Update: commercial property

Life has become a little easier for property practitioners. Property instruments that 'come into effect' (presumably meaning completed '“ the statute does not clarify) on or after 6 April 2010 benefit from the passing of the Perpetuities and Accumulations Act 2009 (PAA), which removes some of the previous constraints where parties wished to allow for the vesting of a property interest at some uncertain, or distant, future date.

The position is different for trusts, wills and appointments, where the rules still apply but in modified form. But, in most respects, for post-April property instruments, the law is now satisfyingly simple: the 'perpetuities rule' has been abolished.

Before PAA 2009, the law relating to the grant of easements and options (and, to a less certain extent, covenants and other contractual provisions made in the property context) was an amalgam of common law and statute, most notably the Perpetuities and Accumulations Act 1964. All property practitioners will be, more or less, familiar with the complex rules, under which it was permissible for certain maximum periods to be specified '“ broadly, up to 80 years, but 21 years in the case of some options, and with other possibilities related to 'lives in being' '“ during which the relevant interest might vest.

Potential harshness in the common law rules was tempered by a 'wait and see' principle which allowed retrospective analysis, so that a property interest that in fact vested within a permissible period was valid even if, when granted, it was possible that it might not (and thus previously would have been void from the outset).

Potential litigation

The passing of PAA 2009 will have been greeted with relief by most property solicitors. It is, however, necessary to keep an eye on situations when the old law still needs to be taken into account. There are three broad such situations. First, two rules relating to leases '“ actually derived from the Law of Property Act 1925 '“ still apply. A lease granted at a rent or premium for a term which is to start more than 21 years after its completion, or an agreement to grant such a lease, will still be void. The same is also the case with a contractual agreement (whether or not contained within a lease) to renew a lease for a term in excess of 60 years.

Second, instruments that came into effect before 6 April 2010 are still governed by the old rules. It will, therefore, be necessary for future generations of solicitors to have a working knowledge of those rules in order to advise on the validity of, or certainty conferred by, the apparent grant of important interests in property. Easements benefitting development sites and options to acquire land are two obvious key issues.

Third, situations will arise where an instrument that was contracted for before 6 April 2010 is now due to be completed. If the parties are alive to the situation, and can reach agreement, they may choose to revise the document to remove redundant perpetuities wording. That seems to be appropriate where inclusion of the time limits was only intended to address the pre-PAA 2009 constraints. However, if the parties cannot agree, or do not consider the point before completion, the document will be completed in the form provided for in the contract.

There is clearly the potential for future litigation over whether such wording was merely anachronistically included, and should therefore be declared void, or was as a deliberate contractual limitation desired by the parties '“ in which case it may be upheld. For this same reason, it is important to ensure that standard precedents are updated so that uncertainty of intention does not remain embedded within them.

Keeping up with the competition

All land agreements in existence next April will need to be assessed to ensure compliance with competition law.

The Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 (the exclusion order) excludes 'land agreements' from the Competition Act 1998's prohibition against anti-competitive agreements (the Chapter I prohibition) on the basis that, generally, they are unlikely to have an adverse effect on competition. The exclusion order is to be repealed with effect from 6 April 2011. The repeal will have retroactive effect.

Broadly, land agreements are agreements which create, alter, transfer or terminate an interest in land or an agreement to enter into such an agreement together with certain 'obligations' and 'restrictions' which are to be treated as part of the agreement. This covers leases and sub-leases of commercial and domestic property and assignments of freehold and leasehold interests. 'Interest in land' includes, for example, any estate, interest easement or right in or over land.

For example, obligations in land agreements that may, potentially, beanti-competitive are:

(a) Restrictive covenants binding freehold land preventing particular uses.

(b) Provisions in leases restricting the landlord from letting other premises to competitors of the tenant.

(c) Restrictions in leases on use, alterations, alienation and the ability to apply for planning permission.

(d) Solus ties where the tenant is required to purchase goods or services from the landlord.

These restrictions run the risk of infringing the Chapter I prohibition only if their impact on competition is 'appreciable'. This will require a case-by-case assessment to establish whether a restriction would significantly restrict or distort competition. Therefore, it is recommended that businesses carry out a full review of restrictive provisions in existing land agreements in advance of 6 April 2011 to identify any risks and make any necessary modifications as appropriate. While the Office of Fair Trading is producing guidance on the application of the competition laws to land agreements, this is not anticipated for several months.

Dealing with Debenhams

Dominion Corporate Trustees Limited v Debenhams Properties Limited [2010] EWHC 1193 (Ch) is another example of courts applying a purposive interpretation of commercial contracts. In February 2007, Dominion entered into an agreement for lease with Debenhams in relation to the letting of units to Debenhams in the proposed extension to Fareham Shopping Centre. The agreement provided for Dominion to construct the extension and for Debenhams to fit out their units and take a leases for 15 years at an initial rent of £320,000 together with a turnover enhancement.

Dominion was liable to pay a total premium to Debenhams of £900,000 in three instalments, being an initial payment of £50,000 followed by £425,000 within ten working days of notification of construction of the units and a further £425,000 once trading commenced.

The second payment was due by 2 March 2009 but Dominion did not make payment on time and, in an effort to extricate itself from the deal, Debenhams served notice on 3 March 2009 to terminate the agreement.

Despite Dominion offering payment on 4 March 2009, Debenhams maintained this was too late as the agreement was already at an end. On 23 March 2009, Dominion treated Debenhams' refusal to proceed as terminating the agreement so the issue became: who was the party in breach?

Debenhams' case was that clause 19 of the agreement entitled it to terminate for any breach or, alternatively, that late payment was a fundamental breach which allowed them to terminate the agreement. Clause 19 provided that if either party was in breach of the agreement then the other party could terminate. Debenhams argued these words should be given their clear literal meaning but Dominion contended that they were not intended to allow either party to rely on a minor breach to determine a complex contract with many different terms. It claimed that a breach had to go to the very root of the contract to entitle the other party to terminate.

Fundamental breach

Any contractual document is to be construed with the aim of ascertaining the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the contract. In line with previous case authority, the court held that it could not have been intended that a relatively minor breach of an agreement containing a multitude of obligations could lead to its termination. The breach had to be fundamental.

Debenhams claimed it was such as it was to be implied that time was of the essence for the payment to be made. In particular, Debenhams relied on the fact that the payment had to be made before they commenced their fitting out works. The court disagreed as the premium was not linked to the costs of the fitting out and late payment would not prevent Debenhams undertaking these works.

The court also took into account the conduct of the parties in deciding against Debenhams. Dominion had made it clear from 25 February 2009 that it was encountering difficulties in making the payment in time but that they remained committed to the agreement and Debenhams had not given Dominion any warning that they intended to terminate or sought to make time of the essence for the payment before terminating.

The court therefore concluded that it was Debenhams, not Dominion, that was in fundamental breach of the agreement and was liable in damages as a consequence. Such damages will be based on the losses suffered by Dominion because of Debenhams' failure to enter into a 15-year lease.

Meanwhile, the inconclusive decision in Good Harvest, which seems to establish that it is not possible to require the guarantor of an outgoing tenant to guarantee the obligations of that tenant pursuant to its authorised guarantee agreement, has received much attention. To the disappointment of many, the case was settled before reaching the Court of Appeal. Practitioners should, therefore, take heed of the wide-reported implications of the case, which makes some hitherto standard practices unworkable or inappropriate.