hedges newsletter oct 2014 version 2

For more information please call us 01865 594265 or visit hedgeslaw.co.uk

The Big News: Judgment ends administrator rent loophole

The recent Phones 4 U debacle makes it a good time to recap the recent Court of Appeal decision in Jervis v. Pillar Denton re Game Station).

Prior to the Game Station decision lease rents which had fallen due before the date that administrators took occupation of property for the purposes of an administration were simply treated as a debt in the administration. This led to companies entering into administration just after a quarter day so that the administrators effectively had the ability to occupy properties “rent free” for the next quarter. The Game Station case has changed this inherently unfair position: rent for any period when administrators are in occupation for the purposes of an administration is now treated as accruing on a day to day basis and is an expense of the administration (which is payable in priority to preferential creditors).

Hedges have produced a comprehensive briefing note for landlords on what to do if your tenant enters into administration. Download a copy here:

http://www.hedgeslaw.co.uk/site/business/landlord_tenant/

Property Insight Our scoop on the latest Property and Business news | October 2014


Bulletin October 2014

Much needed Appeal Court decision clarifies guarantee position on lease assignment

September’s Court of Appeal decision in Tindall Cobham 1 Limited v. Adda Hotels provided much needed clarity on landlords’ rights to approve intra-group assignments of leases notwithstanding the unenforceability of lease provisions requiring an existing guarantor to stand as guarantor for the incoming tenant.

The previous position

The K/S Victoria case confirmed that a lease obligation requiring an existing group company guarantor to guarantee the lease obligations of an associated assignee company was void. This did not, however, prevent the assignment itself meaning landlords could be left in a precarious position.

The facts in Tindall Cobham

In this case the tenants were all members of the Hilton group whose lease obligations under various leases were guaranteed by Hilton Worldwide Inc. The tenants chose to assign their leases to associated shell companies as part of a corporate restructuring without obtaining landlords’ consents and then argued that the parent company guarantee had fallen away.

The leases contained restrictions on assignment without landlord consent but also provided that consent would be given to an intra-group assignment so long as (1) notice of assignment was given and (2) the guarantor gave a fresh guarantee of the incoming tenant’s lease obligations. The tenants argued that as the second requirement was unenforceable following the KS Victoria decision they only needed to satisfy the notice test (which they did following completion of the assignments).

The judgement

The Court of Appeal held that s25 of the Landlord and Tenant (Covenants) Act 1995 was not intended to create “an imbalance in... contractual provisions”. As such both requirements were to be disregarded and the specific lease provisions relating to intra-group assignment should be ignored. The tenant was under an obligation to obtain consent under the standard assignment provisions in the lease.

The consequences

The Court of Appeal judgment would seem to be a sensible result and is certainly good news for landlords who might otherwise have found themselves in a position where the value of their property holdings could decrease dramatically as a result of being left with tenants of a low covenant strength following intra-group assignments.

Some tenants may be less pleased with the result: in particular tenants in the hotel and leisure sectors and supermarket occupiers who typically take longer term leases and often look to move property interests around intra- group may now find themselves in a much less flexible position as many will struggle to find alternative security of an equivalent value to offer on assignment.


Bulletin October 2014 2014

Other News:

Court of Appeal shines a light: shadow and de facto directors come out of the dark

The Companies Act 2006 is clear that the duties imposed on directors apply equally to de facto or shadow directors. A de facto director is someone who behaves as a director notwithstanding the lack of formal appointment and a shadow director is a person “in accordance with whose directions or instructions the board is accustomed to act”.

The recent Court of Appeal decision in Smithton (formerly Hobart Capital Markets) Ltd v. Naggar provided helpful guidance on interpreting the provisions of the Companies Act in relation to de facto directorship and found that Mr Naggar, who was a director of Hobart’s former holding company Dawnay Day, was neither a de facto nor a shadow director of Hobart.

The court held that whilst there is no definitive test for deciding whether a person is a de facto director consideration needs to be given to whether the individual is an integral part of the corporate governance system of a company and whether his or her acts are directorial in nature. It is not about a person’s job title but the cumulative effect of his or her activities examined in context.

VAT and the Standard Conditions of Sale: the importance of good drafting!

The Court of Appeal decision in CLP Holdings v Singh earlier this year emphasised how important clarity of drafting is when it comes to defining the purchase price in a sale contract. In this case the purchase price was stated to be £130,000. The buyer was aware that the seller had elected to waive the VAT exemption in respect of the property and the standard conditions of sale were incorporated by reference. The standard conditions included two critical provisions: (1) that all sums made payable by the contract were exclusive of VAT and (2) that in the case of a conflict the special conditions would prevail over the standard conditions.

Some years following completion HMRC asked the seller to account for VAT on the sale and the seller attempted to obtain payment from the buyer. The buyer refused to pay. The Court of Appeal agreed with the buyer that the £130,000 purchase price was inclusive of VAT. Since there was never any suggestion that VAT might be payable in addition to the £130,000 and the contract did not state “plus VAT” it was impossible to interpret the purchase price as being exclusive of VAT. As such there was a conflict between the standard and special conditions and the special conditions took precedence.

The moral of the tale?

Check and re-check what has been agreed on the VAT position at every stage of a transaction starting with clear heads of terms. And if in doubt, call Hedges!

Landlords beware: don’t forget to re-register your tenancy deposits

Under the Housing Act 1988 landlords of Assured Shorthold Tenancies (AST) must register a deposit with a designated tenancy deposit scheme (TDS) within 30 days of receipt, and provide the tenant with prescribed information confirming registration within that same period. A landlord failing to do so may be prevented from relying on a section 21 Housing Act notice requiring possession and could face a claim by the tenant requiring the landlord to register (or repay) the deposit, and seeking compensation of up to three times the amount of the deposit.

But what happens to deposits where, after the fixed term ends, a tenant remains in occupation of the property under a statutory periodic tenancy)? The Birmingham County Court answered this question In Gardner v McCusker holding that when the original fixed term expires, a new tenancy comes into existence which (again) triggers the landlord’s obligation to comply with the deposit registration requirements. This applies even where an initial deposit, paid at the start of the fixed term and registered under a TDS, is simply held onto by the landlord.

How does this affect you?

As a result of this decision, all landlords of AST tenants should check the terms of their TDS (which may cover this scenario without the need for re- registration of the deposit) and ensure they provide their tenants with the prescribed information at the end of the fixed term if tenants are to remain in occupation.

Bulletin October 2014 2014

And Finally... New Model Tenancy Agreement

The Department for Communities and Local Government has finally released its long promised model AST: https://www.gov.uk/government/publications/model-agreement-for-a-shorthold-assured-tenancy

Initial feedback is generally positive although it remains to be seen how widely the form of AST is adopted.

About Hedges

The commercial property and business services teams at Hedges are able to assist with all your commercial property and corporate commercial needs. We deal with property transactions of all types; ranging from the grant of straightforward leases to complex site assembly deals with related financing and planning issues. We are experts in buying and selling business of varying sizes and can assist with commercial contacts, commercial or property disputes and more. Our team of solicitors is always on hand to guide you through your transaction; starting with advice on how best to structure your deal in a tax efficient manner, using our unparalleled technical and problem-solving abilities to overcome issues along the way and then seeing your project through to a successful conclusion. We pride ourselves on being down to earth, approachable and able to respond to our clients' needs in a quick and pragmatic manner. Whilst every client has different requirements our knowledge of the market and ability to really understand our clients’ business needs ensures that we are able to obtain the best outcome for them. We would welcome your call to discuss any of the issues raised in this newsletter and are always happy to meet with you in our central Oxford offices if you would like an initial view on how we might be able to assist you. If there are any topics you would particularly like to see covered in future newsletters please let us know.

Contributors

Vicky Hernandez Director and Head of Property at Hedges

[email protected] 01865 594 276

David Engwell Director and Head of BusinessServices


Toby WalkerCommercial and PropertyLitigation solicitor



hedges newsletter oct 2014 version 2

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