News

‘Dear Claire’ – I am in default on my development finance loan. What will happen?
‘Frustrated by Brexit’ – Jay Bhandal explains the landmark court decision on Brexit which has far reaching implications for commercial contracts, landlords and tenants
‘Can’t see the wood for the trees?’ – Suzanne Gill gives top tips on how to secure the best rent for your telecoms mast site
‘Covert behaviour and foul play in Mayfair’ – secret recordings of conversations by asset managers and TUPE. Emily Matthews sets the record straight.
‘Security of tenure, but at the expense of landlords’ freedom to develop?’ – Brad Trerise explains the new legal test for landlords wanting possession to redevelop
‘Which hand is your pocket in?’ – what you need to do if a director has an interest in a property transaction
‘Is it on the List?’ – special rules apply to listed buildings. Matthew Mainstone explains how not to fall foul of them

News

IS IT ON THE LIST?

The Planning (Listed Buildings and Conservation Areas) Act 1990 plays a crucial role in protecting the country’s heritage, but it can be a hindrance to landowners by restricting development and potentially exposing them, sometimes unknowingly and without fault, to the risk of enforcement action being taken many years after a breach has occurred.

The legislation precludes works to a listed building being undertaken without authorisation if they would affect its character as a building of special architectural or historic interest. Unauthorised works may result in criminal proceedings and (unlike planning legislation) there is no immunity from listed building enforcement action through passage of time.

The oddities and hidden dangers of the system were exemplified in the recent Court of Appeal case of Dill v Secretary of State [2018] EWCA Civ 2619.

As well as providing a very useful potted summary of the evolution of listed building legislation and the current legal framework, the case clarifies the scope of what is meant by a “listed building”, who determines whether something is a listed building, and the options for challenging a listing. It is also a reminder of the strict liability for contravention of listed building laws.

There are three distinct routes by which something may qualify as a listed building under the legislation, namely by being:

listed as a building in the statutory list compiled by the Secretary of State; or
an object or structure fixed to the building; or
an object or structure that lies within the curtilage of a listed building and which has done so since before 1 July 1948.

The case centred on the first of these routes and had an unusual factual background, relating to two early 18th Century lead urns and their limestone piers created by Flemish sculptor John van Nost. The piers and urns were moved in 1973 to Idlicote House, a Grade II listed building on the edge of the Cotswolds, but had no historical connection to the house, having been moved from one property to another over the years. The piers and urns were then added to the statutory list in 1986 as listed buildings in their own right. When Mr Dill inherited Idlicote House in 1993 he was not aware that the items were separately listed, and he later sold them at auction to an unknown purchaser for £55,000. They were apparently exported, never to be seen again.

The removal of the piers and urns was discovered by the local planning authority five years later. Mr Dill applied for retrospective listed building consent to remove the items, which was refused, and the LPA took enforcement action against him requiring them to be returned; presenting a difficulty as Mr Dill no longer knew of their whereabouts. Mr Dill appealed those decisions, which ultimately came before the Court of Appeal.

It will seem odd to many that objects and structures can be classed as listed buildings even if they bear no resemblance to a building. Mr Dill was one such person and argued that the items were not “buildings”, so that no listed building consent was required to remove them and enforcement action could not therefore be taken.

The Court of Appeal disagreed and ruled that being included on the statutory list as a listed building is determinative of the status of a structure or object as a listed building. It is not open to a planning inspector or judge to ‘go behind the listing’ and consider whether or not something on the list is a building.

The case then considered the options for challenging the validity of a listing and the correct time for doing so.

An appeal against refusal of listed building consent can be made on a merits-based ground that the listed building is not of a special architectural or historic interest, and can result in the building being de-listed. However, the Dill case clarified that the actual validity of a listing cannot be challenged in that way as a planning inspector does not have the power to consider the validity of the listing in the first place and quash the listing. Affected owners can only object to the validity of a listing by challenging a decision at the time of the listing. Otherwise, a building can only be de-listed if the listing was made in error, which wasn’t applicable in the Dill case.

The case serves as a reminder of the complexities and risks of buying a listed building. The extent of any listing, including any separate objects or structures that may be of special architectural or historical interest, needs to be thoroughly checked (Historic England’s web site being a good first port of call).

Being unaware of a building’s listing is no defence and owners can face enforcement action at any time after a breach has occurred. This could extend to breaches committed by previous owners, so enquiries should always be made to confirm that no unauthorised works have taken place in the past.

News

WHICH HAND IS YOUR POCKET IN?

WeWork are often in the news these days, along with their charismatic founder, Adam Neumann. Mr Neumann has reportedly made millions of dollars by renting many properties which he owns back to WeWork and this has attracted a slew of recent coverage. In response to questioning, a spokesman for WeWork stated that all such deals are approved by the board and disclosed to investors. However Neumann is WeWork’s largest individual shareholder with voting control over the company, so one could argue he could not be prohibited from going ahead with the transactions.

He is not alone in seeing the opportunities for personal investment as well as corporate investment. How can directors make sure they’re clear about personal investment and company investment? The starting point is that directors have a duty to declare to the board of their company any interest they might have in a transaction involving the company. Where that interest relates to an arrangement between the company and the director to buy or sell certain assets, shareholder approval might also be needed. These transactions are referred to as “substantial property transactions” and are governed by Section 90 of the Companies Act 2006.

When is shareholder approval needed?

Shareholder consent is needed when a director – or a person connected to a director – buys a substantial “non-cash asset” from the company. There’s a trap for the unwary here: if the individual buying land is a director of the company’s holding company, shareholder approval is still needed from the shareholders of the selling company and also from the shareholders of the holding company. Exactly the same terms apply on a purchase, where a company is buying a substantial non-cash asset from a director or someone connected with the director.

Normally at least 50% of the shareholders have to approve the transaction but it is important to check the company’s articles of association thoroughly. Sometimes the articles stipulate a higher percentage of approval is needed.

Shareholders’ approval can be given at a general meeting of shareholders or if the company’s articles do not prohibit it, by a written resolution which all shareholders can sign. The number of shareholders in a company and their geographical location often dictates which is the better route to follow in each case. If the shareholders’ approval cannot be obtained before contracts are exchanged for the substantial property transaction, the contract can be conditional on such approval being given. And beware of transactions where there is a holding company involved. In that case shareholder approval is needed from both the shareholders of the company and of the relevant holding company.

What is a substantial non-cash asset?

There is a definition in Section 1163 of the Companies Act 2006 which is “any property or interest in property other than cash”. These non-cash assets are “substantial” if the value is either (a) greater than £5,000 and more than 10% of the value of the company based on its statutory accounts or (if there are no statutory accounts) the amount of its called up share capital; or (b) more than £100,000.

It is quite clear that almost all property transactions will therefore be caught by this threshold. Even with lower value properties, if there are a number of assets or a series of transactions, those have to be added together to work out whether those thresholds are met.

What is a connected person?

The definition of connected persons is very wide. Directors need to be alert to their wider relationships to make sure they declare an interest where applicable. Connected persons include a spouse, civil partner, or family member (including step-children). A connected “person” can also be a company if the director has a 20% interest in that other company.

What happens if you don’t obtain approval?

If shareholder approval hasn’t been obtained the transaction can be voidable (reversed) at the company’s request unless it’s not possible for the asset to be returned to its original owner or the company has had an indemnity for any loss or damage it has suffered as a result of the transaction. If neither of these things has happened but the property has been acquired in good faith by an unconnected person who wasn’t aware the relevant approval was obtained and who would be affected by the avoidance, it will also be too late to unwind the transaction.

The relevant director, or the relevant connected person and any other person who authorised the transaction (for example, by signing the contract or the transfer deed) will be jointly and severally liable to pay the company for any gain they made in respect of the transaction or to indemnify them for any loss or damage as a result of that. Directors should be aware that this liability carries on whether or not the transaction is unwound.

Honest mistakes?

It is possible to obtain retrospective ratification from shareholders but this is clearly not an ideal situation for the company, the relevant director or connected person to find themselves in. Any shareholder who feels deceived might ask more questions than they would have done if the approval was sought at the correct time. In addition there is no guarantee that more than 50% of the shareholders will retrospectively ratify the transaction. One form of comfort for directors is that once the transaction has been ratified it can no longer be set aside.

Are there any exceptions?

The most important class of exception to this rule is for transactions between a company and a person in his character as a member of that company or a shareholder. This is intended to cover scenarios such as payment of a dividend in specie or the distribution of assets to a member on winding up of a company. There can be some tax advantages from payment of a dividend in specie so this is a key category of exemptions to be aware of.

Other duties

As well as the procedures of the Companies Act, before directors enter into any transaction, they should bear in mind their general duties to the company, notably their duties to promote the success of the company, to declare an interest in a proposed or existing transaction of the company and to avoid conflict of interest. The company’s articles of association may have an impact on a director’s ability to approve transactions which he or she is interested in so these do need to be checked in each case.

It can be difficult for directors of owner-managed businesses whose company has been successful as a result of that individual’s hard work to distinguish between their personal affairs and their company’s affairs. However if the protection of a limited liability company is to be preserved, it is important to keep that distinction in mind.

News

SECURITY OF TENURE RESTORED, BUT AT THE EXPENSE OF LANDLORDS’ FREEDOM TO DEVELOP?

Background and the controversial High Court decision

Further to my 2017 QIA article on the then landmark High Court decision in S Franses Ltd v The Cavendish Hotel (London) Ltd [2017] EWHC 1670 QB, the Supreme Court has recently published its highly anticipated judgment S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62 after a ‘leapfrog’ appeal by the tenant.

By way of brief background, the case concerned a redevelopment scheme in the Cavendish Hotel, Westminster. The tenant ran a textile dealership at the ground floor and basement premises. Section 26 notices requesting new leases were served by the tenant, S. Franses, upon the landlord, The Cavendish Hotel Ltd, requesting new leases. The landlord served counter-notices opposing the tenant’s applications on the basis of s.30(1)(f) Landlord and Tenant Act 1954; that the landlord required possession for substantial internal development works, bringing their leases to an end.

The issue with the development scheme planned by the landlord was that, whilst stopping short of being entirely fictional, it was completely contrived by the landlord together with its solicitors with the sole aim of opposing the tenant’s applications for new leases under ground (f), rather than genuinely planning improvements. The purported works involved lowering the floor of part of the demised premises as well as repositioning an internal wall and smoke vents and provided no practical or economic benefit to the landlord, save for the fact it could use them as a tool to oppose the tenant’s renewal. The landlord even openly confirmed during cross examination that if the tenant left voluntarily, the works would not be carried out!

Nevertheless, the High Court found in the landlord’s favour, upholding their refusal for new leases.

Supreme Court Decision

The High Court decision was widely regarded as a controversial decision, particularly due to the reason that it was seen as defying the impetus behind the 1954 Act by eroding security of tenure for commercial tenants and shifting the balance of power towards landlords.

The Supreme Court examined two critical issues on the meaning of ground (f), which it labelled as “the acid test”, being:

Whether a landlord which intends to carry out works if, and only if, those works are necessary to satisfy ground (f), has the requisite intention for the purposes of ground (f); and
Whether a landlord whose sole or predominant commercial objective is to undertake works in order to fulfil ground (f) and avoid the grant of a new lease to the tenant has the requisite intention for the purpose of ground (f).

Lord Sumption delivered the leading judgment in the Supreme Court and held that the landlord’s proposed works were not of the nature or quality of the intention required to satisfy ground (f). This was due to the fact there was no benefit to the landlord to be derived from the works and chiefly, the landlord would not have carried out the same works if the tenant were to have left voluntarily.

Part of the Court’s reasoning was that “The right to obtain vacant possession on the expiry of the existing term is not in itself protected by section 30” but it is to enable the landlord to manage its own commercial interests by carrying out works and development for this benefit. Using works only for the basis of achieving vacant possession is the exact opposite of what was intended by the LTA 1954, eroding security of tenure.

In practice, it is unlikely the situation would be quite as clear cut as the Supreme Court envisages, but it would certainly be prudent to advise landlords to be not quite so brazen with their intentions as The Cavendish Hotel were in this case and strip out any ‘artificial’ elements from plans which would have no commercial benefit but would serve to obstruct a tenant’s lease renewal.

Impact upon Ground (f) and the difficulty with proving whether works are genuine

In terms of the practical impact of this decision, a court’s determination as to whether a landlord’s intention is conditional or not upon the tenant’s occupation and their right to a new lease will likely be subject to more careful scrutiny by the court rather than as it was before S Franses – simply the provision of an undertaking that the works would actually be carried out.

Therefore, before devising a cunning plan for works for the purpose of removing unfavourable tenants, landlords should remember that in light of this decision they are likely to be judged more strictly than ever before on the intention behind such works. Equally, at the other end of the spectrum, there is likely to be more onerous analysis of the intention behind works which are being carried out pursuant to the engagement of ground (f), even where the intention is genuine.

It would be advisable for landlords who are planning works to document their nature in respect of tenants’ lease renewals at the earliest stage possible. A bundle of evidence should be prepared well ahead of any hearings comprising of not only planning applications (if required), board minutes highlighting approval for such a decision, contractor quotes but perhaps most pertinently, a report showing the necessity for such works and/or a cost-benefit analysis to show that the works produce financial benefit to the landlord beyond simply achieving the removal of the tenant. This will all aid in demonstrating to the court that the intention to carry out the works exists independent of the tenant’s position in respect of a new lease.

News

COVERT BEHAVIOUR AND FOUL PLAY IN MAYFAIR

The case of Mr D Ferguson and others v Astrea Asset Management Ltd and others (2208175/2017 and others) is interesting for a number of reasons, not least for Judge Goodman’s disparaging comments on the practice of “covert recording”. The case is also a good reminder of “transferor” and “transferee” obligations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

Background

The issues in this case relate to the transfer of the management of the assets of the Berkeley Estate in central London from Lancer Property Asset Management Limited (Lancer) to Astrea Asset Management Limited (Astrea).

The Berkeley Estate is made up of around 140 properties in Mayfair and Knightsbridge, currently worth an estimated £5 billion and owned by the Abu Dhabi royal family. Lancer had managed the estate since 2004.

The transfer was a “service provision change” and as such, was governed by TUPE. As a result, Lancer’s employees, which were involved in the management of the estate’s assets, automatically transferred to Astrea on the same terms and conditions. However, on the day of the transfer, three of Lancer’s four directors were dismissed for gross misconduct, in particular because they were alleged to have enhanced their contractual terms in anticipation of the transfer. The remaining director and head of asset management, Mr Ferguson, was also dismissed soon after the transfer for gross misconduct. The directors all brought claims of unfair dismissal in the Employment Tribunal.

Decision

The Tribunal held that two of the directors were not assigned to the relevant group of employees and therefore did not TUPE transfer and their claims of unfair dismissal failed. However, it held that the other two directors, Mr Ferguson and Mr Kevill, were unfairly dismissed, although Mr Kevill’s compensation award was reduced by 100% due to his conduct – namely devising and leading the enhancement of the directors’ contractual terms.

As part of its analysis of the facts in the case, the Tribunal considered the steps which were taken in connection with the TUPE transfer. The Tribunal held that Astrea had failed to comply with its obligations under TUPE, as it did not inform the transferring entities about the “measures” (i.e. changes) which it intended to take in relation to the transfer. As a result, Astrea was ordered to pay each of the claimants three weeks’ pay.

TUPE transfers – key principles to remember

TUPE applies either in respect of a business transfer or a service provision change. A service provision change occurs either where:

a client engages a contractor to carry out a service which was performed in-house;
transfers a service from one contractor to another (as in this case); or
where a service previously conducted by a contractor is brought back “in-house”.

Who transfers?

Employees assigned to the grouping automatically transfer;
Employees who support the grouping e.g. management or administrative staff, may not be assigned to the grouping and therefore will not transfer.

What transfers?

Continuity of service;
Contractual terms of employment (NB: preserved not enhanced);
Employer’s liability for pre-transfer actions e.g. dismissals made because of the transfer.

Inform and Consult

Transferor has obligation to inform and consult with representatives of affected employees;
Transferee has obligation to provide information about measures;
Both of the above must happen in good time before the transfer;
Failure to do so can result in compensation of up to 13 weeks’ pay per employee.

Covert recording

During the initial conversations around the transfer, Astrea’s CEO, Mr Easter (also a respondent to the proceedings) covertly recorded some of the conversations between himself and Lancer’s directors. Many of the recordings were eventually admitted as part of his disclosure. When questioned, Mr Easter claimed that he had covertly recorded the conversations so that he could grasp the complicated facts around the transfer as quickly as possible.

Judge Goodman took a stern view on covert recording, describing the practice as an “outrageous and a gross breach of trust”. She emphasised that covert recordings should be regarded with caution where admitted as evidence.

The concept of covert recordings is nothing new. Worryingly though, developments in technology suggest that it may become more commonplace, as demonstrated by the recent news stories in relation to Apple’s latest “eavesdropping” technology. For example, the new “Live Listen” feature on iOS 12, designed to help the hearing impaired, enables users of Apple’s wireless AirPod’s to effectively eavesdrop on conversations taking place up to 15 metres away.

Case law has indicated that tribunals will generally admit covert recordings of meetings taken by an employee when they have been present at the meeting. However, such recordings will not only expose those being recorded, they will inevitably put the recorder in a bad light. Employers should also be wary – covertly recording employees could put employers at risk of breaching both the contract of employment, and also their obligations under data protection legislation.

Conclusions

This case is notable for its themes of duplicity and concealment, both around the changes to contractual terms prior to the transfer and Mr Easter’s covert recording. It is unclear whether there was a genuine intent to deceive or whether the parties’ actions simply arose from a lack of knowledge. However, the key learning point to takeaway is that, when involved in a TUPE transfer, take care to communicate in a timely and transparent fashion, and always seek advice if you are unsure of your obligations.

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