Harold Benjamin - Property Review of 2009€¦ · 1. Don’t let the tail wag the dog. 2. Don’t bank on the money. 3. If considering taking over a dilapidations claim, lie down

Welcomewww.haroldbenjamin.com

Managing Partner

Introduction and Welcome

Keith Flavell

www.haroldbenjamin.com

Partner & Head of Commercial Property

Landlord & Tenant 2009The Year of Keeping Going

Sarah Paul


• Be proactive and be flexible

• Keep on top of arrears

• Landlord & Tenant (Covenants) Act 1995

What can Landlords do?


• Tenants “Re-Gearing”

• Pre-empt tenant exercising break

• Consider regular break clauses or a rolling break



• Draft variations carefully

• Can accidentally release a guarantor

• Use personal side letters for monthly payment of rent

• Take leases outside L&T Act 1954



• Seek to negotiate favourable lease terms

• Involve us at Heads of Terms stage

• ‘Shopping list’ of things to ask for

• Tailor to commercial needs your business

• Understand the commitment you are making –not box ticking exercise

• Money

What can Tenants do?


• Read the Lease Code and read the Tips for Tenants in the Occupier Guide

• Government report - general opinion that the Code was unnecessary –market could achieve its own balance and leases now flexible and fair

• The Lease Code tells you what to do and the current market gives you the opportunity to do it

What can Tenants do?


• Upwards only rent reviews

• Rent Year 1 £0Rent Year 2 £50,000Rent Year 3 £100,000Rent Year 4 £150,000Rent Year 5 £200,000

• Real yearly rent £100,000 (not £200,000)

• Not legally possible to ‘bin a break notice’

Traps for Tenants


• Inclusive Technology v Williamson [2009] EWCA CIV 718

• Redevelopment Section 25 notice served

• Landlord changes mind – didn’t tell tenant

• Tenant moved out

• Successful claim for misrepresentation against the landlord

Traps for Landlords


• An invaluable tool – especially in current economic climate

• Quick, safe and cheap• But - a tenancy at will means what it says• It can be terminated by either party at will

- which means without notice- Not for 3 months- Not terminate on 4 weeks notice

Tenancies at Will


• Continued throughout 2009

• Statutory moratorium – landlord needs consent of administrator or court to sue for rent, distrain or forfeit by peaceable re-entry

• Landlords can still pursue a guarantor or former tenant

Administrations


• Rent and deposits – trust or charge?

• R (Cukurova Finance) v HM Treasury [2008] EWHC 2567

• Financial Collateral Arrangement (No.2) Regs 2003

• Dis-apply moratorium

• To any “Financial Collateral Arrangement”

• Includes rent deposits

Administrations


• Landord can take money from rent deposit during an administration if:

- neither the landlord nor the tenant is an individual

- the rent deposit is in the form of a charge; and

- the rent deposit is in the ‘possession or control’ of the landlord

Administrations


• Somerfield Stores Limited v Spring (Sutton Coldfield) Limited [2009] EWHC 2384 Ch

• Held that a tenant cannot proceed with an application for a new lease against a landlord in administration without consent of administrator or High Court

Administrations


• Clarence House Ltd v National Westminster Bank Plc [2009] EWCA Civ 1311, [2009] All ER (D) 70 (Dec)

• SDLT (Stamp Duty) and Holding over under Landlord & Tenant Act 1954

• Update registered office at Land Registry

Warning Bells


• Name given for a landlord’s claim for breach by a tenant of its covenant to repair, decorate and often reinstate when a lease comes to an end

• Strategy

• True nature and reality of dilapidations

• Impact of current state of economy and property market

Dilapidations


• Both landlords and tenants often leave dilapidations too late – this can impact on costs

• Lease Code says landlords should notify tenants at least 6 months before end of lease

• Consider who other than tenant might be liable

Dilapidations


• Tenants – carry out the work or negotiate a money settlement?

• Landlord cannot make tenant carry out dilapidation works

• Once lease has ended landlord’s only remedy is money claim in damages at common law

• Some landlords will use damages to do works but some will have no intention of doing works

• Damages compensation not punishment

Dilapidations


• Only actual loss recoverable• Amount of damages not always the same as the cost of

the works• Number of factors and limitations including individual facts

and state of market• Starting point will be:-

- the reasonable cost of the works to comply with tenant’s obligations

- less any betterment- plus fees- plus irrecoverable VAT- possibly plus loss of rent whilst works carried out

(tricky in this market, evidence is crucial)

Dilapidations


• Landlord should ask itself:-

“Would a reasonable landlord who had the money in this market carry out the work?”

• If “yes” should recover cost subject to supersession and statutory limitation

Dilapidations


• Supersession is items of work that would be genuinely required to remedy the breach of a tenant’s repairing covenant but would be superseded by any works likely to be carried out by the landlord at or shortly after the end of the lease

• E.g. if landlord intends to install air-con

Dilapidations


• Section 18 of the Landlord and Tenant Act 1927 imposes statutory limitation on amount of damages

• Damages cannot exceed the amount by which the value of the reversion in the premises is diminished because of the breach and in addition that no damages can be recovered if it is shown that the premises would at or shortly after the end of the term have been or be pulled down or structural alterations made so as to render valueless the repairs covered by the covenant

Dilapidations


• Note - exception – statutory limitation does not apply to most decorating or reinstatement

• Whether statutory limit or not landlord can only recover actual loss

• E.g. obligation to reinstate the partitioning

Dilapidations


• Calculation of actual loss is where it can go wrong

• Schedule of dilapidations is not the end of the story – landlord has to prove loss

• Tenants – never take a landlord’s schedule of dilapidations at face value

Dilapidations


• Property Litigation Association pre-action protocol for dilapidations claims states:-

‘ A formal quantification of the landlord’s loss based on either a formal diminution valuation or an account of the actual expenditure or a combination of both must be provided by the landlord to the tenant prior to issuing proceedings’

• Landlord can prove diminution by doing works and letting building

• Landlord may need diminution valuation

• If neither can stumble

Dilapidations


• Costs are crucial factor in dilapidations litigation

• Nature of dilapidations is such that any litigation is unlikely to be settled entirely in favour of landlord or tenant

• Invariably tenant in some breach so some damages are awarded

• Tenant may not realise is paying both parties costs

• Conclusion

Dilapidations


Partner & Head of Commercial Property

Landlord & Tenant 2009The Year of Keeping Going

Sarah Paul


Dilapidations claims:

Peter Beckett FRICS

a) Why are they simple in principle?

b) Why are they expensive in practice?

In your pack

• A set of these slides

• Misconceptions in dilapidations *

• Uncertainty in dilapidations *

• A simplified Shortlands-type valuation

• The valuation in Shortlands

• Summary of the most complex valuation

* Half as long as Marx’s Das Kapital, and only twice as funny, I’m afraid

General advice to landlords

1. Don’t let the tail wag the dog.

2. Don’t bank on the money.

3. If considering taking over a dilapidations claim, lie down until the feeling passes.

4. Do the works, assuming they satisfy rule 1.

5. ... and I do mean the works!

6. Be reasonable.

General advice to tenants

1. Think well in advance of termination, and take advice.

2. Don’t assume the landlord has no claim.

3. Unless there are strong reasons not to, do the works.

4. Be reasonable.

General advice

• Did I mention “be reasonable”?

• A common situation is: L says “Full cost of works”; T says “No diminution”.

• Beware: the combined costs of a fully-fought claim usually exceed the award and the cost of works.

Type 1 case: cost of works

• The normal measure: logical, and the law

• Cost of works some indication of loss

• The first port of call in every case

• In a simple case (ie. most cases), cost = diminution

• In such a case, no need for a valuation

• The building surveyor can make a good first assessment.

1 E s timated rental value ("E R V") 29,500

2 Years ' purchas e in perpetuity at: 8.00% 12.5000

3 Inves tment value 368,750

4 Inves tor's acquis ition cos ts at: 4.75% 16,721

5 Gros s development value ("GD V") 352,029

6 S ale cos ts at: 2.75% 9,681

7 Net s ale proceeds 342,348

Target value: same in valuations A and B

Type 2 case: straightforward

Valuation A (in compliance): 50-week project

7 Net s ale proceeds 342,348

8 S cott s chedule work 0

9 L es s s upers es s ion 0

10 Net cos t of work attributable to the outgoing tenant 0

17+ Total cos t of work plus interes t on it 109,625

21 P rofit to purchas er at: 20.00% of GD V 70,406

22 Total deductions unrelated to purc has e price 180,031

23+ Value in compliance, adjus ted for interes t and acq cos ts 148,011


Valuation B (actual): 54-week project

7 Net sale proceeds 342,348

8 Scott schedule work 100,000

9 Less supersession 32,507

10 Net cost of work attributable to the outgoing tenant 67,493

17+ Total cost of work plus interest on it 193,033

21 Profit to purchaser at: 20.00% of GDV 70,406

22 Total deductions unrelated to purchase price 272,597

23+ Value in actual condition, adjusted for interest and acq costs 63,284


Valuation A: value in compliance with covenants on expiry 148,011

Valuation B : value in ac tual condition 63,284

D iminution in the value of the landlord's revers ion 84,727

B ut s ay £85,000

Diminution


• Not conventional valuation, but valuation analysis

• What does value mean?

• The logical relationship between diminution and the schedule

• The parallel worlds

• Probability; deferment; beneficial breaches.

Type 3 case: deeper analysis

Type 4 case: multiple futures

1 Portland Street, Manchester: before

Type 4 case: multiple futures

1 Portland Street, Manchester: after

Dilapidations claims:

a) Why are they simple in principle?

Because they are analytically linked to the schedule:

you just need a clear head.

b) Why are they expensive in practice?

Because everyone strikes a pose. From then on, it’s

litigation, in mind-numbing detail.

Final step (for the valuer): stand back.

First step (for the client):

It’s probably straightforward. Settle it now.

It’s all about costs if you don’t.

Peter Beckett FRICS

Beckett and Kay LLP

16 Savile Row

London

W1S 3PL

(020) 7439 6667

www.beckettandkay.co.uk

Partner & Head of Property Development

Development Land Acquisition

Chris Batty


A. LAND

B. ACCESS

C. NATURE AND WILDLIFE

D. SERVICES

E. PLANNING

General Headings


Access


Peter BillLondon Evening Standard

and Estates Gazette Columist

Managing Partner

Q & A

Keith Flavell


Thank You for Attending We look forward to seeing you

next time

Documents

Harold Benjamin - Property Review of 2009€¦ · 1. Don’t let the tail wag the dog. 2. Don’t bank on the money. 3. If considering taking over a dilapidations claim, lie down