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New protocol for discharging mortgages of commercial property 28 January 2014

The City of London Law Society Land Law Committee has produced a Protocol for discharging mortgages of commercial property.

Click here to view the Protocol

According to the Land Law Committee, the Protocol is intended to be a guide as to steps and procedures that solicitors (and their clients) might adopt and that the Committee regards as being appropriate and fair to all parties. It is for the parties to any transaction to decide on a case by case basis whether to apply the Protocol, whether at all or with such variations as they might agree.  The Protocol sets out procedures which the Committee considers appropriate in the most common situations.  It also contains sample wording for provisions to be included in a sale and purchase contract, and for undertakings to be given at completion.

The Land Law Committee wishes to receive feedback on the Protocol in due course. Comments should be sent to mail@nullcitysolicitors.org.uk.

Practitioners’ views on the likely success of the Protocol vary.  There is no standard procedure for dealing with the discharge of mortgages of commercial property and too much time can be spent in negotiating completion mechanics suitable for a transaction that are acceptable to all parties. Unlike residential conveyancing, there is no Law Society endorsed code for completion that relates to commercial property.  Therefore any suggested procedure must surely be an improvement – particularly if it causes the parties to start to consider completion arrangements at an early stage in the transaction, ideally before contracts are exchanged. Appropriate provisions can then be included in the contract itself where necessary.

Two comments from the Committee stand out.  First, the Committee states that it believes that it is not appropriate for any organisation to insist on something when it is on one side of the transaction that it would not accept on the other side – nor should its solicitors.  That has to be a sensible approach.

Secondly,  the Committee believes that it is appropriate for the seller to be asked to confirm whether the sale proceeds will be sufficient to discharge the mortgage.  If they are not (or if confirmation is not given), it will be appropriate for the buyer’s solicitors to request confirmation before exchange of contracts that the seller’s bank has approved both the terms of the sale contract and the completion mechanics referred to, and that completion may occur and its mortgage will be discharged even if the sale proceeds may be insufficient to discharge the mortgage.  At the very least, this will flush out the issue before the parties are locked into the transaction.

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Guarantor released by unauthorised lease variation 21 January 2014

The Court of Appeal today upheld the first instance decision in Topland Portfolio No 1 Ltd v Smiths News Trading Ltd [2014] EWCA Civ 18.  Smiths News had guaranteed a lease granted originally to its subsidiary Do-It-All.  The lease prohibited the tenant from making alterations to the premises, and yet the original landlord had granted a licence to the tenant to allow the construction of a new garden centre within the demised area.  Smiths News was not a party to the licence for alterations and had not been consulted.  On that basis, it claimed that it had been released from its guarantee under the rule in Holme v Brunskill.  This rule says that a guarantor will be released by a variation to the principal contract unless the alteration is “evidently” insubstantial or the guarantor’s consent to the variation has been obtained.

The Court of Appeal agreed with the guarantor.   Despite the definition of the premises including “any additions, alterations and improvements”, the guarantor  had been entitled to expect to be consulted before the landlord permitted any alterations, since the lease prohibited them.  The landlord suggested that that the usual “forbearance” wording was effective to retain the guarantor’s liability, but the Court of Appeal  disagreed here also: the landlord had not exercised forbearance since there had been no breach of covenant by the tenant.

At first instance the judge had held that permitting the tenant to carry out alterations despite the covenant against alterations in the lease constituted a variation of the lease, so releasing the guarantor.  The Court of Appeal reached the same conclusion without the need to consider whether there had been a variation of the lease.  It was sufficient that the guarantor’s liability had been affected.  Arnold J (sitting in the Court of Appeal) said (at [23]):

“The Licence had the clear potential, to put it at its lowest, to increase the obligations on the Lessee, and hence on the Surety in the event of the Lessee’s default.  It follows that … the rule in Holme v Brunskill applies.”

So we do not know whether a landlord’s agreement to allow a tenant to do something that is not permitted by the lease constitutes a variation or not.  In this context, it plainly does not matter, as the rule in Holme v Brunskill is engaged in any event.   But the issue might still be relevant in other contexts.  For example, if it is ever found to be necessary to note a lease variation at the Land Registry to make it binding on third parties (the point is currently uncertain), whether or not this type of permission constitutes a variation to the lease could prove crucial.

Can one contract out of the rule in Holme v Brunskill ?

One interesting suggestion is raised in the judgment, although not pursued as it was obiter (ie not relevant to the argument in the case).  The rule in Holme v Brunskill benefits guarantors at the expense of landlords (and others who have the benefit of guarantees).  Might it be possible to contract out of the rule entirely ?  Arnold J said (at [38]), when considering the purpose of the “forbearance” provision in the lease:

“If it had been the draftsman’s intention to stipulate that the rule in Holme v Brunskill did not apply at all, it would have been perfectly easy for him to say so in a variety of ways.”

It is not clear whether this does represent the current state of the law, as the point was apparently not argued.  From a landlord’s point of view, it is surely worth including such a statement in new lease guarantees going forward, in the hope that it may be effective.  Given that it is rare for guarantors to appoint solicitors to represent them when a new lease is being granted, and it serves no purpose for a tenant to take issue with the point, one cannot expect much resistance to such wording becoming commonplace in commercial lease guarantees.   Whether the wording actually achieves its purpose will have to wait for a suitable case, for course.

Click here to see the transcript.

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Three key forthcoming legal developments in 2014 15 January 2014

What can we expect on the legal front in the coming year?  Here are three of the most important legal developments in 2014 for property professionals.

Minimum Building Energy Property Standards (MEPS): provisions in the Energy Act 2011 commit the Government to introduce MEPS by April 2018.  A consultation on the secondary legislation is expected in the first quarter of 2014.  The importance of getting this right cannot be exaggerated.  The policy – for both commercial and residential properties – can be summed up as “A landlord will not be allowed to let a property that has an EPC rating of F or G”.  However there are going to be complex exceptions.  The key exception is apparently to be where the landlord has carried out all the work that is possible to the property under the Green Deal (ie that meets the Golden Rule), and the property is still not above an F rating.  I will draw attention to the consultation through this blog when it is issued.  It is vital that everyone in the property industry responds to it.   This is an article that I wrote in 2012 on the subject while a PSL at Eversheds.

An end to distress: landlords will no longer be able to use the ancient remedy of distress as from 6 April 2014, when the commercial rent arrears recovery (CRAR) procedure comes into effect.  Landlords like distress, as it is quick, cheap and – most importantly – effective.  CRAR, on the other hand, seems to have none of these advantages.  Indeed, landlords fear that the requirement to forewarn tenants of their intentions will enable them to spirit away any goods of value in the premises.  Many law firms have briefings on their website about how the new procedure will work.  This is an analysis from Wragge & Co’s website.

Using R22 gas to maintain air-conditioning systems must cease.  R22 is an ozone-depleting refrigerant used in some older air-conditioning systems.  Until 31 December 2014 it is permissible to use reclaimed or recycled R22 to maintain air-conditioning systems.  This will not be permitted from 1 January 2015, so owners of buildings with such systems need to ensure that by the end of 2014 either the system is replaced, or it is adapted to operate with a different refrigerant.  (An alternative is to do nothing, but this will cause real difficulties when the system first needs attention after 1 January 2015.)  This requirement raises complex technical and legal issues, not least the extent to which tenants are expected to pay for the cost of this exercise.  It raises the old chestnut of whether alteration of part of a building constitutes repair or improvement.  Tenants expect to pay towards the former but not the latter.  This article from the Out-Law website includes some useful thoughts on the problem.

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Printing out PDF plans without distortion 7 January 2014

Every practitioner knows that one of the most important issues in a conveyancing transaction is making sure that an accurate plan is produced, in a format that will be acceptable to the Land Registry.  A modern problem is an accurate plan that is inadvertently distorted in scale when it is printed out, typically in a solicitor’s office.

The Land Registry has recently updated its guidance on plans that have been transmitted in PDF format (supplement 2 to Practice Guide 40):

Land Registry is increasingly receiving plans lodged with applications that are not to the stated scale. We suspect that plans are being accurately produced and sent as a PDF to conveyancers. When they are printed from the PDF they are often inadvertently reduced to fit the paper size and are therefore no longer to the stated scale.

Software settings can be adjusted to print the plan without a reduction in size.

When printing PDF files, ‘Page scaling’ on the ‘Print’ menu can default to the ‘Shrink to printable area’ option (or a similar option, depending on your software). The ‘Preview’ panel will show the reduction in size expressed as a percentage.

To print without a size reduction, ensure that any ‘Scaling’ option is set to produce a print at 100 per cent of its original size. Any ‘Fit to page’ or ‘Shrink to printable area’ option should be deselected. The size of the paper may need to be changed.

To change the paper size, select the ‘Properties’ button, select the ‘Paper/Quality’ tab and then select the size of paper required from the appropriate ‘Paper options’ drop-down menu.

Changes made to the scaling options will subsequently default to the original settings and will need to be reapplied.

A distortion of scale will mean that the plan is unlikely to be acceptable to the Land Registry, particularly if there are boundaries on the plan that are not already on the OS Map.

Click here to see Land Registry Practice Guide 40, supplement 2 (Guidance for preparing plans for Land Registry applications).

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Common exclusion clause is upheld 4 January 2014

It is common for property contracts to contain an exclusion clause preventing the buyer from relying upon statements from the seller, other than information contained in replies to enquiries before contract.  The Court of Appeal has recently held, in Lloyd v Browning [2013] EWCA Civ 1637, that such a clause was fair and reasonable in the circumstances, for the purpose of section 11 Unfair Contract Terms Act 1977.  The clause formed one of the special conditions in the contract, and was recommended by the local law society.  Most importantly, its inclusion had been agreed by the parties’ legal advisors, and there was no disparity of bargaining power between the two parties.

The relevant clause in this case read:

“The buyer hereby admits that he has inspected the property and he enters into this contract solely as a result of such inspection and upon the basis of the terms of this contract, and that in making this contract no statement made by the seller or his agent has induced him to enter except written statements, if any, made by the seller’s conveyancers in replies to enquiries raised by the buyer’s conveyancers or in correspondence between the parties’ conveyancers.”

The case was brought after the buyers found that they were unable to build an extension to a farm building as they had expected.  They had been shown an incorrect set of plans; the plans that had actually been approved when planning consent had been granted for conversion of the farm building into residential accommodation had not included the extension.  The buyers had engaged a professional planning consultant, who had carried out investigations for them.

Davis LJ concluded wryly:

“This present case, as it seems to me, is at all events not a case of buyers being tripped up unfairly by small print. It is in fact something of an irony attaching to the claimant purchasers’ present case that they have in effect themselves (by issuing and pursuing these proceedings) retracted their own statement, freely given in Condition 8 itself, as to non-inducement.”

Click here for a copy of the Court of Appeal’s transcript.

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