Real estate technical bulletin - Summer 2008
In this edition we cover The Rating (Empty Properties) Act 2007 which removed business rates relief for most unoccupied properties with effect from 1 April 2008; the Energy Performance Certificate (EPC) which is a certificate containing information about the energy efficiency of a building; a case concerning the right to enfranchise under the Leasehold Reform Act 1967 (LRA), where the House of Lords decided that a property, which had originally been designed as a house but later used commercially, was a “house” for the purposes of enfranchisement under the LRA; discharge of covenant imposed for planning purposes and finally Landlord and Tenant - Recovery of Service Charge.
Rating of Empty Premises
Energy Performance Certificates
Enfranchisement - What is a house?
Restrictive covenant - Discharge of covenant imposed for planning purposes
Landlord and Tenant - Recovery of Service Charge
The Rating (Empty Properties) Act 2007 removed business rates relief for most unoccupied properties with effect from 1 April 2008. Industrial and warehouse premises now have 100% rates relief for the first six months of vacancy, while most other commercial properties (e.g. retail) have only three months of 100% rates relief. Once the initial period of vacancy has passed, the same level of business rates are payable as for occupied properties.
It should be noted that the relevant exemption period will run from the date the premises became vacant and so, if on 1 April 2008 an industrial unit had been vacant for six months, rates would become payable at 100% on that date.
Empty rates are payable by the person or body entitled to occupation. Accordingly, where empty premises are not let, the charge will fall on the freeholder. However, where they are subject to a lease, the charge will fall on the tenant. Many tenants have premises that they do not occupy and which, due to the nature of the assignment and/or underletting provisions in their lease, they are unable to sell or let. These tenants will now have to fund the empty rates charge as well as the lease rent!
There are various means by which the charge could be avoided. These include:
• Re-occupation of premises for a period of six weeks or more - when the premise become vacant again the owner will be entitled to a new exemption period. It may be financially beneficial therefore for a landlord to offer a short term let at a low rent to achieve this further exemption period or for them to re-occupy themselves. It may not be necessary to re-occupy the whole of the property to secure the fresh exemption;
• Delaying completion of a new property - in general, the construction of a building will proceed to the point where it is capable of being occupied. That said, sometimes the owner will substantially complete it, but not to the point where it is completely capable of occupation, until a tenant/buyer can be found. Council’s are required to issue a completion notice for a newly erected building as soon as it comes to their attention that the work remaining to be done can reasonably be expected to be completed within three months. In these circumstances the service of a completion notice by the Council ensures that liability for unoccupied property rates is not avoided. In view of this, developers of large scale new-build developments may consider phasing the works to take account of demand. Furthermore, on any new-build developers may consider postponing any fit-out until a tenant/buyer is found. That said, if the relevant Council takes the view that the fit-out could be completed in less than three months, a completion notice can still be issued;
• Rendering the property unusable - known as “soft-stripping”, removing flooring and other parts of the interior to return the property to a shell could result in empty rates not being payable in relation to a property. The reason is that if a valuation officer considers that a property could not be let without carrying out works which go beyond repair, or that the repair works would be uneconomic, the property may either be removed from the rating list or the valuation may be reduced to nil. In either case no empty rates will payable as these rates are calculated according to the rateable value of the property.
• Letting/selling the property to a charity - charities receive an 80% discount on business rates and can apply for a further 20% discount from their local authority.
• Companies in administration are also not liable for empty rates on their properties for the whole period of the administration.
If none of the options above apply then the following should be considered:
• From a landlord’s perspective, charging higher rents for short term lettings to mitigate against the cost of empty property rates may be a way forward. That said where there is a glut of empty property available this may not be possible. Furthermore, when negotiating Heads of Terms on a new lease the liability for any empty rates which fall due during the term should be expressly dealt with and followed through in to the lease itself;
• From a tenant’s perspective, flexibility under the lease provisions to assign or underlet the property without unreasonable restrictions is essential. This will hopefully allow a tenant to mitigate the increased costs they would incur if the property, or part of it, becomes surplus to their requirements in the future!
Energy Performance Certificates
An Energy Performance Certificate (EPC) is a certificate containing information about the energy efficiency of a building. There is no prescribed form for an EPC but it must include certain information including the asset rating of the building - the asset rating considers the characteristics of the building itself and its services and is expressed on a scale from A to G (A being most efficient and G least efficient). The better the rating, the more energy-efficient the building - this would probably result in lower fuel bills. Valid for a ten year period unless it is superseded by a new assessment, EPCs for non-dwellings are stored in a national register operated by Landmark Information Group Limited.
From 1 October 2008, an EPC will be required for the construction, sale or renting out of virtually all non-dwellings which are buildings. A building is a structure with a roof and walls which uses energy to condition its indoor climate. This definition would exclude certain structures from the requirement to have an EPC, including a car park which is open at the sides.
Even if a structure is a building it may be exempt because it falls within the list of exempt buildings. These include:
• Temporary buildings with a planned use of less than 2 years;
• Stand alone buildings with a total useful floor area of less than 50m² that are not dwellings;
• Industrial sites, workshops and non-residential buildings with a low energy rating; and
• Subject to satisfying certain requirements, the sale or rent of a building that is due to be demolished.
The cost of preparing an EPC can run in to tens of thousand of pounds, especially on a large complex building.
Where the requirement to produce an EPC relates to the construction or modification of a new building it appears that this cost could be passed on to the “owner” of the building.
However, where a building is being sold or let, an EPC must be provided to the prospective buyer/tenant free of charge. Is there any way that the cost could be passed on?
An EPC produced by someone else (e.g. a superior landlord) may be available but would this itself be provided free of charge? Wording in the Lease may require the tenant who is requesting the EPC for its proposed sale or subletting to pay its landlord for the privilege.
Clearly if it is the whole of the building which is being disposed of then if the building is tenanted, a landlord may seek to recover the cost of producing the EPC from its tenants via the service charge. Whether this is possible will depend on several factors. Where the service charge provisions expressly enable the landlord to recover costs of statutory compliance this could cover the production of an EPC provided that the duty to produce the document has arisen. Over-eager landlords who commission the EPC too early may fall foul of this!
Even without an express reference to statutory compliance detailed in the service charge provisions, a landlord may seek to recover it from its existing tenants arguing that it is covered by a general sweep up clause. The success of this argument will depend on how widely that clause is drafted.
Mindful of the fact that a new tenant cannot be charged for the provision of the EPC, if the transaction is the granting of a new lease, care would also need to be taken about when the charge incurred in providing the EPC is recovered via the service charge to avoid the new tenant indirectly paying part of the cost once they become bound to observe the tenant covenants in the lease and receive a service charge demand.
If an EPC is required and not obtained the level of the penalty charge varies according to the type of property in question. In most cases, the penalty for failing to provide an EPC when selling or renting out commercial property is 12.5% of the rateable value of the building, with a minimum penalty of £500 and a maximum penalty of £5,000. That said the potential negative PR connotations of a failure to comply may be a lot more costly!!
Case review: Enfranchisement - What is a house?
In a case concerning the right to enfranchise under the Leasehold Reform Act 1967 (LRA), the House of Lords has decided that a property, which had originally been designed as a house but later used commercially, was a “house” for the purposes of enfranchisement under the LRA.
Under the LRA, tenants of certain long leases of houses have rights to acquire the freehold or to the grant of a lease extension of 50 years at no premium. There are several requirements which need to be satisfied, one of which is that the building in question is a “house” being any building designed or adapted for living in.
In Boss Holdings Limited v Grosvenor West End Properties and others [2008] UKHL the long leaseholders of two properties in Mayfair, originally built in the eighteenth century as houses, served notices on their landlord seeking to enfranchise. The landlord, Grosvenor, served notices of objection in response to each enfranchisement notice. It alleged that the leaseholders did not have the right to enfranchise as neither property was a “house” for the purposes of the LRA enfranchisement provisions. Both tenants applied to the County Court to the effect that their claims should be upheld. The tenants were unsuccessful in that court and also, on appeal to the Court of Appeal. Boss Holdings Ltd (Boss) then appealed to the House of Lords.
During its lifetime, the building leased to Boss had been used either wholly for residential purposes or for mixed commercial and residential purposes. That said, at the time that the enfranchisement notice was served, the building was unoccupied and very dilapidated, to the point that the property was incapable of being occupied as a residence.
Their Lordships concluded that as a matter of ordinary language, the building in question was “designed or adapted for living in” as at October 2003 when the enfranchisement notice was served. The fact that the property had become dilapidated so as to be uninhabitable did not detract from the fact that the property was designed for living in when it was first built. The word “designed” in the LRA was concerned with the past. Although the property had become very dilapidated, this did not detract from the fact that at least some of the property was and remained “designed” to be lived in.
COMMENT:
This decision could have quite far-reaching effect. Although the court did not decide the question of whether a property would be a house if it had been designed for living in, but had subsequently been adapted to another use (e.g. commercial), it did comment that “as a matter of literal language” such a property could be a house. Certainly, if the external appearance and layout of the property have not been significantly altered since its construction and if it was originally designed as a house, the property may still be regarded as a house for the purposes of the right to enfranchise under the LRA. As a result of this decision, many commercial tenants may be able to take advantage of the enfranchisement system!
Restrictive covenant - Discharge of covenant imposed for planning purposes
The Lands Tribunal has ordered the discharge of a restrictive covenant where the owner of the land benefitting from the covenant was a local authority who had granted planning permission for development to the owner of the burdened land. As a result, residential development of the burdened land could proceed.
Alisha House, Re v [2008] EWLands LP_83_2005 concerned land the freehold of which was sold in July 2000 by Easington District Council (the Council) subject to a covenant:
“Not to use the property for any purpose other than as a coach depot with an associated bungalow for residential use. Occupation of the bungalow must be linked to the use of the land as a coach depot and the bungalow cannot be sold or leased separately from the depot.”
Later, the Council granted planning permission for the erection of a dwelling house on part of the property and for a vehicle storage depot with associated garaging on the remainder of the property. Concerned that unrestricted residential use was not acceptable due to the close proximity of the adjacent business use, the planning permission included a condition restricting occupancy of the house to someone who owned/was employed by the company operating from the vehicle storage depot.
A subsequent owner of the burdened land (Mr Graham) sought to acquire some of the Council’s land and in July 2004 applied for outline planning permission for residential development of the burdened land and other land (including some land that was owned by the Council). The Council granted outline planning permission in April 2005 but negotiations for the inclusion of the Council’s land within the residential development subsequently broke down.
The application to the Lands Tribunal was made by Mr Graham for discharge or modification of the restrictive covenant which was contained in a slightly amended form in a Transfer dated August 2000.
The Lands Tribunal concluded that the restrictions preventing residential development in both the July and August 2000 Transfers be discharged, with the Council receiving compensation as result. The Tribunal found there to be a close coincidence between the role of the Council as landowner and as the local planning authority. On the facts the Tribunal could not attribute to those roles the degree of independence argued by the Council in an attempt to leave the restriction in operation and benefitting its land. The grant of planning permission by the Council was, in the Tribunal’s opinion, an event of singular importance and was the best evidence that the practical benefits secured by the restriction were not of substantial advantage to the Council.
COMMENT:
Although this is a decision of the Lands Tribunal and not a higher court it may be useful in the armoury of a developer where the relevant local planning authority also owns land which benefits from a covenant.
Landlord and Tenant - Recovery of Service Charge
In a case concerning recovery of service charge, the High Court found on the facts of the case that failure to correctly adhere to the procedural steps outlined in certain leases meant that the landlord could not recover certain of its expenditure via the Service Charge.
Leonora Investment Company Ltd v Mott Macdonald Ltd, concerned a tenant who had four separate leases in each case demising the majority of a floor in a particular building. All four leases were on the same terms and provided that the service charge to be paid by the tenant was “to be such fair proportion…of the actual or anticipated service costs for each service charge year”, which would be assessed by the landlord or its surveyor “according to a reasonable and proper basis for apportionment applicable from time to time to the premises”.
The service charge provisions also stated that the landlord could make and send to the tenant its estimate for the coming service charge year and that the tenant would pay such amount by equal quarterly instalments in advance. After the end of each service charge year, the landlord could send a statement of the actual service costs and service charge to the tenant, at which point any overpayment would be credited to the tenant, or any deficit demanded from the tenant.
The landlord prepared a statement at the end of the service charge year ending 24 December 2002. On 15 January 2003, the landlord wrote to the tenant at the ground floor premises requesting an additional payment in excess of £260,000 in relation to an item of expenditure erroneously omitted from the previous balancing statement.
The tenant argued that the landlord was only entitled to raise one balancing statement per year and having already done that it could not produce another one. It was also argued that the landlord had not followed other procedural requirements, for example, it had not given the breakdown of the amount payable for each of the tenant’s four leases.
Although the court was of the view that the lease did not prevent the landlord from producing more than one balancing statement, it found against the landlord as it had failed to comply with other procedural requirements in the service charge provisions - for example, by not setting out the proportion of the total it was seeking to recover payable by the tenant under each of its leases.
COMMENT:
Landlord’s seeking to recover service charge payment from their tenants must ensure that, when doing so, they comply with the relevant procedural requirements in the lease. As for tenants seeking to challenge service charge payments the reasoning in this case may be of some assistance.
If you have any questions or would like to find out more, contact one of our Support Lawyers:
Kerrie Deakin on 0115 935 1707 or kerrie.deakin@freethcartwright.co.uk
Shama Gupta on 0115 934 3901 or shama.gupta@freethcartwright.co.uk
Heloise Horton on 0115 934 3902 or heloise.horton@freethcartwright.co.uk