Real Estate Briefing

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• Running on empty 
• VAT: option to tax land and buildings 
• Retail tug of war 
• Tim Keen but Green - proprietary estoppel 
• Branding boost for shopping centres 

Running on empty by Annabel Pyke

In the current economic climate, increased holding costs for rental voids and increased base costs in development appraisals are unwelcome.  Nevertheless, as highlighted previously, changes to business rates for vacant properties took effect in April.

The current business rate “holiday” is three months for vacant commercial property (offices/retail) and six months for vacant industrial property.  After that, full rates are payable.

What follows is an overview of avenues for landlords, developers and tenants to explore, in mitigating business rates liability on vacant stock.

Short-term lets: where the rates holiday has ended, so full rates are payable on vacant property, a short-term letting of the property (for a period of six weeks or more) will serve to “re-set” rates, so as to enjoy a further business rate holiday following the end of the letting.  This pattern can be continued if required. 

Renting out property for TV/film location work is one area where we have recently seen activity.  Use of seasonal lettings, such as short-term lettings of shopping centre voids in the pre-Christmas period, is another possibility. 

Clearly, this “re-set” of the relief will be more valuable for industrial property, where there is then a further six month rates holiday. 

For re-lettings of part of a vacant property, the approach taken by the local authority in applying a rates holiday in this situation should be checked in advance.

Let property: responsibility for rates usually rests with the occupier, by the terms of its lease.  Tenants will naturally wish to exercise a right to break or surrender leases of properties which are surplus to requirements or, if that is not possible, to underlet to reduce overheads.  A landlord will not, however, wish to take back property in a slow market if there is no ready market for re-letting.  It risks being liable to full rates after the appropriate rates holiday ends and so should avoid surrender or forfeiture for that reason.

Landlords may wish to reconsider terminating the lease, even if the tenant is insolvent, so as to avoid rates liability.  If the (insolvent) tenant is a company in administration or liquidation, and the property is unoccupied, then there is a special exemption from rates for the tenant company in that situation.  Landlords should therefore resist pressure from the insolvency practitioners dealing with the company's assets, to accept a premature surrender where there is no rental appetite for the property, since the (insolvent) tenant can claim the exemption for its rates liability.

Site assembly - bringing forward demolition: where vacant residential/other property has been acquired as part of a site assembly, consider early demolition.  Rates are not payable on open land.  As with any vacant property, the requisite consents will need to be obtained to do so, and the site will need to be fenced in to avoid trespassers/ squatters.  This is something under active consideration by local authorities, if press reports are to be believed, for properties previously earmarked for regeneration, given the more challenging economic climate and its effects on developers' appraisals.

Speculative development - defer PC: local authorities can serve a so-called “completion notice” on new development nearing completion (not earlier than three months before the development will be ready for occupation), to trigger liability to rates on new development.  This has not been used by many authorities, so far, but if undertaking any ongoing speculative development it may be worth considering reprogramming/ rephasing, to avoid the possibility arising.

A word of caution: the Government did not initially put in place anti-avoidance provisions, but has reserved its right to do so subsequently, should it consider that to be necessary (presumably if overt rates avoidance activity is seen).

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VAT: option to tax land and buildings by Michael Fluss 

1 June 2008 saw the introduction of the new VAT option to tax regime.  The new regime is similar in many - but, crucially, not all - respects to the former VAT “election to waive exemption” regime (which it replaced). 

Key changes

• Any person intending to acquire (eg by way of sale or lease) a building for use as a dwelling or for other residential or charitable purposes will, in general, need to certify that intended use (to the seller/landlord) before the price is legally fixed in order to disapply any option to tax exercised by the seller (or landlord) on the building. 
  
  
• The new regime allows a person to opt to tax all interests in land or buildings which it acquires, by making a real estate election (“REE”), as an alternative to opting to tax (and notifying HMRC accordingly) on a property-by-property basis.  Notice of the REE needs to be given to HMRC (within 30 days) and takes effect automatically in relation to all properties subsequently acquired by that person.
  
  
• The period for revoking an option to tax is extended from three to six months (ordinarily, once notified to HMRC, an REE cannot be revoked (other than by HMRC in certain circumstances)).
  
  
• A new building constructed by a person on land which that person has opted to tax will not be treated as opted by that person if that person chooses to exclude the new building from the effect of the option and notifies HMRC accordingly before practical completion or, if earlier, the grant of any interest in, or first use of, the building.  Provision is also made under the new regime for an option exercised before 1 June 2008 by a person on a building only to be capable of being treated by that person as revoked if the building is demolished.
  
  
• The installation and operation of an ATM on opted property by a development financier (or connected person) does not by itself cause the option to tax to be disapplied.

Key practical points

• Where buying or taking a tenancy of a previously VAT opted commercial building, it is important to ensure, where use of the building as a dwelling or for (other) residential or charitable purposes is intended, that a certificate of the intended use is provided to the seller/landlord at any time before the price is legally fixed (ie before exchange and, if possible, at the heads of terms stage).  Failure to provide the certificate before the price is legally fixed may result in the buyer/tenant incurring significant irrecoverable VAT.  Where selling or letting such a building, however, it is important to ensure that the buyer or tenant discloses early in the negotiations (with appropriate certification) whether the building is to be used as a dwelling or for (other) residential or charitable purposes.  This is to allow the seller or landlord sufficient time to ascertain what level of adjustment (if any) to the price is needed to compensate for any restriction in VAT recovery for the seller/landlord as a result of any disapplication (by virtue of any certificate being provided by the purchaser/tenant) of the seller's or landlord's option to tax.
  
  
• The introduction of the REE is a welcome compliance and administrative simplification of the option to tax procedure, especially for large companies and groups which acquire real estate on a regular basis.  Care though, will need to be taken if the company (or VAT group) in question expects to acquire properties which could be let to a VAT exempt (or partly exempt) tenant such as a bank.  In these circumstances, it would appear sensible for the company (or its VAT group) not to make the REE, unless it can be comfortable that it will be possible for another company in its commercial, but not VAT, group to acquire properties for VAT exempt use.
  
  
• Where a new building is to be constructed on opted bare land, consideration should be given to whether it is possible, and, if so, desirable, to exclude the building from the effect of the option.  Conversely, where an opted building is to be demolished or destroyed, consideration should be given to whether it is possible, and, if so, desirable to treat the option as revoked once the building is demolished.

Effect of new option to tax regime

The new rules create a level playing field (as the risk to the seller or landlord of the option to tax being unexpectedly disapplied is removed by the certification of intended use required to be provided by the buyer/tenant).  The new rules (in particular, the introduction of the REE) also create VAT planning opportunities, which can best be realised by upfront (rather than post acquisition/disposal) structuring.  The relaxation of the disapplication rules in relation to ATMs is helpful and the extension of the period of time in which the option to tax can be revoked following exercise introduces a greater degree of flexibility.  The new rules are, therefore, broadly welcome (although care will need to be taken to ensure that, where applicable, the newly introduced compliance obligations are properly discharged).

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Retail tug of war by Anne-Marie Lusty 

Trading conditions continue to be challenging and retail insolvencies are on the increase.  The insolvency procedure currently in vogue is administration (introduced by the Insolvency Act 1986 and modelled on Chapter 11 of the US Bankruptcy Code) and in particular, pre-packaged administrations (“pre-packs”).

So what does administration mean for landlords and tenants?

A tenant company which goes into administration benefits from a statutory moratorium, to prevent enforcement action by creditors.

This means that a landlord cannot:

• forfeit by peaceable re-entry, for breach of the lease; or
  
  
• institute/continue any legal process against that company (including levying distress or forfeiture proceedings),

without permission either from the administrators or the court.

Whether a court will allow a landlord to forfeit, will (broadly) depend upon whether:

• the landlord can demonstrate any financial prejudice;
  
  
• forfeiture would impact on the administrators' strategy to sell the business for best value.

Conduct by each party may also be a factor which the court weighs in deciding whether to allow forfeiture.  In practice, it is rare for a landlord to get such an order where the tenant is in administration. 

Pre-packs

As the name suggests, in a pre-packed administration a sale of a package of the company's assets is negotiated (privately) in advance of the appointment of administrators and concluded immediately following that appointment.  This is to ensure that the company's goodwill, employees and supply lines are preserved.  It also achieves a fundamental objective of administration: to achieve a better result for creditors as a whole than an immediate winding-up. 

Pre-packs - leasehold property issues

In a pre-pack situation, no contact is customarily made by administrators with affected landlords before the administration takes effect, but only on appointment.  This avoids landlords acting precipitately, although active tenant monitoring by landlords/agents may spot early warning signs (eg credit insurers withdrawing support from a retailer's suppliers).

If all assets are transferred to the buyer on sale, the buyer will usually be an SPV with no trading history. Without more, this may offer a landlord little comfort and it will usually be reasonable for a landlord to require financial information and some form of financial security.

Since continued trading is essential for retailers, the buyer will take up immediate occupation of the properties for that purpose, under a licence to occupy/management agreement.  That is of itself usually a breach of the alienation covenant, though the landlord may only become aware when application for assignment is made.

A pre-pack may involve “cherry picking” of assets.  Those of no value remain with the (insolvent) company.  If this includes leasehold property, landlords must claim in the subsequent winding-up of the company, usually receiving only a fraction of monies owed. 

So, what tactics should be considered by a landlord who wants to terminate the lease by forfeiture, and what advice is there for administrators to resist that for property required for the business?

Tactics - landlords

• Don't waive any breach of the lease, by accepting rent or otherwise acknowledging an ongoing landlord and tenant relationship (eg discussing dilapidations).
  
  
• Request confirmation from the administrators of who currently occupies the property.  Failure to answer/answer truthfully may count against the administrators when it reaches court.
  
  
• Gather evidence on damage to the reversion (eg by unlawful occupation by the buyer), and the likely cost of recovering vacant possession.
  
  
• Establish the consideration attributed to the property by the sale agreement to the buyer?  If nominal only, that suggests the property is not key, so forfeiture may not impede the administration.

Tactics - administrators 

• Offer landlords the rent in respect of properties required for the business during administration; it may diminish a landlord's claim of financial prejudice.
  
  
• Ensure the assets sale agreement obliges the buyer to supply all the landlord can lawfully require as a condition of giving its consent to an assignment.  “Frontloading” the application, including the offer of a rent deposit/guarantee, may go some way to alleviating landlords' concerns.
  
  
• Attribute an appropriate value to each property to be transferred in the sale agreement, to demonstrate they are required for the business and of value to creditors on sale.

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Tim Keen but Green - proprietary estoppel by Ed Monniot 

BLP client “Tim Keen But Green” has verbally agreed to enter into a contract to acquire and redevelop a block of flats for £12 million.  In reliance on this, and with the approval of the landowner, Tim has spent £200,000 obtaining planning permission to develop the property as six town-houses.  Now that planning permission has been granted, the landowner is refusing to enter into a contract to sell the property to Tim.  Tim calls BLP for advice.

Tim: I'm furious about this.  Can I enforce our verbal agreement?

BLP: Unfortunately, you don't have a contract with the landowner.  Any contract for the sale of land must comply with certain formalities in order to be binding.  It must be in writing, contain all the terms relating to the sale and be signed by both parties.  Your verbal agreement with the landowner doesn't satisfy these requirements and so there is no binding contract for you to enforce.

Tim: But surely the landowner is prevented from walking away from the deal at this stage?  I've spent a fortune getting planning consent for the redevelopment and he's never indicated that his intention to sell the property to me has changed.  He even came with me to the planning committee, where the resolution to grant planning permission was granted.

BLP: Well, there is a principle called “proprietary estoppel”.  It was developed to allow the courts to intervene in cases where it would be unfair to uphold a party's strict legal rights and to award damages or to order a landowner to create a property interest even though the strict formalities haven't been complied with.

Tim: When does this principle apply?

BLP: It applies if:

• a landowner has induced, encouraged or allowed a party to believe it has (or will have) some right or benefit over the landowner's land;
  
  
• that party has relied on this belief and in so doing, acted to its detriment to the knowledge of the landowner; and
  
  
• the landowner then tries to take unconscionable advantage of the party by denying the party the right or benefit that it expected to have.

Tim: Fantastic, that's exactly what has happened to me!

BLP: I'm afraid that it won't work in this case.

Your expectation was that following the grant of planning permission, the landowner would enter into a formal contract with you for the sale of the property but if it had proved impossible for you to agree the remaining terms of the contract, the expectation was that either of you could walk away.

For proprietary estoppel to apply, you would need to be able to show that you expected to acquire a definite right over the landowner's property immediately on the grant of planning permission.  For example, in this case you would need to be able to demonstrate that you expected the property to be transferred to you immediately following the grant of planning permission.

Tim: So is there any way that I can recover the costs I have incurred in obtaining the planning permission?

BLP: It is likely that the court would consider that the landowner has been unjustly enriched by its behaviour.  It might award you damages to cover your costs in obtaining the planning permission.  It would not, however, reflect the fact that you have lost the chance to benefit in the uplift in value of the property due to the grant of planning permission.

Tim: I see.  Next time I'll consult BLP when I agree the deal and put a formal contract in place first.

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Branding boost for shopping centres by Ian de Freitas 

Seeking registered trade mark protection for names and logos used in real estate developments is becoming increasingly common. However, a decision by the Trade Marks Registry to refuse protection for names and logos used by owners and operators of shopping centres appeared to leave that sector without trade mark coverage for core services.  This called into question the value of the investment made in branding.  Thankfully, the courts have recently overturned this decision so allowing effective protection.  This is causing owners and operators of shopping centres to re-assess the trade mark position for their core service of bringing together a variety of retail and other outlets.

The case involved names and logos used by Land Securities, Capital Shopping Centres and Hammerson.  They each made registered trade mark applications on materially the same basis, namely: “The bringing together for the benefit of others, of a variety of retail outlets, entertainment, restaurant and other services, enabling customers to conveniently view and purchase goods and services and make use of such facilities in a shopping centre or mall;….”

On appeal from the Registrar's refusal of protection, the Judge concluded that:

• to be registrable as a trade mark, the services covered normally have to be provided for remuneration;
  
  
• the activities of a shopping centre operator do fall within this definition;
  
  
• a shopping centre operator is undoubtedly providing services in bringing together a collection of shops and other facilities; and
  
  
• the trade marks used fulfilled their essential function of distinguishing the services of one shopping centre operator from another and guaranteeing the origin of the services to which the mark is applied.

The Judge therefore decided that there was nothing in principle to prevent the registration of trade marks for these services.  However, he also decided that the specification put forward by the parties did not sufficiently clearly indicate the services that they were intended to cover, with use of phrases such as “and other services” and “such facilities” being too broad and non-specific.  The Judge therefore remitted the case to the Trade Mark Registrar for the specification of the services covered by the application to be re-worded to make them clearer.

It might seem strange that a manufacturer of baked beans can get trade mark protection for the name appearing on its tin or a credit card company can obtain coverage for the name and logo appearing on its cards, but that there should be objection to affording protection to the core services offered by the owners/operators of shopping centres.  Just as much effort can go into building the brand in that sector and the marks that are associated with it, so why not offer effective protection?  Sensibly, the technical objections to registration have now been lifted, although the decision illustrates that care is needed as to how to describe (clearly) the services covered by the trade mark.

Registered trade marks offer the best form of protection against someone else using the same or a confusingly similar name or logo.  They are relatively cheap to obtain.  Real estate investors are increasingly insisting on proof that registered trade marks are in place to protect the goodwill associated with a development.  Because of this decision they are likely now to be looking to see that the core services offered in a development are adequately protected.  So, if you already have registered trade mark protection we suggest you dust down your trade mark certificates to check that they still offer the best form of protection in light of this ruling.  If you haven't got registered trade marks yet, and want properly to protect the goodwill you have developed, then it would be sensible to consider investing in registrations for your core names and logos.

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Contacts:

Real Estate
Elizabeth Thompson
elizabeth.thompson@blplaw.com

Planning
Ian Trehearne
ian.trehearne@blplaw.com

Tax
John Overs
john.overs@blplaw.com

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