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Santa has a problem with a break claus (sic) 19 December 2014

Like other retailers, Santa is having to adapt to the online world.  There is little point loading everything onto a sleigh on 24 December and hand-delivering it when he can order the presents online and get them delivered directly to the children.  Obviously the delivery system will be slightly different from your average white van left by the side of the road with the engine running. The elves will deliver late at night, after everyone is safely tucked up in bed.

Anyway, the point is that Santa has discovered that he now has too much warehouse space and needs to get rid of it.  Fortunately where possible he ensured that the relevant leases contained break clauses, so that’s all right, isn’t it.  Actually no, because your typical break clause contains conditions with which it is often difficult for tenants to comply.  The lease of No 21, Reindeer Business Park is a typical example.

No 21, Reindeer Business Park

No 21, Reindeer Business Park

In the lease of No 21, Reindeer Business Park, the landlord allows the tenant to serve a notice to break the lease at the end of next year, so long as the premises are left vacant (no problem there) and in good condition (Santa is a model tenant, so unusually this presents no problem either – most tenants will fall at that hurdle, as there is always a bit of chipped paintwork somewhere).  But in this lease Santa has agreed, if the break clause is exercised, to pay a “penalty” of one year’s rent to the landlord, as compensation for having to re-let the building earlier than expected.  There lies the problem.

The lease provides that this penalty has to be paid “on the last day of the term” which, if the break clause is triggered, will be 25 December 2015.  And the banks are closed on that day, so how is Santa to pay the penalty?  Remember that if he doesn’t comply with the conditions of the break clause to the letter, the lease will not end early.

No problem, thinks Santa.  I’ll pay the money on the previous day when the banks are open.  That must be sufficient.

Surprisingly, there seems to be no court decision that confirms that to be the case – in other words, that a condition in a break clause in a lease that a sum of money is paid on a certain date is satisfied by paying it before that date.  Common sense says that the landlord could not object, but the textbooks are full of cases in which lease breaks have been lost in the most extraordinary circumstances, none of which involve any element of common sense at all.

Indeed, there happens to be a case before the court on this very point at the moment.  It was reported on Estates Gazette’s website on 10 December that Royal Mail Group is seeking guidance from the High Court on how it can exercise a break clause under its lease of premises at Heathrow Airport early next year.  According to the report, the lease requires the tenant to pay almost £1.4m on the break date – which is a Saturday.  One of the questions that the Royal Mail Group has asked the court to rule upon is whether payment beforehand will be sufficient to comply with that obligation.  (Presumably if the court says no, the Royal Mail Group will have to turn up with £1.4m in used fivers ** on the landlord’s doorstep at 7.00 am on the break date, allowing plenty of time for the landlord to count them.)

So by the time Santa has to pay the penalty on 25 December next year, he should have some guidance that he can rely upon.  And what will the court decide in the Royal Mail Group case?  Surely a court could not rule that paying the money early would constitute non-compliance with the condition?  Unfortunately, in the unreal world of break clauses, that would come as no surprise.

 

This is the last blog article for this year.  Happy Christmas to you all.

 

**  A quick calculation indicates that the Royal Mail Group would need to bring 280,000 fivers. That is a lot of fivers. They are so uncommon that that is probably more than exist in the whole world.  It might be easier to bring 70,000 twenty-pound notes, or 28,000 fifty-pound notes.  I’m a bit suspicious of fifty-pound notes.  I have only encountered them twice in my life.  They always look so freshly minted (as if just photocopied, to be honest – I always expect them still to be slightly warm).   The only people I have ever seen trying to use them are unsuspecting tourists who have been given them by foreign exchange booths at Heathrow Airport.

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A new twist on residential tenancy deposits 17 December 2014

The residential tenancy deposit scheme was well intentioned, but appallingly drafted.  It is about to go through its second (or possibly third – I have lost count) set of amendments.  This is not the place to explain it in detail.  In brief (but still not very brief at all), a landlord has to ensure that a residential tenant’s deposit is protected either by being placed with a third party, or by insuring it.  There are Government-approved schemes in each case.

The sanctions are severe.  If the landlord fails to comply, it has to repay the deposit to the tenant and also (if the court so orders) pay a penalty to the tenant, which could be as high as three times the amount of the deposit.

More inconveniently, the landlord cannot serve a notice to bring the tenancy to an end unless the deposit is protected.  So in such a case the landlord must protect the deposit (if that is still possible at the time) or repay the deposit to the tenant.

When the scheme was first introduced in April 2007, it was widely thought that the legislation did not apply to tenancies granted before it came into force .  However, the Court of Appeal ruled last year in a case called Superstrike Ltd v Rodriguez that when a tenancy changes from a fixed term tenancy to a periodic tenancy (ie the tenant stayed on after the initial fixed period had expired), legally a new tenancy comes into being for the purpose of the tenancy deposit regulations.  This meant that where this happened after April 2007, any deposit had to be protected at that time.  That came as a shock to a lot of people.  No-one had been protecting deposits in those circumstances, since no deposits were actually being paid over at the time.  They had been paid over at the start of the tenancy, before the scheme came into being.

Now in Charalambous v Ng [2014] EWCA 1604, the Court of Appeal has had to rule on a case with a new set of facts – where the lease had been granted earlier than 2007 and where the tenancy had changed from fixed term to periodic prior to April 2007 as well.  The landlord had served a section 21 notice to end the tenancy.  The tenant said it was invalid because the deposit had not been protected.  The landlord said it did not need to be.

Unfortunately for the landlord, Lewison LJ (giving the only judgment) said “Oh yes it did”.

I am not going to attempt to explain the tortuous Jarndyce v Jarndyce-style complexities that Lewison LJ had to grapple with in resolving the meaning of the legislation.  Ultimately he concluded that the landlord was not in breach of the provision that means that requires a penalty to be paid, but nevertheless was in breach of the provision that says that the landlord cannot validly serve a notice on the tenant to bring the tenancy to an end.  Instead, I am going to point you towards an authoritative blog article about the case by David Smith of Anthony Gold on the Nearly Legal website:

Of Penalties and Possessions

This case is clearly not the last word on this problematic legislation.  Lewison LJ decided that the landlord’s section 21 notice was invalid simply because the landlord had never protected the deposit when he should have done.  What was not fully explored was how the landlord could resolve the problem.  One solution would be to return the deposit, but (as an alternative) could the landlord protect the deposit at this late stage?  After all, one of the reasons for asking residential tenants for deposits is to provide a fund to make good any damage that is found at the property at the end of the tenancy.  So handing it back at this stage will not be popular with landlords.  Lewison LJ refused to answer that question, saying “This argument was not fully explored before us and … I express no final view one way or the other.  That must wait for a case in which it really matters.”

Fortunately, it is likely that there will be few landlords in this position, as residential tenancies tend to be granted for relatively short period, and there are unlikely to be many still in existence that were granted, and became statutory periodic tenancies, before 2007.

In the unlikely event that you want to read this judgment, you can see a copy here.

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The proposed Competence Statement for solicitors – Part 2 11 December 2014

This article considers the draft Statement of Legal Knowledge issued as part of the SRA’s current consultation on the proposed Competence Statement for solicitors.  Part 1 of this article considered the intended purpose and content of the draft statement itself.  Now we turn our attention to the accompanying Statement of Legal Knowledge.

In some parts of the consultation, this document is called the “Statement of Underpinning Legal Knowledge”.  That word in italics is ugly and needs to be removed PDQ.

As explained in Part 1 of this article, the purpose of the Statement of Legal Knowledge is twofold.  First, it sets out the areas of law that the SRA will require intending solicitors to demonstrate before qualification.  How that knowledge is to be tested is still being considered.

Secondly, the Statement of Legal Knowledge is intended to set out what practising solicitors are expected to know.  The proposed Competence Statement requires practising solicitors to –

“[spot] relevant issues that are outside their expertise and [take] appropriate action, using both an awareness of a broad base of legal knowledge and detailed knowledge of their practice area.”

The “broad base of legal knowledge” is proposed to be –

“Legal System of England and Wales, constitutional law and EU law (including human rights), contract law, torts, ethics, professional conduct and regulation, including money laundering and solicitors accounts, criminal law and evidence, criminal litigation, civil litigation, property law, wills and administration of estates, trusts and equitable wrongs, business law and practice (including company/commercial law) and taxation.”

The reasons why the SRA wants solicitors to have this broad base of legal knowledge are set out in Part 1 of this article and I will not repeat them here in order to save space.

Contents of the Statement of Legal Knowledge

Let’s have a quick look at some of the content of the Statement of Legal Knowledge.  You can see a copy here (scroll down to Annex C if necessary).  It’s a lengthy document (8 pages) so we will just look at a couple of practice areas.

The headings are more or less the same as the topics in the “broad base of legal knowledge” listed above. (In fact, they may be identical but I have not done a word-for-word comparison.)

Let’s start with Property, as we are familiar with that.  The topics listed are:

  • Key concepts of real property
  • The property legislation of 1925; registered and unregistered land
  • Estates and interests in land: freeholds, leases, mortgages, easements; and rights over land: licences, tenancies at will
  • The trust of land and co-ownership
  • The landlord/tenant relationship; leasehold covenants; enfranchisement
  • Real property and human rights
  • Tax considerations relevant to property transactions.

 

Now let’s look at Criminal litigation (para 8), as we are likely to be completely unfamiliar with that.  The topics listed are:

  • Criminal Procedure Rules, their overriding objective, and their application
  • Pre-trial procedure, including plea before venue and allocation
  • The role of the defendant’s representative at police stations
  • Custody, review and detention limits under PACE [Police and Criminal Evidence Act 1984, I happen to know, but only because my wife used to be a criminal defence lawyer]
  • Key steps for making an application for a representation order
  • Key steps for making or contesting a bail application
  • The trial process
  • Sentencing
  • Appeals

 

Now let’s test the SRA’s suggestions.  They divide neatly into three:

(A)  Intending solicitors need to demonstrate a knowledge of these areas of law before qualification.

I am agnostic on this one.  I seem to remember that about 30 (and a bit) years ago, in what was then called the Final Examination (now the Legal Practice Course), I had to sit a paper on criminal and civil litigation.  It seemed to be sensible for me to have a broad training – as I did not know at that time what area of law I would fall into on qualification.  So there is certain logic to this proposal, but I will leave that to other people to ponder.

(B)  Practising solicitiors must have a detailed knowledge of the law as it applies to their area of practice

This seems uncontroversial, but the SRA says in para 20 of the consultation document (set out in Part 1 of this article) that it is not planning to specify what that detailed knowledge is.  It seems that the Statement of Legal Knowledge is not relevant for that purpose.

(C)  All solicitors need an awareness of a broad base of legal knowledge as set out in the Statement of Legal Knowledge

WHAT?  IS THIS SERIOUS?

There is a serious mis-match here between what is said in the consultation document and the content of the Statement of Legal Knowledge.

The relevant part of the consultation document says (in para 21):

“We do not expect practising solicitors to retain active knowledge of all these knowledge areas, or to undertake professional development activities in relation to legal topics which are unlikely ever to have a bearing on their practice area.  What we do expect, in line with a broadly based qualification, is that solicitors should be able to recognise possible problems even when these are outside their immediate area of practice.”

I don’t think anyone would seriously want to argue with that last statement.

But in my view there are two really serious reasons why this suggestion is unworkable.

First, if the SRA does not “expect practising solicitors to retain active knowledge of these knowledge areas, or to undertake professional development activities in relation to legal topics which are unlikely ever to have a bearing on their practice areas”, how does it expect people to retain any knowledge as their memories fade over time, or acquire any knowledge of new areas of law introduced since they qualified as solicitors (for example, think of the changes implemented by the introduction of SDLT)?  This makes no sense at all, and on its own would be a good reason for criticising the proposal.

But, secondly, the topics that are set out in the draft Statement of Legal Knowledge are far, far broader than anyone could expect any one lawyer to know, or even to have heard of.

You would not expect property lawyers to have any knowledge at all of the topics above listed under Criminal litigation, and vice versa.

On the other hand, you would expect property lawyers to have knowledge of areas that might be relevant to the transaction on which advice is being given.  Clients do not put their commercial activities into neat pots that represent their lawyers’ specialisms, which means that it is vital for a property lawyer to be able to spot issues relating to, for example, construction law, tax, environmental law and even perhaps data protection and human rights.

In the same way, every other area of expertise will have a related set of peripheral activities that lawyers in that practice area need to be able to spot, and either advise on, or at least inform the client to investigate in more detail.

But to expect all lawyers to have a basic knowledge of the legal topics that fill up the 8 pages of the draft document is unrealistic.  My guess is that someone at the SRA saw this list of topics that had been drawn up with intending solicitors in mind and thought that the same list could be used for practising solicitors.  That is clearly entirely unworkable.

It is also worth asking how the SRA intends this obligation to be policed.  I cannot envisage that there will be any active checking that every practising lawyer is familar with every area of law listed in the Statement of Legal Knowledge.  Will there be spot checks in the form of multi-choice on-line tests sprung on lawyers when they renew their practising certificates?  Amusing as the thought is (unless you are one of the people chosen to take such a test), I think that is unlikely.  It is more likely that the SRA will instead penalise lawyers who are found, after the event, to have failed to comply with the requirements.  Which doesn’t really assist clients.

AN ALTERNATIVE SUGGESTION

It is vital that we tell the SRA that we think the proposed approach is unworkable by responding to the consultation and explaining our concerns.  The last date for responding to the consultation is Monday 12 January 2015.

So what do we say to the SRA?

First of all, we could ask whether it necessary to have a Statement of Legal Knowledge for practising solicitors.  I don’t think that it is helpful, but I suspect that the SRA thinks that it is necessary.  Something has to replace the 16 hours of CPD every year, and the SRA is proposing that something be the Competence Statement, backed up with the Statement of Legal Knowledge.

So, if we do have to have a Statement of Legal Knowledge, I propose that practising lawyers should be required to have the following legal knowledge:

  • a detailed knowledge of specific identified areas of law, which might perhaps be the areas listed in paragraph 1 of the draft Statement of Legal Knowledge, “Ethics, professional conduct, including money laundering and solicitors accounts”.   Perhaps it might also include contract law and tort law
  • a detailed knowledge of the law as it applies to their area of practice (which the SRA says that it does not intend to prescribe); and
  • an awareness of a broad base of legal knowledge that relates peripherally to their area of practice – but without necessarily trying to list the topics.  Alternatively, perhaps it might be possible to list the topics with which each type of specialist – property lawyers, civil litigation lawyers, criminal defence lawyers and so on – ought to be familiar.

 

By way of a conclusion, there can be no doubt that lawyers ought to have sufficient knowledge of topics that relate peripherally to their specialist areas to advise their clients properly.  In fact, the point came up in an article that I have written very recently, about the case of Lictor Anstalt v Mir Steel UK Ltd.  A corporate lawyer had (shock horror) apparently been ignorant of the Latin maxim Quicquid plantatur solo, solo cedit (meaning what is affixed to land becomes part of the land).  That happened to be particularly important in the particular circumstances, since what was affixed to the land in that case was a steel mill – which had indeed (the judge decided) become part of the land.  You can read about it in my article “Dry stone walls and steel mills“.

The law relating to the distinction between fixtures and chattels is arguably within the first heading under “Property” in the draft Statement of Legal Knowledge (“Key concepts of real property”).  How awkward it would have been for the corporate lawyer in that case if ignorance of the implications of that Latin maxim meant that he had failed to comply with the Competence Statement, which the SRA intends to become one requirement of providing a proper standard of service as required by Principle 5 in the SRA Code of Conduct.  But that seems to be the route the SRA is planning to take us down.

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The proposed Competence Statement for Solicitors – Part 1 8 December 2014

The Solicitors Regulation Authority (SRA) is currently consulting on the contents of a proposed new “Competence Statement for Solicitors”.  This (referred to in this article as “the Statement”) has two functions:

  • to set out the standard of competence that the SRA expects from anyone applying to be a solicitor; and
  • to define the continuing competencies that the SRA expects from all qualified solicitors.

 

Our main interest, as qualified solicitors (addressed to those of you who are qualified solicitors), is the second function.  I have added the italics.

The consultation period is well advanced.  It ends on Monday 12 January 2015.  It makes sense for as many of us qualified solicitors as possible to provide our views on the current proposals.  So please make a note in your diary to deal with it early in the new year or – even better – sort it out in those days between Christmas and New Year when you have to be in the office because you have run out of holiday, but client work doesn’t appeal as the clients aren’t in their offices.

You can see the consultation document here.

The purpose of the Statement

A competence statement is “a model that defines effective performance within an organisation, profession or sector” (para 7 of the consultation document).  The Statement is intended to capture the key activities required for effective performance as a solicitor, in that:

  • it tells consumers what they can expect from their solicitors, and solicitors what activities they should be able to perform competently [interestingly, in that order]; and
  • it informs education and training providers about what courses they need to develop to train intending or practising solicitors (intending solicitors what they need to demonstrate they can do, and practising solicitors what they need to do to maintain their competence).

 

What is in the Statement?

The consultation paperwork includes (as Annex A) a draft Statement.  One of the purposes of the consultation is to ask consultees whether the contents of the draft Statement are appropriate.

The contents of the Statement are what we have been awaiting, particularly bearing in mind the Statement’s importance in the system of continuing professional development that is to replace the current requirement to obtain 16 hours of CPD annually (discussed in this blog article dated 24 May 2014).

The Competence Statement is divided into four “domains”: “ethics, professionalism and judgement (sic)”; “technical legal practice”; “managing yourself and your work”; and “working with other people”. Key activities are listed for each domain and are supported by the critical factors which affect the individual’s ability to perform the activities competently (para 16, with quotation marks added by me).

So, for example, under “Ethics, professionalism and judgement (sic)” you will find “domains” of

“A1 – Act honestly and with integrity, in accordance with legal and regulatory requirements and the SRA Handbook and Code of Conduct”, and then five non-exclusive requirements are given

“A2 – Maintain the level of competence and legal knowledge needed to practise effectively, taking into account changes in the role and/or practice context and developments in the law”, again with five non-exclusive requirements.

This is the one that is of special interest to me, as it contains the obligation to keep oneself up to date with legal and other developments.  The five requirements are:

  • taking responsibility for personal learning and development
  • reflecting on and learning from practice and learning from other people
  • accurately evaluating their strengths and limitations in relation to the demands of their work
  • maintaining an adequate and up-to-date understanding of relevant law, policy and practice
  • adapting practice to address developments in the delivery of legal services

 

For current solicitors (as opposed to aspiring ones), the fourth bullet point is effectively what will replace the current CPD “16 hours a year” system.

Suddenly perhaps that joke about not knowing that property law has developed since the 1925 legislation may cease to be so funny.  The SRA may come down on such people like a ton of bricks.  (“It was only a joke, honest.”)

Domain A4 (“Draw on a sufficient detailed knowledge and understanding of their field(s) of work and role in order to practise effectively”) is also interesting in terms of keeping up to date with developments, and is discussed further below.

There are five domains in the section called “Ethics, professionalism and judgement (sic)”, seven in “Technical legal practice”, three in “Managing themselves and their own work” and three in “Working with other people”.

You can see a copy of the draft Competence Statement here (scroll down to Annex A if necessary).

To be honest, as a concept I find it quite inviting.  Clearly it suffers from a couple of disadvantages.  First, like all of the SRA’s output, it’s staggeringly clunky and reader-unfriendly, comprising (in this case) several disparate documents which are meant to fit together, but actually don’t – like a jig-saw that has been badly cut out (this can be cured with a bit of effort).  Secondly, the Statement is really just a checklist written in a grand style, and doesn’t contain much detail.  On the other hand, it would not be possible to include sufficient detail to make it complete without it becoming the size of a telephone directory (remember them?), and then it would not be suitable for different types of organisation (or “entity”, as the SRA prefers).  So leaving it in the form of a framework has to be preferable, while accepting that on its own it is only a starting point.

More documents

The draft Statement is backed up by two other draft documents, the “Threshold Standard” document and the unfortunately named “Statement of Underpinning Legal Knowledge” (which is called simply the “Statement of Legal Knowledge” in some parts of the consultation document).

The Threshold Standard document attempts to explain where on the scale of effectiveness a budding solicitor needs to be.  I think this is intended to be a generic document, appropriate to each “domain”.  There are five levels, from 1 to 5, and the candidate needs to be at 3 or higher.  There are descriptions of how one is meant to be able to operate under the headings “Standard of work”, “Autonomy”, “Complexity”, “Perception of context” and “Innovation and originality”.  It would make this article too lengthy to set out all the detail so instead look at the draft Threshold Standard Document here (scroll down to Annex B if necessary).

The purpose of the Statement of Underpinning Legal Knowledge is not easy to discern in the consultation document.  If this were a draft document that a supervisee had brought me, I would suggest that the document be re-written.  It seems to have two purposes but this only becomes clear after several re-reads of the consultation document.

You can see a copy of the draft Statement of Underpinning Legal Knowledge here (scroll down to Annex C if necessary).

First, the document sets out (sketchily) the areas of law that the SRA will require intending solicitors to demonstrate before qualification.  The consultation paper says (in para 28) that it

“… will assist those education and training providers who wish to offer suitable training and assessment to prepare individuals for qualification. It is deliberately broad and high level. It is not intended to be an exhaustive list of legal topics or to constitute an educational curriculum. Nor is it intended to dictate what must be taught in a law degree. Too detailed a list of topics will have inevitable gaps, will rapidly date and risks stifling innovation and limiting flexibility. But a broad statement can support the development of a curriculum and guide individuals’ own learning.”

How this knowledge is to be tested is still being considered.

What practising solicitors need to know

Secondly, the Statement of Underpinning Legal Knowledge is intended to set out what practising solicitors are intended to know.

Domain A4 says:

“Draw on a sufficient detailed knowledge and understanding of their field(s) of work and role in order to practise effectively, including

  • identifying relevant legal principles
  • applying legal principles to factual issues, so as to produce a solution which best addresses a client’s needs and reflects the client’s commercial or personal circumstances
  • spotting relevant issues that are outside their expertise and taking appropriate action, using both an awareness of a broad base of legal knowledge [FN] and detailed knowledge of their practice area.”

 

FN indicates reference to a footnote.  This lists the areas of the law in which practising solicitors are expected to have an awareness (the use of a footnote unfortunately – or perhaps deliberately – conceals the importance of this part of the consultation).  For you, the reader, this is possibly the most important part of the proposal, because for the first time since you qualified there is going to be a list of stuff you are meant to know, even if you know it only vaguely.

It is worth setting out paras 20 and 21 of the consultation document in full here, despite their length, as they are so important and I want to make sure that you really, really understand what the SRA is saying here:

“20. [Compliance with the requirements in Domain A4] means that a solicitor must have a detailed knowledge of the law (which we do not specify) as it applies to their area of practice.  In addition, we require qualified solicitors to have “an awareness” of background legal knowledge, sufficient to spot relevant issues and to know when to seek additional advice.  We recognise that detailed knowledge of areas of law outside a solicitor’s practice area will decline over time.  However, a broadly based training and knowledge of the law distinguishes solicitors from other legal professionals who receive training which is more focused on their specific area of practice.  The “broad base” of legal knowledge which we say all solicitors should have an awareness of, is summarised in the footnote to paragraph A4 of the Competence Statement. The areas of law included in the footnote reflect:

a. the current generic solicitors’ qualification which confers rights to practise in all of the reserved areas [in the Legal Services Act 2007] ; and

b. research we conducted when developing the Competence Statement which revealed a high level of consensus that solicitors should have a broad base of background legal knowledge, over and above the specialist knowledge required for their area of practice, and about what that legal knowledge should be.

“21. We have expanded the areas of law in the footnote into a Statement of Legal Knowledge.  This is intended to inform practising solicitors in more detail of the areas of law of which we expect them to have a background awareness and to guide curriculum design for education and training providers (see para. 28).  We have tried to strike a middle ground between the need to spot issues outside a solicitor’s practice area and the recognition that the broad knowledge which solicitors have on qualification will inevitably fade where it is not used.  We do not expect practising solicitors to retain active knowledge of all these knowledge areas, or to undertake professional development activities in relation to legal topics which are unlikely ever to have a bearing on their practice area.  What we do expect, in line with a broadly based qualification, is that solicitors should be able to recognise possible problems even when these are outside their immediate area of practice.”

The footnote that covers the various areas of law lists the following areas of law:

“Legal System of England and Wales , constitutional law and EU law (including human rights), contract law, torts, ethics, professional conduct and regulation, including money laundering and solicitors accounts, criminal law and evidence, criminal litigation, civil litigation, property law, wills and administration of estates, trusts and equitable wrongs, business law and practice (including company/commercial law) and taxation.”

So, in short, the SRA’s proposal is that people intending to be solicitors should know about the areas of law in the Statement of Legal Knowledge, but also that practising solicitors are meant to have a working knowledge of those areas of law as well – however long they have been practising.  That is quite a big ask.

Unfortunately this article has already become too long.  I will look at the content of the draft Statement of Legal Knowledge in a separate article later this week.  The concept is one thing.  The content is quite another.

In the meantime, you might like to look at the consultation paper generally, if you have a spare hour or so (only joking – I know you don’t, which is one reason why you read this blog).

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Changes to Stamp Duty Land Tax from 4 December 2014 4 December 2014

I had not intended to write any blog articles today.  However the unexpected changes to Stamp Duty Land Tax (SDLT) announced in yesterday’s Autumn Statement deserve a little comment (and I have already written a short article earlier in the day covering the Law Commission’s recommendations on reform to the law relating to rights of light).

The “slab” system by which SDLT is calculated has always seemed unfair, particularly so as property values have risen and higher rates of SDLT have been introduced.  A difference in price of a house of just £1 can create an astonishing increase in the amount of SDLT payable.  Yet the cunning (pre-election) changes announced yesterday by the Chancellor apparently mean that buyers of the most expensive houses (over £937,500 says the Government – I have not done the maths) will pay even more SDLT under the new system than the old system.  How clever is that, in electioneering terms?  Presumably the thinking is that if you are paying (by way of example) £2.1m for a house, an increase in SDLT from £147,000 to £165,750 is neither here nor there (these are the Government’s figures, not mine – see this leaflet from the Treasury issued yesterday).

(Actually, I imagine many commentators will be pointing out that £937,500 doesn’t get you much more than an ordinary family house in the nicer parts of London, but I’ll leave that to the newspapers.)

So the new proposal is that SDLT, like income tax, will have tax bands, and it is only the amount of consideration within the particular band that will be taxed at that rate.  Full details of the changes are contained in this very helpful HMRC guidance note.   So an initial observation is that everyone gets a tax-free amount of £125,000, which reduces the total amount of tax.

A second observation is that the changes apply only to transactions with an effective date of 4 December 2014 or later.  So the unlucky people who completed yesterday do not benefit.  Where you have exchanged but not completed, you can choose whether to apply the old rules or the new rules – so there was a rush yesterday of buyers trying to exchange contracts on houses costing more than £937,500 before midnight.

A third observation – perhaps the most important – is that the changes affect only residential properties.  There is no impact on commercial or mixed-use properties.  Could this be because companies, LLPs etc do not have votes?  The change means that SDLT on commercial properties and SDLT on residential properties are effectively now two completely different taxes.

Finally, it’s interesting to see that in adopting this new approach, the Chancellor is following the approach of the new SDLT alternative in Scotland, Land and Buildings Transaction Tax (LBTT), which takes effect from April next year.  The Scots could derive some satisfaction from that.  However, as the table below shows, the rates between £250,000 and £925,000 are quite different, with the rate in the UK being 5% but the rate in Scotland being 10%.  This means that in April 2015 the tax rate on a residential property transaction in Scotland will rise steeply under LBTT, as The Scotsman points out today.  This can surely be no accident on the Chancellor’s part.

Update note added on 5 December 2014: A very interesting House of Commons Library Standard Note about the changes is now available at this link.  It contains some analysis of the effect of the changes, a graph showing SDLT charges before and after the changes, and some extracts of political commentary, including this from the FT:

 “Labour and the Liberal Democrats have both proposed a so-called “mansion tax”. The chancellor may have felt politically exposed. His changes will annoy some of his future neighbours in Notting Hill but will be broadly popular.  And remember that about half of property sales worth more than £1m in central London are to foreign nationals. The chancellor is improving an inefficient tax in a way that defends himself from political attacks, helps the average housebuyer and hurts a relatively small number of rich people, many of whom aren’t UK voters.  These opportunities don’t come along very often – and the chancellor is canny enough to take them.”

 

 Tax rate bands on residential transactions

UK (from 4 December 2014) – £

Scotland (from April 2015) – £

0 – 125,000

0

0 – 135,000

0

125,001 – 250,000

2%

135,001 – 250,000

2%

250,001 – 925,000

5%

250,001 – 1,000,000

10%

925,001 – 1,500,000

10%

Over 1,000,000

12%

Over 1,500,000

12%

 

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Law Commission recommends retention of acquisition of rights to light by prescription 4 December 2014

The Law Commission has this morning (4 December 2014) published its recommendations on reform of the law relating to rights to light (or rights of light as I am going to try to continue to call them).

You can see the paperwork here.  I have not read any of it yet.

lawcommission.justice.gov.uk/publications/rights-to-light.htm 

This is a cut-and-paste job from that document to highlight the key recommendations:

  • a statutory notice procedure which would allow a landowners to require their neighbours to tell them within a specified time if they intend to seek an injunction to protect their right to light, or to lose the potential for that remedy to be granted;
  • a statutory test to clarify when courts may order damages to be paid rather than halting development or ordering demolition;
  • an updated version of the procedure that allows landowners to prevent their neighbours from acquiring rights to light by prescription;
  • amendment of the law governing where an unused right to light is treated as abandoned; and
  • a power for the Lands Chamber of the Upper Tribunal to discharge or modify obsolete or unused rights to light.

 

The major change from the earlier consultation paper is that the Law Commission does not recommend that prescription should be abolished as a means of acquiring rights to light.  This represents a different position to that which it advanced as a provisional recommendation in the consultation paper and is a result of responses that it received during the consultation process.

The recommendations in relation to the statutory test for when a court may grant damages in lieu of an injunction take account of the Supreme Court’s decision in Coventry v Lawrence, which was handed down between the date when the consultation ended and the final report being published.

It is now up to the Government to decide whether to implement these recommendations and, if so, whether in this form or in a different form.  I see there is a draft Rights to Light (Injunctions) Bill at the back of the document.  (I think my campaign to retain the phrase “rights of light” is doomed, if that Bill proceeds.)

The Law Commission’s press notice concludes “This report concludes our Rights to Light project”.  One can imagine the Law Commission’s staff neatly bundling up all the papers and sending them into storage – and getting ready for the next project.

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Commercial property leases compared and contrasted 3 December 2014

Sometimes it seems as if there is a new form of lease being unveiled every month.  What would your advice be, for example, to a client who wants to discuss the rarely-encountered Meanwhile Lease?  Or the RICS Small Business Retail Lease?  Or even (but I hope you know the answer to this one and so you won’t need my help here) the Model Commercial Lease?

If only someone had written an article that compares and contrasts the different forms of lease suitable for commercial property.

You can relax.  You will be relieved to know that someone has.  Not only has Estates Gazette recently published an article on this topic by Sue Highmore of Practical Law, but it is available for everyone to read freely on the Estates Gazette website using the link below – even for non-subscribers.

The article is called “Do standard leases have their place?” and it appeared in Estates Gazette on 27 September 2014.

Click here to read Sue Highmore’s article.

 

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Legal Services Board refuses reduction in minimum level of solicitors’ indemnity insurance 1 December 2014

Earlier in the year, the Solicitors Regulation Authority (SRA) proposed reducing the minimum level of solicitors’ professional indemnity insurance (PII) to £500,000.  Currently the requirement is £2m, or £3m for LLPs.

The SRA said that the reduction in the minimum level of PII would reduce insurance premiums and therefore enable solicitors to reduce their bills to consumers.

Few people other than the SRA seemed to think that this was a good idea.  I wrote an article “PII in the sky” (sorry) on 20 August this year explaining why I, and others, hoped that the suggestion would not be approved by the Legal Services Board  (LSB), which needed to approve the proposal.  I predicted:

“… the LSB will refuse the SRA’s application to reduce the minimum level of PII to £500,000, principally on the basis that the SRA will not be able to provide any cogent evidence that insurance premiums will be lower as a result.”

This has turned out to be one of my more accurate predictions.

Last week the LSB did indeed issue a decision notice (click here to see it) accepting some of the SRA’s proposals in relation to PII, but refusing the all-important reduction in the minimum amount of cover.  The LSB’s decision is relatively critical in parts of the SRA’s methodology, and in parts the text of the notice has been redacted (ie wording has been deleted) so one wonders what sort of comments were so embarrassing that they had to be kept secret from the public (and from solicitors).

In particular, the LSB had this to say in its decision notice:

“37. When it comes to assessing whether the likely prejudice to consumers (identified above, on the basis of incomplete, but the most recent and best available data) is outweighed by benefits alleged to accrue, the absence of robust analysis of current data causes real problems in justifying the proposal to decrease the minimum level of PII to £500,000. In summary of what follows, the LSB believes that:

• the evidence of any direct cost benefit is inconclusive, but at best suggests there may be a marginal reduction in PII premiums (in the region of 5%) for those taking out insurance at only the minimum level;

• while the LSB does not discount the value of any cost reduction, the SRA goes too far in assessing the potential benefits of this potential cost reduction;

• there are reasons to be concerned that costs for some may well increase and that therefore any suggested benefits are either unlikely to arise or will be of minimal impact when aggregated at the market level when set against the potential consumer prejudice.”

The conclusion

The LSB concluded (in para 36):

“Hence, whilst noting that there is not complete consensus on the issue, the LSB considers that the evidence shows that reducing minimum PII levels to £500,000 is more likely than not to incur a prejudice to the interest of consumers.”

Is this the end of the matter?  Almost certainly not.  This is all part of a continuing review by the SRA of solicitors’ indemnity arrangements.  Indeed, one part of the SRA’s proposal – the addition of a new outcome in the SRA Code of Conduct for firms to assess and purchase an appropriate level of professional indemnity insurance cover – was approved by the LSB as part of the current application.

In the LSB’s press release announcing the decision, the Legal Services Board Chief Executive (Chris Kenny), said:

“We welcome the SRA’s decision to comprehensively review financial protection arrangements and expect that it will reflect the outcome of this application in its further work. What matters is that firms have the right incentives to assess their risks accurately and so ensure that consumers are protected. It is not clear to the Board that a minimum level of cover necessarily has a place in achieving that and we were certainly not persuaded by the evidence put forward for the figures proposed.”

This story has plenty of mileage in it still.

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