat two adjoining floors of a building separated by a floor /ceiling only as a single hereditament where in common occupation.
The government has now taken the next step towards abolishing the “staircase tax” by issuing a consultation which seeks views on how to reinstate the pre-Mazars practice of the VOA. The consultation pre-supposes that the staircase tax will be abolished and seeks views on how that should be implemented. The Department for Communities and Local Government has simultaneously issued a draft Bill (called the Non-Domestic Rating (Property in Common Occupation) Bill) for consideration.
The move is good news for business occupiers and forms part of the government’s Budget pledge to increase the fairness of the business rates system in England. Affected businesses will be able to ask the VOA to recalculate valuations so that bills are based on the previous practice of assessment, backdated to April 2010.
The consultation opened on 29 December 2017 and closes on 23 February 2018.
For further details on the background, see our earlier blogs on this topic here and here.
Woolway (VO) v Mazars  UKSC 53
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