Case In Point - Kingsley Napley’s Real Estate Litigation Quarterly Update

6 July 2018

Our quarterly update highlights some of the cases from the last three months that will be of interest to property professionals. This quarter includes:

  • the enforceability of oral variations to agreements;
  • a licensee’s claim for relief from forfeiture;
  • clarification of the consultation procedure under Section 20 of the Landlord and Tenant Act 1985;
  • unreasonable refusals of consent in the context of planning applications; and
  • the enforceability of ‘non-reliance’ clauses.

The most highly publicised decision was the Dreamvar decision.  Property fraud is on the increase and Dreamvar is interesting both to see how these frauds are perpetrated and the impact for those involved in the conveyancing process.

Rock Advertising Ltd v MWB Business Exchange Centres Ltd
Message: Ignore clauses that prohibit oral variations at your peril

A lot of time and expense is often spent drawing up contracts to give the contracting parties certainty as to their obligations. Despite this, whether inadvertently or not, they may stray from the strict requirements of the contract or, occasionally, ignore the terms completely, settling into a pattern of dealing that suits both parties.  Rather than always going back to lawyers to vary the terms of a contract or to document particular concessions, the parties may agree oral variations, relying upon and acting on that agreement.  However, this can be a recipe for trouble raising many legal issues, not least,  questions over what exactly was agreed and whether the parties had authority to agree such variations.  To tackle this, contracts may contain what is known as a ‘No-Oral Modification’ clause (“NOM”) which provides that any variation to a contract must be in writing.  The Supreme Court has considered the enforceability of such clauses in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24.

Rock was the licensee of MWB, a serviced office provider. The licence contained a clause that “all variations..must be agreed, set out in writing and signed on behalf of both parties before they take effect”. Rock fell into arrears and, as commonly occurs, put forward a proposal for payment of the arrears and for future payments to MWB’s credit controller. In line with the agreement that Rock thought had been reached, it made the first payment that same day.  Relying upon the NOM clause, MWB did not accept the proposal as a binding variation to the licence terms. On the basis of arrears, it terminated the licence and denied Rock access to the premises. It issued a claim for the arrears and Rock counterclaimed for wrongful exclusion. 

The Supreme Court unanimously agreed that, although party autonomy was important in terms of flexibility of business dealings, the NOM clause was effective and, therefore, based on the facts of the case, the purported variation was not binding.  There were legitimate commercial reasons to have such provisions.  Therefore, parties should remember to always check that agreed variations follow contractual procedure.  In future, we may see more challenges to NOM clauses based on estoppel where parties have relied and acted upon oral variations to their detriment.

Manchester Ship Canal Company Ltd v Vauxhall Motors Ltd
Message: Licensees may be able to seek relief from forfeiture

Landlords will be familiar with their right to forfeit a lease if a tenant is in breach and the tenant’s right to seek relief, usually no later than 6 months after forfeiture.  The effect of relief is to restore the landlord and tenant relationship.  The court has a discretion to grant relief on such terms as it thinks fit taking into account all the circumstances of the case. The case of Manchester Ship Canal Company v Vauxhall Motors Ltd concerned relief from forfeiture where the occupying party was a licensee and not a tenant and the application for relief was made over a year after the licence had been terminated. 

In 1962 MSCC granted Vauxhall a licence to discharge surface water and effluent in to the Manchester Ship Canal for an annual fee of £50. MSCC had a right to terminate the agreement if the fee was not paid. Over time, Vauxhall built infrastructure and contracted with third parties to let them use the infrastructure.  In October 2013, Vauxhall defaulted on payment of rent and in March 2014, MSCC terminated the agreement.  The parties then entered into negotiations for a new licence but MSCC was now seeking an annual rent of between £300 - £440,000 per annum.  Vauxhall made an application for relief from forfeiture, which was granted in the High Court and then upheld by the Court of Appeal, thereby saving Vauxhall a significant amount of money. 

The key factor in this decision was that Vauxhall’s rights were considered to be possessory in nature due to its custody and control of the infrastructure. Relief can be granted where rights are possessory in nature (i.e. where there is an intention and right to occupy and exercise control), as well as where they are proprietary. It is the first reported case where relief has been granted to a licensee.

Reedbase Ltd & Anor v Fattal & Ors
Message: Changes to proposed service charge works may not be caught by the statutory consultation process under the Landlord and Tenant Act 1985 if tenants have already been given sufficient information of the proposals

The Court of Appeal clarified the requirements of landlords who are undertaking qualifying works under the Landlord and Tenant Act 1985.  The Act sets out a consultation procedure which must be followed if landlords are to be entitled to recover the full cost of such works through the service charge.  This involves a three stage process by giving notice of intention of the works, notice of estimates and notice of the award of a contract.

In Reedbase v Fattal, the tenants of two penthouses had issued claims in relation to various alleged breaches by the Landlord in respect of works it had undertaken to the penthouse roof terraces.  The landlord had followed the statutory procedure in relation to the works albeit that there had been two variations to the works after the consultation process had been undertaken: the tenants had wanted more expensive tiles than had originally been proposed and the method of laying the tiles needed to be revised.  The tenants claimed that the consultation period should have been followed prior to these changes which would require fresh estimates to be obtained.  The Court of Appeal has clarified that this is not necessary if a) sufficient information was provided by the first set of estimates and b) providing further estimates would not materially assist in terms of the protection the Act is intended to provide tenants.   Here, the variation to the proposals only increased the cost of the works by about 6% and there was no evidence that obtaining new estimates would have resulted in any cost saving. 

The decision, although fact specific in terms of its application,  provides welcome clarification to landlords.

Rotrust Nominees Ltd v Hautford Ltd
Message: The risk of enfranchisement may not be a reasonable ground for a landlord to rely upon to refuse consent to a tenant’s application for a change of planning use

This Court of Appeal decision concerned whether the landlord had unreasonably refused the tenant’s application for consent to apply for planning permission to change the use of part of the premises from offices to residential.  It appears to be the first reported case on a refusal to such a request. Leases usually contain restrictions on the tenant’s ability to deal with the lease or undertake alterations without the landlord’s consent (see our Consents note) and may sometimes prohibit the tenant from applying for planning permission without the landlord’s consent. 

In Rotrust Nominees Ltd v Hautford Ltd, the premises comprised basement, ground floor and four upper floors. The basement and the ground floors were retail space with ancillary offices on the first and second floors and residential accommodation on the third and fourth floors.  The landlord had refused the tenant’s application for consent for a change of use on the grounds that the change would increase the likelihood of a successful claim for enfranchisement under the Leasehold Reform Act 1967 and that this would be detrimental to the landlord’s estate as a whole as the premises formed part of a wider block which the landlord owned.  

The County Court had found that these were not reasonable grounds for refusal.  The Court of Appeal agreed.  It confirmed that when considering if consent had been unreasonably withheld for consent to a planning application, the same principles will be taken into account as apply to applications for consents to assign or underlet.  In this case, the lease expressly allowed residential use for the whole property and the landlord had tried to argue that, despite this, it could still reasonably refuse consent to the planning application on other grounds but the Court of Appeal felt that this would amount to a re-writing of the user clause. It was also noted that previous cases where enfranchisement had been relied upon as a ground to refuse consent involved leases granted before the 1967 Act.

First Tower Trustees Ltd v CDS (Superstores International) Ltd
Message: Failure to give full and accurate replies to enquiries (including updating where necessary) could amount to misrepresentation and a ‘non reliance’ clause will be no defence

The principle of ‘caveat emptor’, meaning ‘let the buyer beware’ is well known but its application in property transactions has been modified over time. A buyer or tenant entering into a lease of commercial property will want to investigate the property to understand what it is buying by using the Commercial Property Standard Enquiries (CPSE’s) to ask specific questions. There is no legal obligation to provide responses save that latent defects that could not be reasonably discovered by inspecting the property should be disclosed. However, to the extent that responses are given, care should be given to ensure that these are accurate and updated to ensure that there can be no allegation of misrepresentation. This can result in a contract being rescinded or in a claim for damages for losses suffered as a result.  To minimise exposure, contracts usually include a clause which provides that the buyer/tenant can only rely on written replies to enquiries exchanged between the parties’ solicitors. 

In the case of First Tower Trustees Ltd v CDS (Superstores International) Ltd, there was a further attempt to limit liability with the following clause “The tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord” (“the non-reliance clause”).  This was aimed at preventing any claims for misrepresentation and caught the replies given to CPSE’s.  The Court of Appeal had to decide whether it was effective in doing so in relation to the tenant’s claim for over £1.4m in damages. In replies to enquiries, the landlord had stated that it had no knowledge of environmental problems affecting the property but that “the Buyer must satisfy itself”.  The reply was correct at the time it was given but it was not accurate at the time of completion as the landlord had received a report indicating that there was asbestos at the property. On fitting out the property, the tenant discovered significant asbestos contamination and had to move to alternative premises whilst this was dealt with.

The Court of Appeal unanimously held that the non-reliance clause was unreasonable.  To seek to limit liability for replies to pre-contract enquiries would render such replies worthless, even where both parties were legally represented and of equal bargaining strength. This case is a reminder that replies to CPSE’s need to be given proper consideration and there is a real risk in drafting non-reliance clauses too widely. Buyers and tenants should ensure that any statements upon which they wish to rely are made formally. 

For further information, please contact Rosalind Cullis or a member of our Real Estate Litigation team.

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