Brick by brick

New beasts

The recession in the commercial property industry has certainly not resulted in a downturn in developments in commercial property law.

At the end of 2009 the Court of Appeal handed down its judgment in Clarence House v National Westminster Bank plc [2009] EWCA Civ 1311. The case concerned virtual assignments and the lead judgment was delivered by Ward LJ. He explained that a virtual assignment was not in fact an assignment, rather 'it merely mimics the economic result of one without changing the legal position vis-à-vis third parties at all'.

In Clarence House the landlord asserted that the virtual assignment was a breach of a number of the covenants in the lease. Taking each alleged breach in turn, Ward LJ concluded that the document executed by the tenant and the virtual assignee was not a parting with possession, not a declaration of trust, not an assignment and not an underletting.

At paragraph 47 of his judgment, in typically picturesque language, Ward LJ said: 'I am satisfied there is no trust. I recognise that virtual assignments are strange new beasts in the forest; that one must circle around them suspiciously and cautiously; but the moment one gets close and has a good sniff, the overwhelming smell is of contract, not trust.'

It seems that post Clarence House there may be more use of virtual assignments unless landlords decide to further restrict a tenant's freedom of action by including more restrictive covenants in a new lease.

Lost profits

Strategic Property Limited v O'Se [2009] EWHC 3512 is a case that creates particular problems for intermediaries seeking to make a financial profit in commercial property transactions.

The case concerned the sale of a large number of off-plan properties. The claimant had entered into a contract for the purchase of a flat, yet to be developed, from the developer. The claimant never intended to retain ownership of the flat, instead it sought, simultaneous upon the completion of its contract, to sell on to the defendant as ultimate purchaser under a subcontract. Such a subcontract was duly executed. In other words, in return for agreeing to purchase a property which had not yet been built and accepting the attendant risks, the claimant sought to make a profit by selling the property at a profit to the ultimate purchaser. Such a sub-sale is commonplace in a rising property market.

The claimant's problems were caused by the failure of the defendant to complete the ultimate purchase, despite an order for specific performance. The claimant therefore sought damages, leaving the question for the court whether damages were to be assessed on the basis of the difference in value between the sum paid by the claimant for the flat and its market value, or whether the claimant could recover the loss of the envisaged profit.

In a decision that has attracted some criticism, Anthony Elleray QC held that the claimant could not recover damages for loss of profit. Applying the rules for recoverability of loss in Hadley v Baxendale [1854] 9 Exch 341, it was held that the defendant could not have anticipated that the claimant would only be able to complete its purchase once the defendant had provided its own completion monies, with the result that the defendant could not have anticipated that a breach of its obligations would cause the claimant the loss of profit.

The court so held despite the fact that not only was the defendant aware that the claimant was an intermediary, but the contract between the claimant and the developer was actually annexed to the subcontract between the claimant and the defendant.

Although Lord Neuberger MR granted permission to appeal, the appeal has been withdrawn. Consequently, until this type of sale arrangement is revisited by the court, legal representatives acting for such intermediaries should bear the following in mind:

(i) The judge placed emphasis on the fact that the subcontract did not make clear that the claimant intended to profit from it. Consequently, the inclusion of such a statement, however obvious it might seem, might help to avoid this difficulty in the future.

(ii) Similarly, the inclusion in the subcontract of the fact that in the event the ultimate purchaser fails to complete it will indemnify the intermediary against the loss of profit suffered should negate another of the judge's stated reasons.

(iii) Finally, in view of the reasons given in the judgment, it appears to be the case that an intermediary would benefit greatly from expressly including in the subcontract the fact that those completion monies are the sole means by which the intermediary intends to complete the purchase from the developer.

Surrenders by operation of law

QFS Scaffolding Ltd v Sable [2010] EWCA Civ 682 is a useful restatement by the Court of Appeal of the principles to be deployed where one party to a lease contends that it has been surrendered by operation of law. In a market place where tenants are ever keen to escape from leases and landlords keen to retain tenants, arguments about surrenders by operation of law frequently arise. Often they are combined with cases where the tenant has served a break notice and there are disputes as to its validity. The tenant, having moved out, is anxious to ensure that its lease has ended.

In QFS, the judgment of Morgan J contains a useful set of ten propositions to be deployed when considering whether a lease has been surrendered by operation of law. The key points to remember are that the doctrine 'does not depend upon the subjective intentions of the parties but upon estoppel' and that 'the conduct of the parties must unequivocally amount to an acceptance that the tenancy has ended; there must be either a relinquishment of possession and its acceptance by the landlord or other conduct consistent only with the cesser of the tenancy'.

Landlord opposition

Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd (in administration) [2010] EWHC 2084 (Ch) concerned a landlord's opposition to the grant of a new tenancy under section 30(1)(f) of the Landlord and Tenant Act 1954; namely that, on the termination of the existing tenancy, the landlord intends to demolish, reconstruct or carry out substantial works of construction to the demised premises.

The question for the court was whether, on a summary judgment application issued by the tenant, the date at which the landlord had to make out the requisite intention was the date of the application hearing or of the trial.

HH Judge David Cooke held that the answer was the trial date. He said a summary judgment hearing was not an occasion upon which the court would determine disputed facts and it could result in the substantive issue being concluded only in the event that the application had been issued by the tenant and it was successful.

The judge pointed out that to hold otherwise would mean that a tenant could effectively have two bites of the cherry by putting the issue before the court in an application for summary judgment and then arguing the point again at the trial of the ground of opposition.

Guiding light

HKRUK II (CHC) Ltd v Heaney [2010] EWHC 2245 (Ch) is a right to light case with a startling conclusion. This case concerned two buildings facing one another in the centre of Leeds. One was a grade II listed Victorian property and the second a more modern five-storey building upon which a developer had constructed further floors at the sixth and seventh floor level.

From an early stage of the development of the newer building it was recognised that the construction of the extra floors would amount to an actionable interference with the access of light to the grade II building. However, without a settlement of the dispute between the two building owners, the developer of the newer building carried on and completed its construction.

At the trial, it was recognised that there was an actionable interference with the access of light and the argument was whether this should sound in damages or the judge should grant a mandatory injunction requiring parts of the new floors to be demolished. Despite the fact that the seventh floor was occupied by commercial tenants, the judge decided that he could not judicially sanction the 'buying off' of the breach of the right of light by refusing an injunction. He therefore granted a mandatory injunction requiring parts of the floors to be demolished.

This case has already sent shockwaves through various developers. Subject to the case being overturned on appeal, the lesson is that any claim for interference with rights of light must be taken very seriously.

Defective notice to complete

In Eminence Properties Developments Ltd v Heaney [2010] EWCA Civ 1168, Mr Heaney had agreed to buy 13 flats off-plan. He did not complete on the contractual completion date and the vendor's solicitors served a notice to complete specifying an expiry date one day too soon.

Believing that the notice was valid, immediately upon its expiry the vendor's solicitors wrote claiming that the contracts were ended and seeking forfeiture of the deposit and damages. This was great news for the purchaser, who seized upon the vendor's action as being a repudiatory breach of contract. This argument succeeded at first instance, with the result that the purchaser recovered his deposits. However, this decision was reversed by the Court of Appeal which decided that service of the invalid notice and reliance upon it was not repudiatory conduct.

The Court of Appeal examined the authorities, particularly the House of Lords decision in Woodar Investment & Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277. After analysing the authorities, Etherton LJ stated that the test is: 'Whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contract.' Posing this test, it was decided the vendor did not clearly show an intention to abandon its contract.

Granting relief against forfeiture

It is worth mentioning part of the decision in Patel v K&J Restaurants Ltd [2010] EWCA Civ 1211. Among the points considered by the Court of Appeal in this case was whether the court, when granting relief against forfeiture, should normally grant the landlord costs on an indemnity basis or only on a standard basis.

Some comments of Lord Templeman in Billson v Residential Apartments Ltd (No 1) [1992] 1 AC 498 seemed to indicate that costs should not be awarded on an indemnity basis. After examining the authorities comprehensively, Lloyd LJ indicated it would probably be right in cases where relief against forfeiture was granted to normally award costs in favour of the landlord on the indemnity basis.