Real Estate update. Rebuilding after the riots. Tenant s fit-out works: whose risk? Whose insurance? page 5 The draft NPPF: what will it mean for

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1 Real Estate update September 2011 Real Estate update Rebuilding after the riots page 2 Tenant s fit-out works: whose risk? Whose insurance? page 5 The draft NPPF: what will it mean for planning? page 7 Option agreements, development and site assembly page 9 Easy come, easy go: an easier future for easements? page 12 Vacant possession: good intentions are not good enough page 15 Ask a question If you have any questions please contact Marie Scott, Partner T +44 (0) m.scott@nabarro.com QuarterDay Midsummer Edition Our Real Estate Dispute Resolution update click here The Real Estate team To find out more about the team, and our capabilities click here 1

2 Rebuilding after the riots Summary and implications The recent riots across the UK could have significant implications for owners and occupiers of commercial property. The Local Data Company reveals that more than 10 per cent of the nation s 475,000 shops, pubs, restaurants and clubs have been affected by the disturbances. The Prime Minister has vowed to help landlords and retailers repair damage caused by the rioting. He has pledged 20m to help retailers and has set up a 10m recovery scheme for councils to make buildings safe and to speed up planning consent for reinstating properties. This briefing highlights a few issues which landlords of commercial premises of whatever size, be it a shopping centre, small parade of shops or a single let unit, need to be aware of when seeking to repair the damage and protect their businesses: Insurance is the damage covered? Loss of rent insurance/rent cesser will the rent suspension be triggered in leases and if so what are the implications? Reinstatement to what extent is this the landlord s responsibility and what does a landlord need to watch out for when rebuilding? Insurance are you covered? Where your building has suffered loss by an insured risk (through no fault of the occupier as is the case in the recent riots) you may be able to look to your insurance company to pay for making good the damage. Most modern, commercial leases are likely to provide for the landlord to insure the building against loss suffered from what are known as insured risks. Risks covered are usually listed in detail (to avoid ambiguity and argument later). Firstly you need to consider if the recent events fall within one of the defined risks. The obvious risk that springs to mind is riot. However, you should consider all relevant risks for example fire, theft, civil commotion and damage by malicious persons. Your starting point should be checking what risks are covered by your policy. Many policies nowadays are all risks, so you should be covered, however, everything hinges on the specific policy wording. Ask a question If you have any questions please contact Verity Waington, Senior Associate T+44 (0) v.waington@nabarro.com or Camilla Askaroff, Associate T +44 (0) c.askaroff@nabarro.com Definition of a riot Where 12 or more persons who are present together use or threaten unlawful violence for a common purpose and conduct of them (taken together) is such as would cause a person of reasonable firmness present at the scene to fear for his personal safety, each of the persons using unlawful violence for the common purpose is guilt of riot. (section 1(1) Public Order Act 1986) Rent and service charge does a tenant still have to pay? Most commercial leases provide that the rent (or a fair proportion of it) is suspended while premises are unusable or incapable of occupation, however always check the drafting of the rent suspension clause in your lease carefully: Ascertain exactly what is suspended is it only principal rent, or is it principal rent, service charge and insurance rent? 2

3 Check the length of time that the suspension applies it is normally only for a limited time to coincide with loss of rent insurance but sometimes can be open-ended until reinstatement is complete. If common areas or accesses have been damaged or destroyed so as to render the premises unusable or incapable of occupation, but the premises themselves are not actually damaged, it may be that the tenant is still liable under the lease for its rent. Whilst it is common nowadays for tenants solicitors to amend rent cesser clauses to provide that the rent is suspended in the event of damage or destruction to the premises or any access or services to it, this is not always the case. As the rent suspension may not apply if the tenant is in arrears. Rent suspension should not be an issue provided your insurance cover for loss of rent mirrors the provisions of the rent suspension clause you could, however, find yourself with a shortfall if you have only insured for loss of principal rent but the rent cesser in the occupational lease provides for all rents to be suspended. Any risk to your income under a rent suspension should not be an issue provided you have adequate loss of rent insurance Keep open Some retail leases contain keep open provisions which require a tenant to remain open for trade during specified opening hours. A breach of this obligation could give rise to a damages claim against the tenant. However it may be difficult for a landlord to demonstrate any loss in these circumstances. Pursuing a tenant under a keep open clause may be seen as an aggressive stance and is likely to be unpopular in the market. Repair and reinstatement who is responsible for what? If on checking your policy, the relevant damage is covered as an insured risk, it will be your responsibility as landlord to make the necessary notification to the insurers and proceed to make a claim. Damage covered by insurance is highly likely to be carved out of the tenant s obligation to repair. It is, however, worth checking that this is the case as, if not, and your insurance claim is not successful, you may be able to pursue your tenant under its repairing obligations in the lease. It is usual in a multi-let building for the landlord to covenant not only to reinstate the premises but all the retained parts and depending on the nature of the damage to your property, this may impact on the construction programme of any reinstatement works. Ideally, a landlord s obligation to reinstate will be subject to the landlord being able to obtain all necessary permissions and consents. The precise terms of the occupational leases should be reviewed to ascertain whether or not there are any best endeavours obligations (which may require you to go over and above making an application for consent to reinstate). Now is the time to review your occupational leases to ascertain obligations you as landlord have in terms of reinstating the premises 3

4 It is also important to check if you are required to provide the same premises on reinstatement or if you can provide a different configuration this may present an opportunity to create a more efficient layout with more units or better servicing. Usually where leases allow comparable premises to be reconstructed, there will be obligations on the landlord to provide the same size premises with the same services and amenities. The terms of the leases should be reviewed to check how flexible they are in these circumstances. What if reinstatement is not possible? Usually leases state that all insurance proceeds belong to the landlord if reinstatement is frustrated. If the lease is silent, the position at common law is unclear as the courts must establish the intention of the parties by looking at the lease as a whole and usually take into account the value of the parties respective interests which can mean insurance proceeds being split between landlord and tenant. If the landlord considers it is impossible or impractical to reinstate the premises the lease may allow the landlord to terminate the lease upon giving notice to the tenant. Similarly the tenant may be able to terminate the lease by giving notice to the landlord if, following damage or destruction of the premises by an insured risk, the premises have not been reinstated within a fixed time period after the date of the damage or destruction. Although this may be some way off, it is advisable to diarise any such dates so that they are factored into any construction programme for reinstatement. Removal of properties from valuation lists As part of the riot support package published by the Department for Communities and Local Government, seriously damaged business properties will be taken off the valuation lists, removing the liability for paying rates. This relief includes empty rates for landlords, however the decision on exemption ultimately falls with the local authority. Landlords are therefore urged to contact their local authority as soon as possible if they think they might be entitled to this relief. Inspections of damaged properties by the local authorities are expected to be especially stringent. If any of your property portfolio has been damaged in the recent riots and you would like advice on any of the issues covered above, please speak to your usual Nabarro contact. 4

5 Tenant s fit-out works: whose risk? Whose insurance? Summary and implications An agreement for lease or a licence to alter often allows for fit-out works to be carried out by the tenant. The clauses in these agreements dealing with the fit-out need to cover the question of insurance. This is insurance both for the existing building and for the fit-out work itself. Everyone concerned, landlord, tenant and fit-out contractor, must carefully consider the question of insurance whenever a tenant is undertaking works within a building insured by the landlord. Crucially, they should do this as early as possible to ensure there is time to reach agreement and put the required insurance in place. The problem is that: The tenant does not usually insure the existing building and is not in a position to procure insurance for it; Landlords may be reluctant to include tenants and their fit-out contractors on the buildings insurance as joint insured, due to the risk of an increase in premiums both during the works and in the future if a claim occurs; and Even if the landlord is prepared to include the tenant and its fit-out contractor on the insurance policy, the usual building contract risks are not exactly the same as property insurance risks. Ask a question If you have any questions please contact Penny Moore, Partner T +44 (0) p.moore@nabarro.com Construction & Engineering team To find out more about the team, and our capabilities click here Key questions to ask Is it feasible to add the tenant and its fit-out contractor as joint names on the policy for the existing building, and preferably for the fit-out works too? What are the cost implications of doing so? Is the fit-out contractor s public liability insurance adequate to meet claims for damage to the existing building? Do the lease, licence for alterations and fit-out building contract reflect exactly the insurance that has been put in place? Open discussion on how to share risk The starting point is to recognise that insurance is an issue. Everyone should talk to insurance brokers early on in the process and decide the optimum approach in the particular circumstances. Moreover, both the agreement for lease/licence to alter and the fit-out building contract should be drafted to reflect the insurance arrangements. Worst case: what if the fit-out contractor negligently destroys the building? Where a tenant of a single floor of a building carries out works to that floor. The most important thing is to address the question of insurance during fit-out works as early as possible in the process 5

6 Under an unamended JCT building contract the tenant (as employer under the fit-out building contract) must insure the existing building and the fit-out works in the joint names of itself and its contractor. However, without landlord s co-operation, the tenant will be unable to comply with this obligation. Under the lease (or agreement for lease) the tenant will probably only have the benefit of a waiver of subrogation under the buildings insurance rather than being a joint name on the policy. The lease will almost certainly not provide for the tenant s fit-out contractor to be a joint name on the buildings insurance. Without the tenant and the tenant s fit-out contractor as joint names on the buildings insurance policy, or alternatively a waiver of subrogation against them from the landlord s insurer, the landlord s insurer could choose to pursue the tenant and/or the contractor to recoup its payment for the loss of the building. If the insurance company pursues the fit-out contractor, the fit-out contractor could then look to the tenant to recover the amount based on the tenant being in breach of its building contract obligation to insure the existing building in joint names. In the context of a large building the potential rebuild cost could be significant, so this represents a significant risk for both tenants and fit-out contractors, and so, indirectly, for landlords. Waiver of subrogation? Stepping into the shoes of the insured Subrogation allows an insurer to step into the shoes of the insured. The insurer may pay out but can take any rights the insured had and sue on them. When a car driver is in an accident caused by someone else, their insurer will often pay out and then sue the person responsible for the accident stepping into their shoes. A waiver of subrogation means one party to a contract waives its rights against another so that an insurer cannot sue that other party. The insurer only has the same rights as its insured and if these have been waived, the insurer has no rights. So what should the landlord and tenant to avoid that scenario? Options Comments The landlord either adds the tenant and contractor onto the existing buildings insurance as joint names or notes their interests on their policy with a waiver of subrogation. Landlord insures both building and fit-out works in the names of landlord, tenant and fit-out Usually the tenant will bear any resulting uplift in insurance contractor. premiums and any excesses payable for claims arising from the fit-out works. Furthermore, the tenant will probably have to agree to pay any future increase in premium directly attributable to a claim relating to the fit-out works. Landlord insures building in names of landlord, tenant and fit-out contractor, and either tenant or fit-out contractor insures fit-out works in names of tenant and fit-out contractor. Tenant or its fit-out contractor insures fit-out works in names of tenant and fit-out contractor, and fit-out contractor s public liability insurance covers any damage to existing building. This leaves potential arguments and practical issues in relation to any insurance claims and reinstatement as, for example, the wall is insured by one insurance company and the paint on it by another. This might apply if the landlord does not wish to or is unable to co-operate with any joint arrangement. If the intention is for the fit-out contractor s public liability insurance to cover damage to the rest of the building, this will only be viable if the fit-out contractor has a level of public liability insurance commensurate with the value of the existing building and the risk profile of the works. 6

7 The draft NPPF: what will it mean for planning? Summary and implications In July 2011, the Government published its much anticipated draft National Planning Policy Framework (NPPF) for public consultation. The NPPF will replace current Government planning policy and has the potential to make important changes to planning decisions and development plan policies in England and Wales. The draft NPPF is described by the Department for Communities and Local Government as a key part of reforms to make the planning system less complex, more accessible and promote sustainable growth. Developers, planning authorities and local communities will be particularly interested in: The introduction of a presumption in favour of sustainable development; and The significant reduction and simplification of government policy. Ask a question If you have any questions please contact Rob Bruce, Senior Associate T +44 (0) r.bruce@nabarro.com The Planning team To find out more about the team, and our capabilities click here Public consultation on the draft NPPF closes on 17 October 2011 and Nabarro LLP s Planning team is well placed to draft responses on behalf of its clients. The presumption in favour of sustainable development The draft NPPF refers to the definition of sustainable development from the Brundtland Commission s 1987 report Our Common Future as meaning development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The draft NPPF places significant emphasis on local planning authorities planning positively for new development and states that authorities should approve all individual proposals wherever possible and should: Prepare Local Plans on the basis that objectively assessed development needs should be met, and with sufficient flexibility to respond to rapid shifts in demand or other economic changes; Approve development proposals that accord with statutory plans without delay; and Grant permission where the plan is absent, silent, indeterminate or where relevant policies are out of date. The above policies should apply unless the adverse impacts of allowing development would significantly and demonstrably outweigh the benefits, when assessed against the policies in the draft NPPF taken as a whole. Our view A common issue with sustainable development is ascertaining what it actually means, particularly in regard to particular development proposals or policies. Reference to the Brundtland Commission s 1987 definition appears outdated and in our view would have been best left out of the draft NPPF to avoid policy confusion. Reference to the needs of present and future generations suggests, on one interpretation, that those needs have to be assessed and development proposals might face an assessment as to why 7

8 they are needed. That would be a backward policy step in our view and reading the draft NPPF as a whole, it does not appear to be a policy position that is intended. The criteria for the presumption regarding the preparation of Local Plans and approval of planning applications will be welcome by developers as a counter-balance to the localism powers currently before Parliament in the Localism Bill. As we anticipated, the benefit of the presumption for developers is significantly restricted, however, so that it applies unless the adverse impacts of allowing development would significantly and demonstrably outweigh the benefits. This leaves a significant discretion within the terms of the presumption for planning authorities to refuse planning permissions on matters of planning judgement regarding impacts. We expect an increase in the number of planning appeals, for example, in areas where the Council and local community are generally resistant to more housing on grounds not sufficiently based on impacts. Reduction in the amount of government policy The draft NPPF will replace thousands of pages of existing government planning policies, made up of Planning Policy Statements, Planning Policy Guidance and Circulars with a single 58-page document. Our view We anticipate that the reduction in government planning policy will generally be welcomed all round and inevitably simplify it, making it more user-friendly. Perhaps the greatest beneficiaries are likely to be local neighbourhoods seeking to use their localism powers after the Localism Bill is passed. Practitioners are likely to view the revocation of the detailed technical guidance as a loss in some instances resulting in more justification being required for assessment methodologies. The reduction and simplification of government policy should not be seen as a change in policy. For the most part, the essence or direction of existing policy is retained (with the principal exception being the introduction of the sustainable development presumption). With the replacement of the existing more detailed and prescriptive policies, local planning authorities will, through their interpretation of the NPPF policies, have greater discretion as to how they are applied in their local areas. With the notable exception of the sustainable development presumption, we do not generally anticipate that developers will receive an easier ride through the planning system. With the notable exception of the sustainable development presumption, developers should not generally be expecting an easier ride through the planning system 8

9 Option agreements, development and site assembly Summary and implications An option to purchase (that is, a call option) is an incredibly useful tool for a developer who is seeking to assemble ownership of a site for a development scheme. The land which comprises the intended development site may be owned by a number of different parties, and the use of options to acquire these interests is capable of providing the developer with the required combination of certainty coupled with flexibility. The developer acquires the ability to call for the transfer of the land at a time that suits him (for example, once options are in place covering the whole of the site), but without being committed to do so. The landowner will usually be paid an option fee, and if the option is never exercised, will have generated this income from their land without giving anything away (other than a commitment to sell during the option period). There are a number of commercial and legal issues to be considered in connection with option agreements, which are relevant to both the landowner and the developer. These include: The terms of the option itself; How the sale price is calculated; Asset management of the land between entering into the option and completing the sale; and Possible alternatives to an option agreement. Ask a question If you have any questions please contact Nathan Rees, Senior Associate T +44 (0) n.rees@nabarro.com The terms of the option agreement Options are inherently flexible arrangements, and the parties can (subject to certain specific statutory restrictions) generally agree such terms as they see fit. Main issues when agreeing heads of terms: How long will the option last? Although an option agreement lasting many years is legally possible, the landowner will not want to sterilise their land and their ability to asset manage/sell for any period longer than that which reflects the benefit they receive from entering into the option agreement (i.e. the option fee). Option fee. How much is being paid by the developer, and when? A fee will almost certainly be payable on exchange. Are periodic payments also to be made during the life of the option? Is the option fee deducted from the eventual sale price? Will the developer have the right to extend the option (for example, by serving notice before expiry of the initial option period, extending the option for a further fixed period)? Again, is a fee payable for this, and do any of the other terms of the option/eventual sale need to be amended if an extension is allowed? Price. If the option is exercised and the land is sold, how is the price calculated? Is the developer paying a fixed price, or are there any variables? If the option period is of sufficient length that the value of the land may change, both parties will need to consider how to deal with this. Possibilities include RPI (or other index) increases; stepped increases; or an open market valuation at the point of sale. Conversely, if the market drops, would the developer be entitled to a price reduction? This is less common than mechanisms for price increases. 9

10 Main issues when agreeing heads of terms: If the option is exercised and planning permission is granted/the development proceeds, does the landowner receive any form of overage to reflect the increased value of the land? Asset management. What can the landowner do (and what must they not do) with their property during the option period? The developer will want as much control as possible, and will not want the landowner to grant any leases, or rights over the land, or do anything else without its consent (the developer will have a vacant possession strategy for the entire development site at the forefront of its mind). The landowner needs to be aware that this therefore reduces its ability to maximise income from the property. This is explored further below. Asset management of the property A long-term option which prevents any asset management such as new leases is unlikely to be attractive to a landowner unless a significant option fee is paid. Therefore, where there are asset management opportunities, a compromise may need to be reached. The developer may in this scenario be prepared to permit the landowner to grant contracted out tenancies which do not extend beyond, or which have landlord break options prior to, the developer s required vacant possession date. However, the developer will almost certainly require a level of oversight to ensure it is satisfied that the leases are validly excluded from the security of tenure provisions of the Landlord and Tenant Act 1954, and that the break options are valid and will allow vacant possession to be delivered in accordance with the development timetable. Inevitably this type of arrangement requires monitoring by the developer, and may require the developer to consent to the form of leases being used. The parties therefore need to be aware that this will involve increased legal, surveying and internal costs for both parties, which need to be factored into the overall commercial deal for the grant of the option. The developer will want to be sure that it can obtain vacant possession; the landowner will not want to lose its ability to generate income Alternatives to option agreements Options are not the only method of securing the ability to acquire land in the future, but they do, in many ways, offer the greatest flexibility for the developer. The main alternative in this context is probably a conditional contract, although pre-emption agreements could also be used. However, these provide much less certainty for the developer and will rarely be sufficient in a site assembly scenario. In the context of a complicated site assembly, options can offer the greatest flexibility for the developer Key differences: options, conditional contracts and pre-emption agreements Option agreement Conditional contract Pre-emption agreement Commitment/ability to buy land The developer can call for the land in its absolute discretion at any time during the option period. The developer will be committed to buying the land once the relevant pre-conditions set out in the contract have been complied with. Unless it has the right to waive pre-conditions, the developer cannot buy the land earlier. The developer is only entitled to buy the land once the landowner decides to sell. 10

11 Timing The developer decides when to exercise the option, and therefore when to buy the land. Other obligations The developer may be under no obligation to try to satisfy any of the other requirements for the development scheme which would then lead to the option being exercised. Price As mentioned above, there are a number of ways of dealing with this, but either a fixed price, or a method for calculating the price, will need to be included. Once the conditions are satisfied, the completion date will follow soon after. If any conditions are not within the developer s control, it may find itself committed to purchase at a time it did not fully anticipate. The landowner may impose obligations on the developer to try to satisfy pre-conditions, such as obtaining planning permission. This is likely to work in a similar way to the option agreement. The developer may, without prior notice, be required to make a decision whether to purchase the land, where the landowner makes an unexpected decision to sell. Unlikely to include any obligations on the developer this is simply a right of first refusal where the landowner decides to sell. The developer will have the ability to buy the land at a price equal to the price at which the landowner is prepared to sell to a third party purchaser. The developer therefore has far less certainty of the price at which it may ultimately be able to acquire the land. Conclusion The flexibility which options provide, and the freedom to agree terms as the parties see fit, together with the inherent complexity of transactions involving major developments, present the developer and the landowner with a number of commercial issues to consider and agree at heads of terms stage, so that each potential scenario is addressed within the option. A well drafted option agreement will provide the developer with confidence that ownership of the development site can be achieved, and called for at the appropriate time. Each potential scenario should be addressed in the heads of terms 11

12 Easy come, easy go: an easier future for easements? Summary and implications Developers need certainty that they can proceed with a development without interference from third parties. One area of uncertainty has always been easements. Easements are rights for the owner of land to do something over another s land. Examples are rights of way, rights of passage of services, rights of support and rights to light and air. They are not simple contractual arrangements, but bind successors in title to land. They are therefore of financial benefit to the owner of the land with the benefit of such rights and can be a development hurdle for the owner of the land with the burden of such rights. The Law Commission recently published a report on easements, covenants and profits à prendre. The report contains a draft bill dealing with reforms on the laws relating to easements, covenants and profits à prendre. For the purposes of this update, we will focus on the Law Commission s proposals relating to the acquisition and abandonment of easements. By way of summary, the Law Commission proposes: A new statutory rule for acquiring easements by long use: The abolition of the existing laws on acquiring easements by long use and its replacement with a new statutory method. A new method for modification and discharge of easements: New powers for the Lands Chamber to modify and discharge easements. A new statutory rule for abandonment of easements: A new statutory presumption that easements not exercised for 20 years have been abandoned. The Law Commission has not proposed an overhaul on the laws relating to rights to light. There will be a separate Law Commission report on rights to light in the future. Ask a question If you have any questions please contact Cheryl Gurnham, Senior Associate T +44 (0) c.gurnham@nabarro.com The Real Estate team To find out more about the team, and our capabilities click here a) Easy come: the acquisition of easements The Law Commission made various suggestions to tidy up anomalies that have developed over time. However, for the purpose of this update, we have focused on the Law Commission s proposals for the acquisition of easements by long use, or prescription. 12

13 Current law Under current law, prescription refers to rights acquired by use over time which has not been exercised by force, by stealth or with the other land owner s permission. Rights acquired by prescription can be acquired under the following regimes: Common law use since 1189 (based on the assumption that a benefit over someone else s land enjoyed for at least 20 years is to be treated as use of that benefit since 1189, unless there is evidence to the contrary); Lost modern grant based on a presumption that a benefit over someone else s land enjoyed for at least 20 years at any time was granted by a deed that has been lost, unless it can be established that the owner of the land subject to the right could not have made the grant; Under the Prescription Act 1832 if one land owner enjoys a benefit over someone else s land, the other land owner will not be successful in bringing a claim against the first land owner, if that first land owner has enjoyed that benefit for the last 20 years without interruption before legal action is taken. Only interruptions of one year or more will be treated as an interruption. Therefore, use of a benefit over someone else s land of 19 years and one day is sufficient. For the right to actually crystallise though, a third party must bring a claim. Current law Easements can be created or acquired in a number of ways: Express grant and reservation (i.e. a document creating a right); Implied grant and reservation (i.e. where the document does not expressly grant or reserve a right, but where this is implied); and Prescription (i.e. long use). Law Commission s proposals The Law Commission proposes to abolish all current laws on prescription and proposes a new statutory method of prescription based on use. The main points of this proposal are as follows: It must be a qualifying use of land (see box to the right); Use must have been for a continuous period of 20 years (although the proposals do not clearly state whether the 20 years has to be immediately preceding the date the right is claimed); The easement will be a freehold easement (i.e. it will benefit the freehold owner of the land with the benefit of the right and bind the freehold owner of the land burdened by the right) but it will also bind leasehold owners of the land with the burden of the right; Rights will be subject to local usage or custom (see the comment below regarding the Custom of London and rights to light). The obvious benefits of the proposed scheme is that it will no longer rely on a legal fiction assuming use since 1189, it will also not require litigation to be brought to establish the right (as under the Prescription Act 1832). Qualifying use of land Use to which a right could be granted as an easement; Without force, stealth or possession; Not the same possession or ownership of the land with both the benefit and burden of the use; Not where the owner of the land burdened by the use is unable to grant a freehold right; Not where the land with the burden of the use is let; and Not a right to light against the Crown (see below). b) Easy go: how can easements be brought to an end? Just as easements may be created by express grant and reservation, parties may agree to release rights. However, if parties are unable to agree, how can a developer of land subject to an easement have certainty that a particular easement will not prevent it from developing its land? 13

14 Modification and discharge The Law Commission has proposed that the Lands Chamber s jurisdiction is extended to cover easements, so that it can modify and discharge easements in the way it currently does for restrictive covenants. Abandonment The above change to the Lands Chamber s powers will only apply to easements created after the date the legal reforms on easements come into effect. It will not apply to easements created before that date. Therefore, the law relating to abandonment will be relevant to existing easements created or acquired before the law reforms take effect. The current law on abandonment is unclear. The main premise of the principle is that, just as, over time, rights can be acquired by user, so they can also be extinguished by non-user. However, case law is inconsistent. The Law Commission has suggested that there should be a statutory presumption that where an easement has not been used for a continuous period of 20 years, it has been abandoned. The presumption could be rebutted by evidence to the contrary. c) Rights to light and air The Law Commission acknowledged that the current law relating to rights to light and air gives rise to disproportionate practical problems. However, their current report is concerned only with general principles of easements and does not focus on any specific rights. The proposed bill does, however, retain Crown immunity, so that rights to light cannot be obtained by way of prescription against the Crown. The proposed bill also ensures that any rights to light created by way of prescriptive acquisition under the new scheme are subject to any local usage or custom to which they are currently subject. The Custom of London which currently permits freehold owners in the city to build or rebuild on ancient foundations to any height, regardless of the interference with light and air to adjoining owners, will therefore defeat any claim for prescriptive acquisition under the proposed bill, as it currently defeats any claim for prescription by way of common law or lost modern grant. Rights to light future review In July 2011, the Law Commission announced that it intends to start work on a review of rights to light in early 2012 and produce a draft bill in 2014 or Therefore, for the time being, rights to light and air will continue to be a concern for all developers. Click here for the Law Commission s programme of law reform. 14

15 Vacant possession: good intentions are not good enough Summary and implications Whether in relation to buying, selling or granting a lease of property, the term vacant possession is commonly used within the real estate industry. Although it may seem self-explanatory, what constitutes vacant possession has been subject to significant judicial scrutiny and the recent case of NYK Logistics (UK) Limited v Ibrend Estates BV serves as a reminder of the careful consideration that should be given when either requiring or accepting an obligation to give vacant possession. Failure to providing vacant possession can potentially lead to significant and even ongoing liabilities. Although the facts of any particular case will have a bearing on exactly what is required, the following principles should be followed when providing vacant possession: The property must be empty of people. This includes employees, security personnel and even trespassers; The party expecting to receive vacant possession must be able to assume and enjoy immediate and exclusive occupation, possession and control of the property; and All chattels must be removed from the property. Leaving anything behind (including rubbish) could constitute a breach of the obligation. Ask a question If you have any questions please contact Chris Oakley, Senior Associate T +44 (0) c.oakley@nabarro.com NYK Logistics (UK) Limited v Ibrend Estates BV To read the full judgement of the case click here The Real Estate team To find out more about the team, and our capabilities click here The relevance of vacant possession The Standard Commercial Property Conditions (Second Edition) are incorporated into almost every commercial sale and purchase contract. Without amendment, these conditions impose a contractual obligation that the property will be sold with vacant possession (or subject to a specific lease). On the grant of a lease, in the majority of cases, the documentation will provide that the landlord will give vacant possession to the tenant on completion. Equally, on expiry of the lease, the tenant will have an obligation to yield up the premises to the landlord with vacant possession. It is also common to see vacant possession as a pre-condition to the exercise of a break clause. The majority of recent case law where the meaning of vacant possession has been argued relates to circumstances where it has been claimed that a tenant has not provided vacant possession to the landlord and has not therefore validly exercised the break. A breach of the contractual obligation to provide vacant possession in any of the circumstances above could give rise to claims and resulting liabilities. However, where a tenant fails to exercise a break validly, the lease will continue in full force and effect and the tenant will be obliged to keep paying the rent and complying with the tenant s covenants for the remainder of the term, which could be a number of years. Where a tenant fails to exercise a break validly, the lease will continue in full force and effect 15

16 NYK Logistics (UK) Limited v Ibrend Estates BV The parties in this case had entered into a lease of warehouse premises. The lease contained a break clause which entitled the tenant to break subject to the tenant complying with several pre-conditions, one of which was to give vacant possession to the landlord on the break date. The tenant served a valid break notice to break the lease on Friday 3 April Several days prior to 3 April, the tenant realised that the repair works that it was undertaking to the property (which were not a pre-condition to the break) would not be completed by 3 April. The tenant suggested to the landlord that it should be allowed a further week to complete the repairs and during that period, it would continue to pay for security guards at the property. The tenant also offered to hand the keys back to the landlord so that during the week period the landlord could have access to the property. The landlord did not respond to the tenant s suggestion. Over the weekend, the tenant maintained its security of the property and on Monday morning, the tenant s contractors entered the warehouse and proceeded to complete the remaining repair works. Shortly after that, the tenant received a letter from the landlord s lawyers stating that the lease had not been effectively terminated because the tenant had not complied with the obligation to give vacant possession on the break date. Decision The Court of Appeal ruled that the tenant had not given vacant possession to the landlord on the break date and therefore the break was ineffective and the lease would continue in full force and effect. The tenant s attempt to reach agreement with the landlord to permit access after the break date was described by the court as a sensible proposal, however, the tenant knew that it had to obtain the landlord s agreement to continuing occupation by the break date and it had not. As a result, on and after the break date, the property was not empty of people and the landlord could not have assumed and enjoyed immediate and exclusive possession, occupation and control of the property. Furthermore, the tenant had done nothing to demonstrate that it was actually giving up possession of the property. Although the tenant offered to return the keys, it did not do so and the tenant retained exactly the same control of the property after the break date that it had enjoyed before. What the tenant should have done was to return the keys to the landlord and remove all personnel and chattels from the property. It could have then approached the landlord the following day and requested permission to return to carry out the works as a licensee. Implications and further points to consider The decision in NYK Logistics reinforces the fact that failure to comply with an obligation to give vacant possession can lead to significant ongoing liabilities. It also raises the question of whether, as a tenant, it is always appropriate to agree to a vacant possession obligation, particularly in the context of a break clause. 16

17 Previous case law on the subject of vacant possession conditions in break clauses has influenced the approach in practice to agreeing heads of terms and lease negotiations. It is not uncommon now to see leases where there is either a heavily qualified or no vacant possession obligation as a pre-condition to a break. The Code for Leasing Business Premises in England and Wales 2007 (the Code) states that the only pre-conditions to a tenant s break should be: That the main rent has been paid up to date; That the tenant should give up occupation of the property; and That no continuing sub-leases should be left in place. Interestingly, there is no suggestion in the Code that a tenant s obligation to provide vacant possession upon expiry of the term (where no break has been exercised) should be qualified. This is a clear recognition by the real estate industry that failure to meet the strict criteria that vacant possession imposes can result, arguably, in a disproportionate liability if the break is not effectively exercised. The decision in NYK Logistics simply affirms that the term vacant possession is not a simple or straightforward concept and any vacant possession obligation should be considered with these factors in mind. It is not uncommon now to see leases where there is either a heavily qualified or no vacant possession obligation as a pre-condition to a break London Sheffield Brussels Singapore Lacon House, 1 South Quay, 209A Avenue Louise, 50 Raffles Place, 84 Theobald s Road, Victoria Quays, 1050 Brussels, Belgium Singapore Land Tower, London WC1X 8RW Sheffield S2 5SY T Singapore T +44 (0) T +44 (0) F T F +44 (0) F +44 (0) Alliance firms France Germany Italy August & Debouzy GSK Stockmann + Kollegen Nunziante Magrone Gilles August Rainer Stockmann Gianmatteo Nunziante T +33 (0) T +49 (30) T Nabarro LLP Registered office: Lacon House, 84 Theobald s Road, London, WC1X 8RW. Nabarro LLP is a limited liability partnership registered in England and Wales (registered number OC334031). It is a law firm regulated by the Solicitors Regulation Authority. A list of members of Nabarro LLP and of the non-members who are designated as partners is open to inspection at the registered office. The term partner is used to refer to a member of Nabarro LLP or to an employee or consultant with equivalent standing and qualifications in one of Nabarro LLP s affiliated undertakings. Disclaimer Detailed specialist advice should be obtained before taking or refraining from any action as a result of the comments made in this publication, which are only intended as a brief introduction to the particular subject. This information is correct on the date of publication. Nabarro LLP is not responsible for the operation or content of any external website or hyperlink referred to in this publication. Nabarro LLP