Warren Gordon

Property Section Committee,

The Law Society

Commercial Property Update 2017

Third Edition of Standard Commercial

Property Conditions

• New Third Edition.

• Try to use it without making changes.

• More sophisticated provisions.

• Balanced approach between seller and buyer continues.

• New Conditions launched in May 2017.

Special conditions

• Special conditions and front page in the Law Society/Oyez Contract are irrelevant for many

firms’ standard contracts.

• Part 1 of the Conditions on the inside pages is incorporated into firms' contracts, subject to

variation by the contract. Part 2 of the Conditions is not usually incorporated into the contract.

• Anything in the Special Conditions of the Law Society/Oyez Contract needs to be expressly

incorporated, otherwise it will not be included in firms' contracts.

• So expressly provide with a list if sale includes chattels (known in the Conditions as "contents")

or excludes fixtures. Condition 12 deals with Contents.

• Expressly provide if money is not to come from a conveyancer's account (it is now a

requirement of the Conditions that money comes from a conveyancer's account).

• Also expressly include new statement "Neither party can rely on any representation made by

the other, unless made in writing by the other or its conveyancer, but this does not exclude

liability for fraud or recklessness" – most firms have something to that effect in their contracts

(Morgan v Pooley).

• The Special Conditions also include a limited title guarantee alternative.

Payment

• Definition of "direct credit" from 2nd edition is replaced.

• 3rd edition states that money is to be paid by electronic means from a conveyancer's account at

a clearing bank to the seller's conveyancer's account (not account nominated by seller's

conveyancer) (Conditions 3.2.2 and 9.7).

• Money due on completion is to be paid in same day cleared funds (not requirement for deposit

payment). CHAPs (which costs between £20 and 30) is same day clearance; BACs (which is free)

clears within 3 working days.

• CHAPs' opening hours were extended in June 2016 which can mean that deadlines for customer-

to-customer payments are put back for up to an additional 1 hour 40 minutes to as late as

17:40, and 18:00 for bank-to-bank payments. No impact on the Conditions.

• Where a deposit of less than 10% of the purchase price (or no deposit) was paid by the buyer,

the Conditions reinstate the requirement for the buyer to bring the deposit up to 10%, if it

receives a notice to complete (9.8.3).

• The deposit payment and holding Condition does not apply to an auction sale (3.2.2).

VAT

• The default position in Part 1 of the 2nd Edition was the sale is not a taxable supply.

• The default position in Part 1 of the 3rd is there is a VAT standard rated supply

(Condition 2).

• The optional Part 2 Conditions allow for:

– Sales that are not a taxable supply (Condition A1)

– Transfers of a going concern (A2) – includes seller's warranty that it is using the

property for the business of letting to produce rental income.

• Need to expressly incorporate Part 2 Conditions if they are to be used.

• References to "option to tax" include "electing to waive exemption".

• No other substantive changes to the VAT Conditions.

Capital allowances

• New Condition on capital allowances among the more significant revisions. It is Condition B in

Part 2 and needs to be expressly incorporated.

• Condition reflects changes to Capital Allowances Act 2001 from April 2014.

• Key impact of the changes is that for a buyer to obtain the benefit of capital allowances, the

relevant “past owner” (usually, the seller) must have "pooled" the fixtures (in addition to

entering into the "section 198 election").

• “Pooling” means including the fixtures in the capital allowance pool in a tax return for a

chargeable period beginning on or before completion of the sale.

• Information is key for the buyer and the seller agrees to provide this and cooperate.

• If the seller has claimed allowances, the seller and buyer on completion will jointly make the

section 198 election. Special Conditions specify the amount of the purchase price apportioned

to fixtures.

• If the seller is not entitled to claim allowances, but the buyer wants to claim, the seller is

required to use reasonable endeavours to trace information about historic expenditure from the

seller's predecessor, who most recently incurred the expenditure. The buyer needs this

obligation under the new regime to be able to claim available capital allowances in respect of

such historic expenditure.

Rent review and pending lease

renewals

• Rent reviews where seller is landlord or tenant – on actual completion, provisions

requiring seller and buyer to seek approval on rent review figure cease to apply if

the review date is more than 2 years before the contractual completion date.

• As a matter of general law, it is the buyer who benefits from/is liable for the whole

of any uplift if and when that (or any) review is agreed or determined after actual

completion.

• Condition 9.3.5 deals with any consequential adjustments to the apportionments.

• There is a new Condition 6.2 for the negotiation of or proceedings relating to

pending lease renewals where seller is landlord. Neither seller nor buyer can agree

the amount of rent (including interim rent) payable before actual completion

without the other's approval. Apportionment provisions extend to pending lease

renewals and include apportionment of any allowance due to the tenant.

• No change that buyer receives or is liable for any sum for the apportionment day.

Leasehold title

• Transfer will include a statement that covenants in section 4 of the Law of Property

(Miscellaneous Provisions) Act 1994 do not extend to any breach of tenant's covenants relating

to the property's physical state (7.6.4).

• Seller is obliged to give buyer copies of all correspondence with reversioner relating to

obtaining its consent (11.3.2(a)(ii)).

• Condition 11.3.3(a) caters for the buyer (as prospective tenant under a new sub-lease) being

obliged to covenant with the reversioner to comply with the tenant's covenants in the sub-

lease.

• Tidying up of mechanism for postponing completion if reversioner's consent has not been

obtained by the original (contractual) completion date. Postponement until 5 working days

after seller gives notice that consent has been given or a court has declared that consent was

unreasonably withheld. Parties can rescind at any time after 6 months (was 4 months in 2nd)

from the original completion date, if consent still not given/no such declaration (11.3.5 and

11.3.6).

• Some have expressed concern about whether the seller's obligation to use all reasonable efforts

to obtain the reversioner's consent (11.3.2(a)(i)) imputes an obligation to apply to court for a

declaration that consent has been unreasonably withheld. Even if it does, that does not seem

unreasonable and is envisaged by the drafting of the rest of the Condition.

Insurance

• Express statement that the buyer takes the risk from exchange (8.1) (so buyer still

has to complete even if property destroyed before completion).

• New seller's obligation where it is a leasehold title and a landlord insures.

– The seller is to use reasonable efforts to ensure that the insurance is

maintained until completion (8.2.5(a)).

– If the property is damaged before completion, the seller is to assign to the

buyer on completion any rights that the seller has in the policy money

(8.2.5(b)). For a typical rack rent lease, there will be no rights and it will only

be valuable, usually longer term leases where this provision will be relevant.

• Seller has no responsibility to arrange for insurance for a contractual purchaser's

loss of rent following completion (8.2.7). This is a reminder to the buyer to ensure

it has insurance for such loss of rent if the property is destroyed before completion

– this would not be covered by the payment of proceeds provision 8.2.2(f).

Other matters

• Ready, able and willing to complete if it would be (rather than could be) (1.1.3(a)).

• Conditions allow for possibility of valid email service if an email address for a party is expressly

given in the contract for that purpose (1.3.3(b)).

• Contracts (Rights of Third Parties) Act 1999 is excluded (1.5).

• Matters affecting the property – the 2nd edition stated that the buyer is not subject to

"monetary charges or incumbrances". The 3rd refers to "mortgages" which means a mortgage or

charge securing the performance of any obligation (whether or not for the payment of money).

The idea is that the buyer should not be subject to the seller's mortgage, but there may be

other monetary obligations that can legitimately burden the buyer.

• Seller no longer has to prove the property's exact boundaries or who owns boundary features

(7.4.1(a) and (b)).

• Notices to complete can only be given after the latest time for receiving money on the

completion date (9.8.1). Avoids giving of notices on the morning of completion date.

• Reversionary interests in flats – auction sale part more clearly identified (Part 2, Condition C).

Manorial rights and other rights to

mines and minerals

• Derivation of manorial rights, in particular mines and

minerals.

• No requirement for registration of manorial rights at

HM Land Registry.

• Often a matter of guesswork whether a property is

affected.

• Sale of property may not include the minerals beneath

the surface.

• Interference with development of land.

Establishing ownership of mines and

minerals

• Registration of mines and minerals held apart from the surface is not compulsory,

except where there is a registrable disposition of such mines and minerals.

• Ownership of mines and minerals may only be recorded in private physical

documents.

• Rebuttable presumption mines and minerals included in registered title of surface

land.

• However, Land Registry will not pay compensation if not included, unless specific

note on title that they are included.

• More often there is a note that they are excluded.

• Uncertainty leads to disclosure in certificates of title.

• Searches of Index Map will help, but position may change prior to completion.

• Priority searches do not help and the surface owner will not be notified of a

qualified mineral title.

Problem properties

• Greenfield or brownfield development sites on rural or edge of

town land.

• Land in an area that has been subject to mine workings.

• Land owned by the Crown, Church of England or old landed

estates.

• Excavating on a development site is potentially a trespass against

the owner of the mines and minerals.

• The threat of an injunction can lead the mineral owners to seek

ransom payments from developers.

Solutions

• No watertight solutions but greater assurance can be obtained.

• Enquiries to ascertain awareness of third party claims.

• Search of index of franchises of little use – can provide false comfort.

• Repeat SIM shortly before exchange (and possibly also completion).

• Greater protection for buyer or lender for valuable consideration from 13 October

2013. Manorial rights ceased to be an overriding interest.

• However, certain exceptions – pre-1925 rights; Crown/Coal Authority.

• Lender exercising power of sale to avoid manorial rights.

• Substance may not be a mineral i.e. it may not be economically recoverable.

Surveys may assist.

• Insurance. Bear in mind negotiations with minerals owner puts at risk insurance.

• Specialist Counsel’s advice on likelihood of injunction if development.

Scope of an easement – Gore v

Naheed

• Can the beneficiary of an easement use it for land other than the

dominant land?

• Gore v Naheed, a Court of Appeal decision from May 2017.

• Provides much needed clarification of confusing case law.

• Decision may assist when interpreting easement drafting that does

not appear to benefit particular land.

• Is the use of that land subsidiary or ancillary to the use of the

benefiting or dominant land?

Facts and issues

• Conveyance right “to go and return over the driveway for all purposes

connected with the use and occupation of the granary but not further or

otherwise”.

• Granary but not an adjoining garage stated to benefit from right.

• Gore was owner of Granary and adjoining garage.

• Adjoining owners (Naheed and another) obstructed access to garage.

• Gore sought injunction and damages.

• Adjoining owners argued that the easement did not benefit the garage

and, therefore, it was not unlawful to obstruct access.

• County Court found for Gore.

• The adjoining owners appealed.

Basic principles

• Essential characteristics of an easement (Re Ellenborough Park [1956]).

• Easement must “accommodate” the dominant land i.e. operate for its

better enjoyment.

• Challenge based on Harris v Flower [1904]: general principle that

dominant owner can only use the way for the purpose of the specified

dominant land and not for other land.

• Is there a difference between “passing through” and “passing alongside”

cases?

• Passing through: adjoining land acquired by dominant owner and used as a

single unit with the dominant land.

• Passing alongside: direct access sought to adjoining land.

• Argued that easement can only be used for passing through situation.

Outcome and analysis

• Court rejected distinction between passing through and passing alongside

cases.

• Instead, they are part of the factual matrix in determining whether the

original servient owner would have consented to the alleged right.

• Key questions to determine whether easement extends to the extra land.

– Was use of the extra land subsidiary or ancillary to the use and

enjoyment of the dominant land?

– Was it for a purpose independent of the dominant land?

• If ancillary use, adjoining land is being used for the better enjoyment of

the dominant land.

• Importance of construing the scope of the grant of the easement.

• Scope sufficiently wide to enable the easement to cover the garage.

Conclusions

• Even thought an easement may not refer to particular land, the land may

still benefit if ancillary to the use of the dominant land.

• If the land is used independently, it is unlikely to benefit.

• Interpretation of easement wording is key to see whether the scope

potentially covers the alleged right.

• More general wording is more likely to be helpful.

• Court’s decision may help with interpreting an easement where previously

we may have considered the right would not extend.

• It comes down to a matter of fact and circumstance.

Overseas entities and real estate

transactions

• Arrangement with Land Registry for execution/Entity is registered proprietor of land/charge,

• or

• Form 7 Certificate from qualified lawyer practising in territory of incorporation of entity,

• or

• Certified copy of constitution etc of entity with certified translation if not in English.

• Form 7 - Certificate of powers of overseas companies

– I of [insert workplace address, including country] certify that –

– I give this certificate in respect of [the corporation],

– I practise law in [insert territory] (the territory) and am entitled to do so as a qualified lawyer under the

law of the territory,

– I have the requisite knowledge of the law of the territory and of the corporation to give this certificate,

– the corporation is incorporated in the territory with its own legal personality, and

– the corporation has no limitations on its power to hold, mortgage, lease and otherwise deal with, or to

lend on a mortgage of charge of, land in England and Wales.

– Signature……………………………………… Date…………………………………………..

• Traditional Overseas Counsel’s Opinion will not suffice.

Is a UK branch of an overseas

company a UK company?

• No.

• Registration at Companies House of overseas company if it has a UK

branch or place of business (an “establishment”).

• Such a company has a UK registration number preceded by “FC”.

• “BR” prefix equivalent of “FC” for registrations before 1 October 2009.

• However, the establishment is not a separate legal entity, but is the

same as the overseas entity.

• Therefore, legal opinion and form 7 certificate/constitution required.

Execution of deeds by overseas companies

• Land Registry’s approved wording for execution of a deed by an authorised person’s

signature.

• Signed as a deed on behalf of (by (name of company), a company incorporated in

(territory), by (full name(s) of person(s) signing), being [a] person[s] who, in

accordance with the laws of that territory, [is][are] acting under the authority of

the company

• Signature(s):_______ Authorised [Signatory][Signatories]

• Deemed due execution under Companies Act 2006. Insert signatory’s full name.

• New Land Registry practice guide 78 (31 July 2017) -

https://www.gov.uk/government/publications/overseas-companies-and-limited-

liability-partnerships-pg78/practice-guide-78-overseas-companies-and-limited-

liability-partnerships

Strange new execution requirements

• Changes to Land Registration Rules not yet in force.

• Executed as a deed by (name of company), a company incorporated in (territory)

acting by (full name(s) of person(s) signing) who, in accordance with the laws of

that territory, [is][are] acting under the authority of the company

• Signature in the name of the company

• Signature of Authorised [signatory][signatories]

• Signatory must sign the name of the company, not her own name!

Worth of Counsel’s opinions?

• Legal opinion from local lawyers acting for overseas entity.

• Must be independent with separate insurance.

• There are standard forms of opinion, but more likely to be a checklist.

• Just a box ticking exercise?

• Problems of enforcement if opinion is negligent.

Proposals for register for overseas owners of

UK property

• Await final statement from Government about new regime.

• Companies House will have a new register of the beneficial owners of overseas

entities owning UK property.

• Corresponding ID number will be issued that lasts 2 years.

• Most transactions involving overseas entity will require provision of ID number to be

registered at Land Registry.

• If not provided, transfer is valid but registration cannot occur so legal title does not

pass.

• After a transitional period, a restriction will automatically be added where

overseas entity to enforce new requirement.

• Include contractual protection to ensure ID number is provided by overseas entity.

New Electronic Communications Code

• New Code expected to come into force in December 2017.

• Similarities to current Code, but more elaborate and extended

process to terminate agreement and remove apparatus.

• Much of the Code cannot be contracted out by parties.

• Avoidance of overlap between Code and Landlord and Tenant Act

1954.

• Operators will pay less for agreement.

• Greater rights to assign agreement and share and upgrade

apparatus.

New Electronic Communications Code

• The freeholder must agree to be bound otherwise the operator does not

have statutory protection against him (unless a Court order is obtained).

• Subject to certain conditions, an agreement is void if it prevents or limits:

– assignment to another Code operator.

– upgrading or sharing of the apparatus.

• No order can be made by Court if relevant person intends to redevelop the

land and could not reasonably do so if the order was made.

• Change in valuation approach is operator friendly - “no scheme value”.

• 2 stage process – termination of agreement and then removal. 18 months’

delay in termination.

• Controversy about breadth of anti-avoidance.

• No equivalent of paragraph 20 (lift and shift).

• Complex transitional provisions.

Minimum Energy Efficiency Standards

• This legislation comes into force in April 2018 and makes it unlawful for

landlords to grant new leases of a property that has an “F” or “G” energy

performance certificate rating, unless there is an exemption registered.

• The lease itself is valid, but the landlord can be fined substantially.

• From April 2023 landlord will be fined if there are existing leases and F/G.

• Key point is ensure landlord has control over EPCs obtained by tenants.

• Contractual right prohibiting alterations with an adverse energy impact.

• Cost of complying with legislation likely not to be covered by service

charge.

• Government guidance -

https://www.gov.uk/government/uploads/system/uploads/attachment_d

ata/file/593422/Non-Dom_Private_Rented_Property_Minimum_Standard_-

_Landlord_Guidance__2_.pdf

New Law Society standard office lease

• Simpler solution to more straightforward leases.

• Standard short form commercial lease of whole and of part.

• Office, and retail to follow.

• Caters also for rent reviews.

• Model Commercial Leases inspiration -

http://modelcommerciallease.co.uk/ .

• Avoiding unnecessary negotiations.

• Launch date to follow shortly and hopefully this year.

• Impact on Law Society Business Leases.