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1. Time Is Of The Essence – A Resume Of The Possible Courses Of Action For Default Under A Land Contract |
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675c53leftReview of Procurement Regulations Impact on Development Agreements
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This e-bulletin is not intended to be an exhaustive statement of the law and should not be relied on as legal advice to be applied to any particular set of circumstances. Instead, it is intended to act as a brief introductory view of some of the legal considerations relevant to the subjects in question.
Dear Frankie,
Welcome to the June 2009 edition of E-Gen the newsletter covering legal tips, topics and issues in Regeneration and Development. The main subjects that will be covered in this regular newsletter will be:
Landlord and tenant, Regeneration, Housing finance and Development.
Articles in this edition:
1. Time Is Of The Essence – A Resume Of The Possible Courses Of Action For Default Under A Land Contract
2. CPRs one year on - are you trading fairly?
3. Joint Ventures: Knowing Your Business
4. Review of Procurement Regulations Impact on Development Agreements
5. Be careful who you borrow from – another VAT trap for commercial development
6. Deposits – Size, Alternatives and Forfeiting
7. What rights do I need to build my development?
Time Is Of The Essence – A Resume Of The Possible Courses Of Action For Default Under A Land Contract
In the current economic climate most sensible landowners and purchasers are re-scheduling debts and re-negotiating contracts rather than seeking to litigate or exit from them.
From time to time however that is not possible and this note summarises the possible courses of action should a seller (or vice versa a buyer) under a land contract wish to try and force the other party to perform to its terms once a payment date or contractual completion date has occurred and the other party is default.
The range of action falls into the following categories:-
1. Making time of the essence under Standard Conditions incorporated in most land contracts; or
2. Seeking to enforce express "events of default" provisions that frequently appear in land contracts; or
3. Issuing a Statutory Demand; or
4. Issuing proceedings in the High Court for specific performance.
Standard Conditions Route
99.9% of land contracts will incorporate some Standard Conditions. There are a number of different forms of Standard Conditions in use but they all incorporate provisions enabling a seller or a buyer, should a payment date or contractual completion date occur and payment and/or completion not take place, to serve a Notice to Complete making time of the essence of the contract.
It is very important that the person serving the Notice to Complete is "ready, able and willing to complete" as otherwise the Notice to Complete will be invalid. Ordinarily a person will be "ready, able and willing to complete" if (1) he has executed the relevant completion documentation and (2) (with a seller if Title is charged) he is in a position to discharge those Mortgages or Charges.
For a buyer it is quite rare to serve a Notice to Complete but to be able to do so he must (1) too have executed the completion documentation and (2) have the funds immediately available to enable completion to occur.
Occasionally the factors putting persons into a position where they are "ready, able and willing to complete" will vary from the above but, ordinarily speaking, the above matters will be a pre-requisite to service of a Notice to Complete.
The Notice to Complete will name the person in default and require completion within a specified number of working days. Ordinarily the day of service of the Notice to Complete does not count towards the period of the Notice to Complete.
The Notice to Complete period is usually 10 working days (therefore excluding Saturdays and Sundays and any Public Holidays) and if completion does not occur by the contractual time for completion on the last working day of the Notice to Complete then:
• if the person seeking performance is a seller, the seller has the option (but not the obligation) to rescind the contract, thereby treating it as at an end and to retain the deposit paid on exchange of contracts together with any interest accrued. He also has a right of action in damages against the buyer to put himself, the seller, back in the position that he would have been in had the buyer completed on the contractual completion date. No seller can recover loss that is reasonably avoidable and so a seller would be under a duty to mitigate his loss and re-market and sell the land the subject of the contract for the best price reasonably obtainable and the defaulting buyer would be liable for any difference if the price obtained was less than the contracted price.
• if it is a buyer serving the Notice to Complete he will be entitled to return of the deposit (and it will be easier for him to recover the deposit if it has been held by solicitors as stakeholders) and to recoup direct losses incurred. These could vary and careful consideration needs to be given before claiming such losses.
Express "event of default" termination provisions in land contracts
Many land contracts, particularly commercial and development contracts, will contain express provisions enabling either the seller or the buyer to determine the contract on notice.
Ordinarily these would be:-
(1) On insolvency or bankruptcy; or
(2) Non-payment of any sum due under the land contract; or
(3) Material or substantial or cumulative breach of specified provisions or provisions generally of the land contract.
Termination under express "event of default" provisions ordinarily will have the same effect at law as rescission under the Standard Conditions referred to above.
Following rescission or termination the claim for damages would almost inevitably be the subject of Court Proceedings which could result in summary judgment for liability with damages to be assessed. How long the assessment of damages takes would depend upon the size of the transaction and how complex it is. In complex and high value property transactions assessment of damages could easily take six to twelve months to resolve.
Statutory Demand
The issue of a Statutory Demand is, as the expression suggests, a right in statute that applies when a debt is due and the debt has not been paid.
Any person can issue a Statutory Demand following non-payment of a sum of money on a due date.
If a statutory demand is not complied with within 21 days, assuming that it has been properly and lawfully issued, then a person that has issued a Statutory Demand can issue a winding up petition against a company or file in bankruptcy.
Issuing a winding up petition or filing in bankruptcy are public processes and can obviously therefore have considerable consequences, including but not limited to loss of reputation.
Specific Performance
As an alternative to rescinding or terminating a contract a person who is ready, able and willing to complete a land contract could seek to specifically enforce the contractual obligations of the defaulting person and require legal completion.
Obviously it follows from the above that seeking Specific Performance excludes rescinding or terminating a contract and vice versa.
The decision as to whether or not to sue for Specific Performance and/or rescind or terminate, as the case may be, does not however have to be made immediately upon a default. These are rights, not obligations, and there will be a variety of circumstances to take into account as to which is the best course of action on the facts of any particular case.
It is possible for an action for Specific Performance to be launched before the expiry of a Notice to Complete but unusual.
A claim for Specific Performance would have to be lodged in the High Court and for that reason would be public.
An Order for Specific Performance is however discretionary and a court may refuse to make an Order. Again all cases do turn on their own facts.
If however one has a buyer who is able to complete but simply does not want to complete then in all likelihood a court would make an Order for Specific Performance.
If an Order is made there is no defence to failure to comply with such an Order and failure to comply would lead to, in the case of a company, winding up proceedings, and in the case of an individual, filing for bankruptcy.
There is no reason why proceedings for Specific Performance cannot be run in tandem with issuing a Statutory Demand.
Concluding Remarks
This is very much a brief summary of remedies available on default under a land contract and the facts and the commercial considerations in each case must be carefully considered before action is taken.
For more information please contact Roger Fitton - rfitton@wslaw.co.uk
CPRs one year on - are you trading fairly?
The Consumer Protection from Unfair Trading Regulations 2008 (CPRs) are now just over a year old. According to the Trading Standards Institute there have been 171 enforcement cases, mostly concerning rogue traders in the home maintenance and improvement sector.
Home builders and developers are traders dealing with consumers and are therefore subject to the CPRs. The CPRs should be kept in mind when advertising and dealing with potential buyers, alongside the other protections for consumers, such as the law on unfair contract terms and the Property Misdescriptions Act 1991.
The CPRs prohibit unfair commercial practices before, during or after a contract is made. A commercial practice is an act or omission by a trader directly concerned with the promotion, sale or supply of a product to consumers. Products include goods, such as a new home, and services, such as after care services and rights, such as cancellation rights, and obligations.
A home builder advertising a new development in brochures, price lists, advertisements, newsletters and circulars or on its web site would be undertaking a commercial practice and this must be CPR compliant.
The CPRs include:
• a list of specified commercial practices which are prohibited in all circumstances;
• a general prohibition of unfair commercial practices; and
• prohibitions of misleading and aggressive commercial practices.
Outright banned practices:
The CPRs list 31 practices which are banned in all circumstances. Evidence of their effect, or likely effect, on the average consumer is not required to prove a breach. These practices include:
• Falsely stating that a product will only be available for a very limited time. A home builder falsely telling potential buyers that prices for new homes will be increased in 7 days time to pressurise them into making a decision to buy would be an unfair commercial practice.
• Using editorial content in the media to promote a product where the trader has paid for the promotion without making that clear. This would include paying for a feature on a new development in a magazine without the magazine making it clear that the feature has been paid for.
• Passing on materially inaccurate information on market conditions, or on the possibility of finding a product, with the intention of inducing the consumer to acquire the product at conditions less favourable than normal market conditions. Telling potential home buyers that several similar houses have recently been sold at a certain price when this is untruthful with the intention of selling at an inflated price would be an unfair commercial practice
General prohibition:
Regulation 3 contains the general prohibition of unfair commercial practice, also known as the duty not to trade unfairly. The general prohibition prohibits any practice that is not professionally diligent and that materially distorts, or is likely to materially distort, the economic behaviour of the average consumer:
• Professional diligence is the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers which is commensurate with either (a) honest market practice in the trader's field of activity; or (b) the general principle of good faith in the trader's field of activity. The standard is objective and will vary according to the context but the CPR guidance states that poor current practice that is widespread in an industry cannot amount to an acceptable standard, because it is not what a reasonable person would expect from a trader who was acting in accordance with honest market practice or good faith.
• A material distortion is one which is likely to appreciably impair the average consumer's ability to make an informed decision, thereby causing him to take a different decision.
Misleading practices:
Regulations 5 and 6 of the CPRs prohibit misleading actions and misleading omissions which cause, or are likely to cause, the average consumer to take a different decision.
A misleading action occurs when a practice misleads through the information it contains, or its deceptive presentation, and causes or is likely to cause the average consumer to take a different decision. Three types of misleading actions are specified: misleading information generally; creating confusion with competitors' products and failing to honour commitments made in a code of conduct.
Misleading information generally is likely to be most common type and are actions which mislead by:
• containing false information or deceiving, or being likely to deceive, the average consumer (even if factually correct);
and
• the false information, or deception, relates to one of more items in a specified wide ranging list; and
• the average consumer takes, or is likely to take, a different decision as a result.
The list includes the "main characteristics of the product" which includes a further list of matters including availability, after sales service and specification.
If a home builder advertises a home as having three bedrooms when the third is physically too small to fit a bed in, this will be misleading if the average consumer takes, or would be likely to take, a different decision as a result.
Misleading omissions: Practices may mislead by failing to give consumers the information that they need to make an informed choice. This includes giving insufficient material information about the product, or hiding it or presenting it in an unclear or untimely manner. It will be an unfair commercial practice if the average consumer takes, or is likely to take, a different decision as a result.
Care should be taken to ensure that any descriptions are accurate. For example, leaving out part of an address, because of its unfavourable connotations, or referring to the development being in a different locality than where it actually is located, could mislead.
Prohibition on aggressive practices:
The CPRs prohibit commercial practices which by harassment, coercion (including physical force) or undue influence significantly impair, or are likely to significantly impair, the average consumers' freedom of choice or conduct concerning the product and the average consumer takes, or is likely to take, a different decision as a result.
Compliance
Local Authority Trading Standards Services and the OFT have a duty to enforce the CPRs and they have a range of tools to ensure compliance including education, advice and guidance; other established systems of regulation such as the Advertising Standards Authority, codes of conduct, civil enforcement and criminal enforcement. The CPR Guidance states that they will not necessarily take enforcement action in every case and that they should promote compliance by the most appropriate means.
Civil enforcement: Enforcers can take civil enforcement action under Part 8 of the Enterprise Act 2002 under which they can apply for an enforcement order, breach of which could be a contempt of court which could lead to up to 2 years imprisonment and/or an unlimited fine. They would usually seek to stop an infringement by consultation with a trader and seeking an undertaking instead.
Criminal Offences Defences and Penalties: The CPRs include criminal offences:
• Contravention of the general prohibition requirement is a "mens rea" offence and so it must also be shown that the trader had the specified state of mind (knowledge or recklessness in engaging in a commercial practice which fails to comply with the requirement of professional diligence).
• Contravention of the misleading actions, misleading omissions, aggressive practice and banned practices provisions are "strict liability" offences and it needs only to be shown that there has been a prohibited act or omission.
Sometimes traders are required to attend formal interviews with the Trading Standards Officer, conducted under the Police and Criminal Evidence Act 1984 and tape recorded, as part of the investigations. Where a company commits an offence with the consent and connivance of an officer of the company then both can be prosecuted.
The penalties are:
• on summary convection, a fine not exceeding the statutory maximum
• on conviction on indictment, a fine or imprisonment not exceeding two years or both.
The defences (except for the general prohibition) are:
• due diligence where the trader proves the commission was due to (i) a mistake (ii) reliance on information given by another person, (iii) the act or default of another, (iv) an accident or (v) another cause beyond his control and in each case that he took all reasonable precautions and exercised all due diligence to avoid the offence being committed. This defence does not apply to the general prohibition because that already requires proof of state of mind. Reliance on information given by another person may be relevant where, for example marketing material has been provided by a lead developer in a development site which is being developed by a number of developers. However, the developer would have to show that he took all reasonable precautions and exercised all due diligence to rely on the defence.
• innocent publication may apply for the publisher of, or person arranging, an offending advertisement (including brochures, price lists, circulars, newsletters etc) who proves that he is a person whose business is to publish or arrange publication of advertisements, he received the advertisement in the ordinary course of business and that he did not know and had no reason to suspect that the publication would amount to a defence. A home builder who submitted the offending advertisement for publication could still be charged with an offence under the CPRs.
The time limit for prosecution is either three years of the offence or within one year of discovery of the offence, whichever is earlier.
Conclusion
Homebuilders and developers should therefore check carefully the content of any advertising material and train staff in their dealing with consumers, including in relation to any verbal statements, to ensure that the CPRs are not breached. The CPR guidance published on http://www.oft.gov.uk/advice_and_resources/small_businesses/competing/protection
gives useful guidance although it should be read in conjunction with the CPRs and of course only the court will decide whether a particular commercial practice is unfair.
For futher information please contact Jane Sewell - jsewell@wslaw.co.uk
Joint Ventures: Knowing Your Business
In our first joint venture article we focused on the joint venture models that are available and highlighted some of the attractions and disadvantages associated with each. In this second article, we move on to look at the joint venture as a functioning business and the parameters that can be set down. In particular, we focus on the means by which strategic objectives can be agreed and documented.
Business
It is advisable for all participant parties to agree the nature of a joint venture's business on or before its creation. In doing so, the parties should consider the scope of the activities of the joint venture and the period over which they are to be conducted. Options vary from a single project joint venture (for example, in relation to the development of a single site) to an ongoing business relationship intended to maximise synergies between the parties (for example, a multi-party partnering arrangement established to target mixed scheme projects within the M25). The nature of the joint venture's business should be set out in the joint venture documentation so as to ensure the parties have a marker against which to judge future potential business opportunities and their relevance to the joint venture. In setting out the business of the joint venture, the parties should not overlook the manner in which the core objective, such as site development, is to be achieved through the carrying out of ancillary activities. Using the example of site development, more likely than not, the joint venture will need to address such issues as site assembly, funding, planning permissions and marketing and disposal of units.
Strategy
Following the establishment of a joint venture, and the settling of its business activities, key strategic decisions will need to be made: at board meetings in the case of a company; members meetings in the case of a limited liability partnership; and in the case of other joint ventures through some form of management committee (assuming strategic decisions have not been allocated to one of the parties only). Given the importance of strategy to the success of the joint venture, it is imperative that the parties give consideration to the nature in which any such forums are constituted and the frequency with which they meet. Generally, one seeks to ensure the participation of all parties in the decision making arena, with each granted rights proportionate to their contribution to the joint venture's resources. Strategic decisions should not be taken lightly and in order to ensure stability it would not normally be advisable, or necessary, to have such meetings more regularly than once a month. In fact, in many cases they may be held far less often.
Day to Day Management
Since strategy tends to focus on long term objectives, consideration also needs to be given to everyday decision making. Day to day management of a joint venture should be vested in persons able to commit sufficient time and resources to the achievement of its objectives. The delivery of tasks can then be delegated by the strategic decision making entity within the joint venture to such persons. In the case of a joint venture company this will take the form of the board of directors delegating to the equivalent of the joint venture's staff, albeit these persons may be "seconded" in to the joint venture's business by each of the joint venture parties. In such cases it is practical and effective to ensure that tasks are allocated to those parties best placed to deal with the task at hand. Splitting tasks between different joint venture parties may work effectively, but creates additional hurdles, particularly where there are not strong channels for communication. Notwithstanding the delegation of day to day delivery to personnel, the joint venture parties will wish to ensure that matters do not escalate beyond that which was contemplated at the outset. Two common ways of achieving this are set out below:
Business Plans
It is becoming increasingly common for parties to a joint venture to agree a "business plan" at the outset. The business plan will extend in detail beyond the agreed objectives of the joint venture and essentially places some "flesh on the bones". It is a means by which the parties can elaborate on the manner in which the objectives will be achieved and may incorporate key activities, milestones, budgets and funding strategies. Its primary use is as a reference tool for those persons tasked with the delivery of the joint venture's objectives and as a guide to the nature of the activities that the joint venture can carry out without further referral back to the joint venture parties. The joint venture agreement will frequently provide that the parties can do all that is set out within the business plan, from time to time, to facilitate the achievement of the joint venture's objectives. As a consequence, the business plan should only being capable of variation with the agreement of the joint venture parties. The benefits of a well developed business plan should not be underestimated since they can significantly reduce the risk of subsequent disputes and deadlocks at a later stage.
Reserved Matters
Agreeing the list of "reserved matters" is often one of the most difficult issues to be resolved when considering the decision making authority of the board and executives of the joint venture vehicle. On the one hand, there is an obvious need for the business to conduct itself efficiently and expeditiously without interference from the joint venture parties whilst allowing it to exercise a degree of autonomy in the management of its own affairs. On the other hand, the parent companies may wish to exercise residual control, particularly in respect of the most important decisions. It is therefore common to see reserved matters withdrawn from the authority of the board of the joint venture and provision for decision making on those matters addressed elsewhere (for example the articles of association or the joint venture agreement). Matters which are often reserved for this special treatment include: material changes to the nature, scope or objectives of the business; amendments to constitution documents; increases or decreases in the issued share capital or capital contributions made by the parties; approval of the annual budget or business plan; borrowing or financial commitments over and above a specified amount; the entering into of a material contract, liability or commitment and the appointment or the removal of senior employees. Even once the parties have gone through the demanding process of deciding what matters to reserve for themselves, they then need to consider what method to apply for deciding these "reserved matters" – should decisions be made unanimously or should decisions be made by a majority?
Conclusion
There is no single blue print for a successful joint venture. However, by giving serious consideration at an early stage to issues that are likely to impact on the operation of the business of the joint venture, the parties are much more likely to achieve the expectations they have at the outset.
For further information please contact Richard Tinham - rtinham@wslaw.co.uk
Review of Procurement Regulations Impact on Development Agreements
A year since Roanne
Its been just over a year since the French Roanne case hit the headlines and two years since the new competitive dialogue procedure was introduced for most complex projects. Both have the potential to cause local authorities and developers a headache but as yet their full impact is untested in these unusual times. Bidders are reluctant to engage in expensive procurement exercises and authorities are anxious to avoid delays caused by a review of procurement procedures as circumstances or aspirations change. To remind readers, Roanne caused concern when it was decided that works to land not owned by the local council should have been procured in accordance with the EC Directive. This followed the earlier Italian case of La Scala where consideration in the form of works for the grant of a right to develop (akin to a section 106 obligation) was found to be sufficient to require the contract between the local authority and the developer to be procured in accordance the regulations.
Development contracts
The relevant legislation as far as the UK is concerned is The Public Contracts Regulations 2006. There is a separate Statutory Instrument for utilities. In simple terms, a "contracting authority" must follow the procedures laid down in the Regulations where it proposes to enter into a contract for the provision of works, goods or services. Construction works are clearly caught as are the provision of architectural or engineering services. Contracts for the acquisition of land or rights in land are expressly excluded. Contracts for the sale of land would automatically be excluded because they do not involve the authority in procuring anything, unless goods, works or services are being delivered to the authority in addition to any financial consideration for the sale of land. The sorts of contracts that might be affected in the regeneration context are section 106 agreements, development agreements and sale agreements. All may involve works being undertaken by the contracting party whether or not for the benefit of the contracting authority.
Mixed contracts
It is likely most such contracts will be trying to achieve a number of things: sale and/or exchanges of land, the carrying out of works, the creation of joint venture type arrangements including profit share, securing overage, the giving of approvals to development and subsequent rights to buy. The Canary Islands case of Gestion is authority for the principle that a mixed contract is to be classified by determining its main purpose and identifying what is merely incidental to that purpose. Whilst the case itself involved a mixed contract for both works and services, both of which are caught by the Regulations, the case has been used since as justification for a distinction between a contract that is caught by the Regulations and one that is not, e.g. a works contract that is caught or a land contract that is not.
Determining the true nature of the development contract
There are no hard and fast rules for deciding what sort of contract the parties are contemplating and each must be decided on the facts and circumstances but by asking the following questions a determination may become clear:
• Is the main object to sell land or develop land?
• Are the works to be carried out by the contracting party general in nature or heavily prescribed?
• Is the Authority protecting its own land (i.e. the retained estate) or that of others?
• Is the Authority undertaking an estate management role or is it fulfilling a statutory function?
• Is there a separate section 106 agreement or are the development control provisions contained in the main contract?
• Is the Authority exercising any statutory rights, such as compulsory purchase powers, to achieve the outcome or not?
• Is the Authority making any financial contribution to the development and are any third party grants being made directly to the contracting party or through the Authority?
• Is the Authority bearing any risk in the development?
• Are public facilities being reprovided?
No single answer to any one of these questions is likely to lead to an automatic conclusion but an analysis in the round is required. There is little comfort from the European case law, which is usually decided on very specific local law circumstances which do not lend themselves to direct analogy and reported decisions may seem perverse. Authorities are naturally wary of a procurement challenge but at the end of the day a common sense approach should be adopted. The parties should ask themselves is this a land deal with some related works or a works agreement where an interest in land is being created or transferred to facilitate the carrying out of works?
Expectations going forward
Procurement issues will continue to feature highly on any local authority's list of key concerns when approaching a development or regeneration project. There is likely to be more case law on the application of the EC Directive to land transactions. This will be caught up with questions about the fair treatment of bidders when some are likely to be in a privileged position by virtue of having secured grants or having land holdings in the vicinity of the development. As yet the exclusive rights argument (another exemption from the Regulations) has not been tested in the courts and there continues to be disagreement amongst practitioners as to the merits of such a defence in the land context. There is also an increasing interest amongst local authorities for joint venture and partnership arrangements with development partners. Framework type arrangements are likely to be used for these and have the advantage of only requiring one procurement process. We may begin to see more use of the "integrator" model where a primary "contractor" secures a development opportunity only to then subcontract precise parcels of works out to other developers and building contractors.
It is also possible that local authorities themselves will start to take on a more direct development role and parcel up sites itself for either simple sale or the procurement of works. Certainly the current noises about local authorities being encouraged to build their own houses may support this and as the payment of financial charges under section 106 agreements (as opposed to agreeing to undertake works) do not trigger a Procurement Regulation question, we may see more of this. Interesting times lie ahead.
New OGC Guidance to be issued
Having appreciated the concerns of contracting authorities, the Office of Government Commerce has now announced that it will issue guidance to authorities on how the Procurement Regulations apply to regeneration and development deals. We will advise further when the guidance is issued.
For further information pleaser contact Andrea Squires - asquires@wslaw.co.uk
Be careful who you borrow from – another VAT trap for commercial development
Whatever you think of the banking bailout, it seems to have had one consequence that the Government surely did not intend: yet another VAT trap for the property sector.
Developers and investors already needed to take care if they were letting property to a bank that was also providing them with finance. If you are doing a development where, say, HSBC will be one of the tenants, there is a risk that borrowing the funds from HSBC will trigger anti-avoidance rules, and that this will prevent you recovering all or some of the VAT on the development costs. There is a similar issue if you are buying an investment property with funds from – let's say this time – Barclays, and Barclays happens to be one of the tenants. This can prevent the purchase being VAT-free as a 'transfer of a going concern' so you may have to pay VAT on the price, and at least some of this will be irrecoverable and a cost. You will also have to pay SDLT on top of the VAT – another 0.6% on the total purchase price.
The same point applies if the banks in question are part of the same corporate group – if you are borrowing from RBS, and NatWest is one of your tenants. But it looks as though this also includes any banks in which the Government has a majority stake – that they are 'connected' for the purposes of the legislation. So we now have to be careful with borrowing from RBS if it's Lloyds or Northern Rock that is going to occupy the property.
Whether any of this actually creates a problem will vary with circumstances. So will the scale of it. If banks are not falling over themselves to lend to you, it may still make sense to take a modest VAT hit. But in some cases it means suffering VAT as a cost on the entire development cost or purchase price – a £20m project becomes a £23m project. So you need to check out the impact, and if need be to look elsewhere for funds. Care is needed.
HMRC acknowledge the problem. Clearly Government intervention was not intended to create added obstacles to borrowing, and it is hoped that the VAT legislation will be amended to cover the point. Other helpful changes to the rules were in the pipeline anyway. But in the meantime – be careful who you borrow from.
A longer, and more technical, version of this article appeared in the Tax Journal for 13 April 2009. Martin Scammell's other published work includes the looseleaf publication VAT on Construction, Land and Property, available from Tottel Publishing.
For further information please contact Martin Scammell - mscammell@wslaw.co.uk.
Deposits – Size, Alternatives and Forfeiting
Introduction
In the current economic climate, and with dropping land and property prices, a number of buyers are either unwilling or unable to complete contracts for the purchase of land and/or property.
Many buyers can no longer afford to buy property which they are contractually committed to acquire because of withdrawn mortgage offers arising from the "credit crunch" restricting the availability of bank finance. Declining property prices may mean that there are problems with buyers of their existing home or further down the chain. Developers are also affected as declining land values may mean that projects are no longer viable and they too have problems with funding.
A seller is at a greater risk than previously of a buyer rescinding the contract or failing to comply with a notice to complete, on the basis that a lender has withdrawn the availability of finance. Banks will generally only lend a percentage of the present value of the property and, recently, this has been set at 75% of the present value whereas, historically, banks have lent up to 90% of the present value and some have even lent 100%.
The majority of contracts provide for a deposit equal to 10% of the purchase price to be paid to demonstrate the buyer's intention to complete the purchase.
In other words if the buyer defaults and completion does not take place, the deposit acts as compensation for the seller.
It is sometimes the case that the parties agree to a reduced deposit. Where a buyer has paid a 5% deposit (or less), there is often a clause in the contract that states that even if a lesser some is accepted as a deposit, the balance (up to 10%) will remain due and payable.
Where a buyer defaults the seller will be entitled to ask for the balance of the deposit and any accrued interest to be paid immediately. In these circumstances it will be an advantage if the seller's solicitor is holding the deposit "as stakeholder" as the monies are then more easily recovered.
A seller should be aware that it may be able to claim additional costs, expenses and/or losses arising from the buyer's default.
A buyer may also be liable to make up any shortfall if the seller subsequently sells the property for a purchase price which is less than the price agreed with the original buyer.
Seller Beware
Some sellers who are considering selling to "risky" buyers, are demanding larger deposits to protect against any default by the buyer.
Care should be taken when negotiating larger deposits, as it may well be the case that a court will consider any payment of a large deposit (either in terms of the amount or as a percentage of the purchase price), a penalty (which is void under English law) and as a consequence the buyer may be entitled to recover the deposit in full.
Under section 49(2) of the Law of Property Act 1925 ("the LPA") the court has a discretionary power to order the repayment of any deposit paid by a buyer. This power is only used in exceptional circumstances where the "justice of the case" requires it.
The whole purpose of the deposit is to guard against failure to complete pursuant to a legal agreement and it is therefore unlikely that this power will be utilised unless the seller has acted fraudulently or where in the circumstances it is unfair for the buyer to lose its deposit (but these situations are rare).
Tennaro v Majorach [2003] involved the sale and purchase of three flats. The buyer paid a large deposit. The sale of two of the flats was completed but due to financial difficulties the buyer was unable to complete the third purchase. The seller relied on the contract to retain the deposit. In response the buyer offered to buy the third property at a price higher than the property's market value. The seller refused. The court exercised its discretion under section 49(2) of the LPA deciding the retention of the deposit was a cynical move on the part of the seller to take advantage of the buyer's short-term financial difficulties. The fact the buyer had offered to buy the third property at a higher price meant that the retention of the deposit would be unjust.
The case of Midill Limited and Park Lane Estates Limited & Anor [2008] showed that even where the seller was able to resell the property at a higher price than the price agreed with the defaulting buyer, the courts still held that there were no exceptional circumstances to justify returning the deposit to the defaulting buyer. The buyer sought to rely upon the decision in Tennaro however the court refused to accept there were any special circumstances arguing that if "liability to repay the deposit depended upon some future sale price there would be considerable uncertainty possibly for a lengthy period. That would create precisely the uncertainty which a fixed deposit is intended to avoid".
Protected Deposits
House builders and Housing Associations often enter into development agreements where the Housing Association will pay a substantial amount of the purchase price (sometimes up to 100%) on exchange of contracts.
As the Housing Association does not have a legal interest on exchange of contracts the deposit is usually protected by a bond and/or a parent company guarantee pending grant of a lease or transfer of the land.
If the Housing Association units are transferred in phases the bond will be released on a pro rata basis until all of the units have been transferred.
If the house builder is unable to transfer all or part of the contracted Housing Association units there is frequently a contractual obligation on the house builder to return all or part of the deposit.
Where the house builder fails to return the deposit (or part thereof) to the Housing Association the bond company or guarantor will be obliged to repay the deposit (or part thereof) on behalf of the house builder.
The treatment of the deposit in these circumstances is different to the conventional transaction and thus unlikely to be caught by the provisions of section 49(2) of the LPA as the development agreement contains provisions setting out in what circumstances the deposit will be returned to the Housing Association.
Deposit Guarantee Companies
There are new companies coming to the fore which offer property deposit guarantees to prospective buyers.
The guarantee is often secured by a bank with a strong financial rating.
The buyer purchases the guarantee from the bank. The seller (often a housebuilder) agrees to accept the guarantee in place of a cash deposit. The housebuilder is given the guarantee on exchange and is able to claim the deposit amount from the bank, should the buyer fail to pay the deposit at completion. The buyer is liable for the deposit amount to the deposit guarantee company.
The seller should be aware that the property deposit guarantee company may have a right to buy included within the terms of the guarantee permitting the deposit guarantee company to purchase the property at the amount that the defaulting buyer contracted to pay pursuant to its contract (including any additional items offered as incentives, less any discounts that are available to the buyer).
Concluding Remarks
The law largely supports the seller where a buyer defaults on the sale/purchase of a property/land. The buyer will, in the majority of cases, lose its deposit however sellers should be careful to avoid negotiating deals that may fall within the remit of section 49(2) of the LPA requiring the seller to return the deposit to the buyer.
Sellers should consider alternatives to the traditional cash deposit. In the current economic climate, deposit guarantee companies offer an opportunity to buyers to get back into the property market.
For futher information please contact Huseyin Huseyin - hhuseyin@wslaw.co.uk
What rights do I need to build my development?
In the recent case of William Old International v Ayra [2009] Ch, the High Court considered whether a developer's right to lay service media across adjoining land required the owner of the adjoining land to enter into a deed of grant with a statutory undertaker (EDF) or whether the developer's existing easement over adjoining land was sufficient in itself.
The facts of the case
The developer and the Ayra owned two adjoining plots of land which had originally been in one ownership. The developer had purchased the land from a predecessor in title of the Ayra with the benefit of planning permission for the construction of an office building.
The developer's easement over the adjoining land provided:
"... free and uninterrupted passage and running of Services through the Service Media respectively now laid or to be laid in the perpetuity period in on or under any other part of the Estate and further during the construction period to lay any further Services in or on any other part of the Estate that may be necessary to connect into any existing Services or to obtain a new supply to the Property causing as little damage or disturbance as possible making good as soon as reasonably possible any damage so occasioned to the reasonable satisfaction of the Transferor"
The developer applied to EDF for a connection of its land for the purpose of obtaining electricity supply.
EDF sent back a plan to the developer showing the proposed cable route going through the middle of the Ayra's back garden, part of the adjoining land over which the developer had the above easement.
Under the Electricity Act 1989 EDF is not obliged to provide a connection that requires cables to be laid under land owned by a third party and EDF was willing in this case to do so only if the adjoining owner first entered into a separate deed of grant. Ayra refused to sign the deed of grant.
The developer issued proceedings alleging that the adjoining owner was not entitled to refuse to grant the easement to EDF.
The developer's case was based on the following:
(a) That the express easement included an implied positive obligation to sign a deed of grant satisfactory to EDF as this ancillary right was necessary for the use and enjoyment of the express easement or that there was an implied easement.
(b) The adjoining owner was derogating from grant by not signing a deed of grant with EDF.
The decision
The Court dismissed the developer's case and held that the adjoining owner was not under any positive obligation to enter into a deed of grant with EDF. The Court stated that an easement is essentially negative in character and can only impose a positive obligation on the owner of the land which is subject to the easement (the servient owner) in very limited circumstances. Any right ancillary to an express easement had itself to be capable of being an easement. The servient owner's only obligation was to refrain from doing anything that would impede the enjoyment of the easement by the owner with the benefit of the easement (the dominant owner). It was not possible to imply an easement which imposed the positive obligation sought by the developer.
The Court also held that the doctrine of non derogation from grant could not be used to force a grantor to enter into a contractual relationship with a third party on terms satisfactory to that third party. This doctrine essentially prohibits a seller of land, or grantor of a lease or an easement, who knows that the buyer or grantee or lessee is going to use it for a specific purpose, from doing anything which would hinder the use of the land for that purpose or, in the case of an easement, which would diminish the right granted.
Concluding Remarks
The decision is a useful reminder that, when drafting rights or reservations, careful consideration should be given as to whether any positive obligations are needed to require a landowner to enter into deeds of grant with other persons not identifiable at the time the contractual right.
It will usually be advisable, not only to grant or reserve the rights to lay services, but to put the owner of the land under an express clear obligation to enter into any deed of grant that any relevant service company or drainage authority may require, if requested to do so which can then be enforced as a matter of contract.
A positive obligation will however not bind successors and it may be appropriate to include positive covenants to obtain direct deeds of covenant from successors in title, secured by restrictions on the title to protect an easement if granted.
For further information please contact Francesca Maran - fmaran@wslaw.co.uk
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