Real World - Summer 2015
Welcome to the Summer 2015 edition of Real World from Dechert’s London Finance and Real Estate Group, keeping you up to date with recent developments in real estate law and practice.
In this issue:
- Government Consultation on Reforming the Electronic Communications Code.
- Enforcement of Restrictive Covenants Under a Building Scheme - Birdlip Ltd v Hunter and Other 2015.
- Construction Update: The CDM 2015.
- Energy Efficiency in the Rented Sector.
- Liability for Empty Rates Where Property is Being Re-developed: Newbigin (Valuation Officer) v SJ & J Monk 2015
Government Consultation on Reforming the Electronic Communications Code
By David Gervais
The Electronic Communications Code, set out in Schedule 2 to the Telecommunications Act 1984 and amended by the Communications Act 2003, has been much criticised over the last 30 years for being unclear, out of date and inconsistent with other legislation. The Code was introduced following the privatisation of British Telecom in the mid 1980s with a view to enabling electronic communications providers to construct their network infrastructure and to obtain rights over private land, in the absence of agreement with the landowner, on application to the County Court.
In early January 2015, the Government proposed some last minute amendments to the Infrastructure Bill (now the Infrastructure Act 2015) which would have introduced a new Code. However, on 22 January, the Government withdrew the proposed amendments to allow more time for consideration of the proposals.
At the end of February, the Department for Culture, Media and Sport (DCMS) issued a consultation document seeking views on reforming the Code with the stated aim to “promote network connectivity, expand coverage and take into account the legitimate interests of all parties." The consultation closed on 30 April and the DCMS is now considering the responses received.
The British Property Federation (BPF) has recently published its response to the consultation. On the whole the BPF is highly supportive of the draft revised Code, but it has highlighted a number of areas where, in its view and in the view of its members, the draft Code should be improved. The BPF’s concerns focus around the following issues:
- Contracting out – while the draft Code suggests that it should not be possible for landowners and operators to contract out of parts of the Code, the BPF’s view is that the parties should be free to contract out generally to ensure that landowners are willing to accept installations on their properties without fear of affecting future development plans.
- Valuation – the BPF is concerned that the provisions in the draft Code allowing the Secretary of State to change the basis of valuation for telecoms sites to facilitate expansion of networks in current “not-spot”1 areas could result in reduced or “no scheme” valuations becoming the norm and this is likely to result in landowners being deterred from entering into Code agreements generally.
- Sharing and upgrading – the BPF supports the rights of operators to share and upgrade their apparatus but is concerned that the Code does not allow sharing arrangements to be reflected in the calculation of market value for setting the rent payable by operators. The BPF has also suggested that any changes to the appearance of apparatus as a result of sharing or upgrading should require the landowner’s consent. The draft Code provides that no consent is required where there is “minimal adverse impact” on the appearance of the apparatus but the BPF feel that this wording is unclear and likely to cause issues in practice.
- Consistency with Landlord and Tenant Act 1954 – the BPF is concerned that the notice period of 18 months required to bring an agreement under the Code to an end is out of step with notice periods required to bring a lease to an end under the Landlord and Tenant Act 1954. They have also recommended that the period for service of a counter-notice and application to court by the operator should be reduced from 6 months to 4 months so as to minimise delays and the impact on development.
- Land Registration – the BPF have recommended that Code rights should be protected by registration at the Land Registry rather than by the creation of a new overriding interest. This approach is consistent with the Land Registry’s desire to reduce the number of overriding interests.
The DCMS’s response to the consultation is expected over the summer and we await with interest their proposals for addressing the often competing concerns raised by stakeholders such as the BPF. Whatever the outcome, it is likely that the revised Code will be an improvement on the current position and will no doubt be welcomed by all.
Enforcement of Restrictive Covenants Under a Building Scheme - Birdlip Ltd v Hunter and Other 2015
By Elizabeth Dale
Under a building scheme, where restrictive covenants are imposed on the original plot owners within a development for the mutual benefit of the plots, subsequent owners may enforce those covenants against each other.
In this case, the owner of a plot argued that there was no building scheme because there was no clear evidence as to the extent of the original development and no clear statement in the original conveyances that a building scheme was intended.
A company called Birdlip Ltd owned a property known as Little Orchards and obtained planning permission to build two new dwellings on part of the land. The adjoining property, Ashlea, was owned by Mr. and Mrs. Hunter.
The title to both Little Orchards and Ashlea contained restrictive covenants against building, and it was accepted by Birdlip that if these were enforceable then they would not be able to implement the planning permission. However, Birdlip contended that the restrictive covenants were not enforceable.
Mr. and Mrs. Hunter argued that the two properties were part of a larger building scheme and that they were therefore entitled to enforce the covenants against Birdlip.
Birdlip issued two sets of proceedings: one in the High Court, for a declaration that the restrictive covenants were not enforceable, and one in the Upper Tribunal (Land Chamber) for a declaration that the restrictive covenants should be set aside.
The properties had originally been built pursuant to a 1910 conveyance, and there had been other sales of plots both before and after that time. The restrictive covenants in the various conveyances were not all in identical form and not all of the sales had plans attached. Of those that did have plans attached, not all showed the development with identical boundaries.
What is a Building Scheme?
If a scheme of development exists, restrictive covenants may be enforceable by owners of individual plots and their successors in title against others in the same development.
There must be reciprocity of obligations between plot owners, and an intention to create such reciprocity, and the area covered by the scheme must be clearly defined.
The conveyances of the various plot sales may be made at different times and need not contain identical wording but the idea is that these covenants are mutually beneficial for the owners of the development as a whole.
The court is entitled to take extrinsic evidence into account to establish whether, at the time of creation of the scheme, it was intended that the covenants would be for the common benefit of purchasers.
The High Court held that on the balance of probabilities there was a building scheme. The court found that there was a common intention for all purchasers of plots under the original scheme to benefit, and therefore their successors in title were also subject to and benefited from the covenants. The court also took into account other extraneous matters, such as the fact that previous residents of the estate had applied unsuccessfully to the Lands Tribunal to set aside the restrictive covenants, and evidence that plans may have been attached to conveyances which were no longer attached.
The fact that the intention to create a building scheme and the extent of the original development could not be definitively established by reference to the original conveyances – and may have changed slightly over subsequent years and sales of plots – did not bar the existence of a building scheme. However, it was crucial that the respondents were able to produce other evidence that a building scheme had been intended and that the covenants were intended to be for the mutual benefit of the plot owners.
Construction Update: The CDM 2015
By Navpreet Atwal
The Construction (Design and Management) Regulations 2015 (“CDM 2015”) came into force on 6 April 2015 and replace the Construction (Design and Management) Regulations 2007. The CDM 2015 are intended to ensure that construction works are carried out safely.
Main provisions of the CDM 2015
1. They affect all construction projects, including small projects or residential projects.
2. The person who is the client under the CDM 2015 has various duties. There may be more than one person who is a client – for example, where a tenant is carrying out works to its premises, the landlord and the tenant may both be a client. However, the CDM 2015 allow one party to “agree” to be treated as a client under the CDM 2015. The wording is slightly different from the 2007 regulations, which had a similar provision but referred to the party making an “election” to be treated as a client.
3. The CDM 2015 places greater responsibility on the client to check and review the health and safety arrangements in place throughout the duration of the project including:
- the appointment of a contractor to act as “principal contractor” if there is more than one contractor for the project. If the client does not do so, then, except in the case of a “domestic” (i.e. non-business) client, the client itself will be the principal contractor;
- providing pre-construction information to every contractor and designer;
- the contractor, or principal contractor if there is more than one contractor, must draw up a “construction phase plan” which sets out health and safety arrangements and site rules. The client is required to review the construction phase plan throughout the duration of the project as necessary;
- if there is more than one contractor, the client must appoint a person to act as “principal designer” under the CDM 2015. If the client does not do so, then, except in the case of a domestic client, the client itself will be the principal designer under the CDM 2015. The principal designer must prepare a health and safety file for the project which must be kept under review and revised from time to time as necessary;
- an ongoing requirement to check that the principal designer and principal contractor comply with their duties; and
- a duty to “take reasonable steps to satisfy themselves that the designer or contractor” appointed “have the skills, knowledge and experience” necessary to fulfil their role and to consider the organisational capability of those appointed.
4. References in the CDM 2015 to the “principal designer” replace the definition of “CDM co-ordinator” in the 2007 regulations, but the two roles are not exactly the same. A designer may be an architect, quantity surveyor, interior designer or another person who carries out any “design” relating to the works. This may include drawings, design details, specifications, bills of quantity and calculations.
5. The client cannot delegate its duties as client under the CDM 2015, except in the case of domestic (i.e. non-business) clients, where the contractor will be liable under the CDM 2015 for the duties of both the contractor and the principal designer.
6. Previously the CMD co-ordinator (now the principal designer) was responsible for notifying the project to the Health and Safety Executive (“HSE”). Under the CDM 2015, this duty falls on the client. Subject to limited exclusions, a project will be notifiable to the HSE in the following circumstances (similar to the 2007 regulations, except for the words in bold which mean that fewer projects will be notifiable):
- if the project is scheduled to last longer than 30 working days and has more than 20 workers working simultaneously at any point in the project; or
- exceed 500 person days.
7. There are transitional and saving provisions in relation to projects which began before 6 April 2015. The client must appoint a principal designer (in place of an existing CDM co-ordinator) if the project does not come to an end before 6 October 2015. In addition, the client must appoint in writing a contractor as principal contractor (unless previously appointed) as soon as practicable after 6 April 2015. The CDM co-ordinator must give the health and safety file and all other relevant material to a principal designer, if one is appointed.
Energy Efficiency in the Rented Sector
By Elizabeth Alibhai
The UK government has a target to reduce greenhouse gas emissions by at least 80% by 2050, compared to the 1990 baseline. As domestic buildings were responsible for 25% and non-domestic buildings for 12% of total carbon emissions in 2009, improving their energy efficiency is central to achieving the target.
Pursuant to requirements in the Energy Act 2011 (“the Act”), the Department of Energy and Climate Change (“DECC”) drew up regulations prescribing a minimum level of energy efficiency for the domestic and non-domestic private rented sector in England and Wales.
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“the Regulations”) became law on 26 March.
Subject to certain exemptions, landlords of private rented properties may not:
- grant a new tenancy/renew an existing tenancy after 1 April 2018;
- continue any existing letting of domestic property after 1 April 2020; or
- continue any existing letting of non-domestic property after 1 April 2023;
where a building’s energy efficiency falls below the minimum standard, being an Energy Performance Certificate (“EPC”) rating of “E”.
The Regulations apply to all buildings requiring EPCs (broadly those with heating or air conditioning systems, except those due to be demolished).
Domestic private rented property encompasses property let on an assured or regulated tenancy excluding certain low-cost social housing, including certain agricultural tenancies. Non-domestic private rented property is property let on a tenancy which is not a dwelling.
Exemptions and Non-Compliance
These are few, but include:
- where third party consent is required for any necessary works, but is withheld;
- where an independent surveyor confirms that necessary works will reduce the property’s market value by more than 5%;
- for non-domestic properties, leases that are either under 6 months (unless already renewed twice) or originally granted for over 99 years; and
- where the cost of necessary works (including interest) exceeds the expected energy savings (“the golden rule”). For non-domestic property, this is over a maximum seven year period.
Where a landlord relies on an exemption to let a property, details should be added to an online exemptions register, which will be open to public inspection and used by local authorities to monitor compliance.
Where the Regulations are breached a tenancy will remain valid but penalties will apply. For example, renting out a sub-standard domestic property for over three months will attract a fine of up to £4,000. The fine for renting out a non-domestic property for the same period will be the greater of £10,000 and 20% of the property’s rateable value, capped at £150,000. In each case, the breach will be published on the register, with the additional reputational damage.
Landlords will enjoy a six-month grace period for improvements where they are not at fault for delayed compliance, for example where a lease is granted pursuant to a court order or by operation of law.
The effect of the Regulations will be far-reaching. Approximately 13.5% of all private rented properties currently have an EPC rating of “F” or “G”, rising to 20% in the context of commercial property.
Energy efficiency is likely to feature much more prominently in investment pricing, rent reviews and lending decisions.
Prospective landlords should implement necessary changes in good time to take advantage of void periods and on-going maintenance and plant renewal.
Consideration should be given to improving properties beyond the minimum standard, where appropriate, as the minimum “E” level of energy efficiency is expected to be subject to gradual increase over time.
Liability for Empty Rates Where Property is Being Re-developed: Newbigin (Valuation Officer) v SJ & J Monk 2015
By Scott Curtis
The Court of Appeal has ruled that rates will be payable unless a vacant building is beyond economic repair.
Liability for empty rates for empty properties is governed by the Local Government Finance Act 1988 (LGFA 1988). If a property becomes unoccupied, the owner does not have to pay rates for three months (shops and offices) or six months (industrial or warehouse premises). Once this period has expired, full rates are payable, subject to some exceptions.
In this case, the owner planned to re-develop the property as 3 separate units and had removed various non-structural items including the comfort cooling system, electrical wiring, suspended ceiling and sanitary fittings. The owner argued that, since the property was unfit for beneficial occupation, it should not be liable for rates.
The LGFA 1988 sets out various assumptions which are to be used by the rating officer to assess the rateable value. These include an assumption by the officer that, if a tenancy of the property were to be granted, then before the tenancy commences the property is in a state of reasonable repair, but excluding any repairs that a reasonable landlord would consider to be uneconomic (paragraph 2(1)(b)).
The Upper Tribunal (Lands Chamber) held that, since the property was not capable of beneficial occupation, the property had a nominal rateable value of £1.
The rating officer, Mr Newbigin, appealed to the Court of Appeal on the basis that, on the date of his valuation, the property was in a state of disrepair but that, faced with a choice between repair and doing nothing, a hypothetical landlord would carry out the repair works necessary to put the property back into repair. Therefore, the repairs would be economic and should be taken into account in valuing the property as being in a state of reasonable repair under paragraph 2(1)(b) of the LGFA 1988.
The owner argued that the refurbishment works were alterations and improvements, and could not be called repairs. There was no intention to recreate the original layout.
The Court of Appeal agreed with Mr Newbigin and held that, on the facts, the replacement of the items which had been removed would be “repair” and they could be put back economically. It did not matter whether in fact they would be put back, or if the property would be used for the same purpose in the future. The court commented that some of the valuation assumptions in the Valuation Office Agency’s Rating Manual, which had been relied on in court, were incorrect.
Repairs had the usual landlord and tenant meaning, and on the date of valuation by the rating officer the property should properly be valued as being in a reasonable state of repair. On this basis, the property was liable for rates.
The case is now the subject of a further appeal to the Supreme Court but, for the time being, the effect of the Court of Appeal judgment is to make it more likely that landlords will be liable for rates while an empty building is being re-developed. If the cost of re-development goes beyond economic repair, then landlords may avoid liability, but this will be a question of fact in each case.