Update: property

Earlier in the year the widely discussed case of Angel Solicitors v Jenkins O'Dowd & Barth [2009] EWHC 46 (Ch) gave all conveyancers pause for thought '“ if not a shiver down their collective spine. The judge said the case demonstrated 'the folly of giving the usual solicitors' undertaking to redeem or discharge existing mortgages and charges over the property which is being sold without having first obtained a redemption statement and the mortgagee's agreement to release the property from all relevant charges upon payment of an ascertained sum'.

A subsequent case this summer causes us to revisit the perils of conveyancers' undertakings. In Clark v Lucas Solicitors LLP [2009] EWHC 1952 (Ch), the Clarks had bought a house from a developer. Two all monies charges were secured on the development site, one in favour of a bank and another in favour of an individual who had helped to finance the development. In replies to requisitions on title the developer's solicitors gave undertakings to the buyers to discharge the two charges on or before completion. It appears that no redemption figure had been obtained in respect of the charges and no arrangements made with the two chargees for the release of the property from their respective charges.

Following completion, the sale proceeds were paid to the bank and it sealed a discharge of its charge. The other chargee, however, who was still owed in excess of £1m, refused to seal a discharge without payment of the entire sum secured, which was approximately twice as much as the buyers had paid for the property. The buyers applied for summary enforcement of the undertaking. The developer's solicitors admitted that they were in breach of their undertaking, but argued that it was inappropriate to order them to perform their undertaking as performance was impossible and that there should be an inquiry as to damages instead. They also submitted that ordering performance of the undertaking would be disproportionate to the buyers' true loss.

The court held that the undertaking was not impossible to perform and was entirely within the control of the developer's solicitors. The situation could have been avoided if a redemption figure had been obtained and agreement reached before the undertaking had been given. The fact that the amount required to perform the undertaking was larger than anticipated did not make its performance impossible or disproportionate as the developer's solicitors should have anticipated that a greater sum might fall due given that it was an all monies charge on the whole development site.

Sellers' solicitors must give full consideration to all possible consequences of any undertaking they give and obtain all necessary authorities and redemption figures prior to giving it. Ideally, where there are unusual or complex arrangements, this should be tackled prior to exchange of contracts, so that no pressure is felt to give a rash undertaking simply to facilitate completion.

Buyers' conveyancers must also give careful consideration to the undertakings they are willing to accept. Enquiries should be made of the sellers' solicitors for confirmation that redemption figures have been obtained and that they are authorised to receive that amount on behalf of the chargee and that it will result in the issue of a discharge. This is especially important at the moment as there is a greater risk of negative equity. If in doubt, insist on receiving a discharge at completion. Particular care should be taken where the chargee is not a member of the Council of Mortgage Lenders. It should always be remembered that the court's jurisdiction to enforce undertakings is discretionary and a buyer's solicitors can be found to be negligent where they have relied on a seller's solicitors' undertaking in circumstances exceptional enough to give cause for concern.

Beware the VAT trap '“ residential parking spaces

A recent appeal to the Tax Tribunal in Civilscent Limited v HM Revenue and Customs [2009] UK FTT 102 (TC) highlights the fact that the VAT treatment of leases of parking spaces can contain unexpected traps.

In this case, the developer granted 125-year leases on 11 flats and then between ten and 20 months later granted 125-year leases on 11 parking spaces to the tenants. HM Revenue & Customs challenged the developer's zero-rating of the parking space leases and argued that they should be treated as standard-rated supplies rather than as single composite supplies with the grant of the flat leases. A single composite supply would render the grant of the parking space lease as ancillary to the principal supply of the zero-rated flat lease, with the consequence that the parking space lease would also enjoy zero-rating.

The tribunal confirmed that the correct test for a single composite supply in this case was whether the grant of the parking space leases and flat leases were sufficiently linked for the two lettings to constitute a 'single economic transaction', and thereby benefit from zero-rating. The tribunal stated that 'close enough links for there to be a single economic transaction' required 'at least an arrangement or understanding, albeit one short of legal obligation, on the part of both parties that the elements of a single economic package will be completed'. Here they found no such arrangement or understanding. There was 'a separate offer, separate acceptance and separate agreement as to price' for each of the parking spaces, which weighed heavily against them being single economic transactions.

Conveyancers acting for developers should consider carefully HM Revenue & Customs' published guidance on the single economic transactions VAT treatment of residential parking facilities as well as ensure that all consideration is defined as being exclusive of VAT and reserve the right to demand payment of any VAT, even if it is anticipated that all aspects of the transaction are zero-rated. If the contract is silent on VAT, the consideration is deemed to be inclusive of VAT.

Conveyancers acting for purchasers from developers in these circumstances should not automatically assume that zero-rating will apply in all respects and should bear in mind that under condition 1.4 of the Standard Conditions of Sale (Fourth Edition) 'an obligation to pay money includes an obligation to pay any value added tax chargeable in respect of that payment'.

Restrictive covenants

During the course of the summer there has been yet another case on restrictive covenants to catch our eye. Although not a ground breaking case, it reminds us of the importance of clarity when imposing covenants as to which land is to benefit and for how long. It also highlights the importance of careful advice on the enforceability of covenants when acting for a buyer.

In the case of Norwich City College of Further and Higher Education v McQuillin and Downs [2009] EWHC 1496 (Ch), the college applied to the court under section 84(2) of the Law of Property Act 1925 for a declaration that a covenant in a 1936 conveyance was no longer enforceable and would not prevent them developing an area of their campus.

The college sent over 1,000 letters to properties in the area giving notice of their intention to apply to the court for a declaration. Ultimately, only two local property owners objected and just one of these, Mr McQuillin, took part in the hearing.

The college grounds were originally part of an estate owned by the Trafford family. The land in question had been acquired in 1936 and the buyer had given the 'vendor and his successors in title' a number of covenants 'for the benefit of the Trafford Estate at Lakenham or the part or parts thereof for the time being remaining unsold'. The college argued that the benefit of the covenants was annexed to the land owned by the original vendor at the date of the conveyance, but only while it remained unsold. Mr McQuillin maintained that the covenant remained annexed to the land that had belonged to the original vendor at the time of the 1936 conveyance.

The High Court had no difficulty in giving the college the declaration sought. The judge concluded that the document was 'looking to the future' in referring to the vendor and his successors in title and more importantly referring to the part or parts of the estate for the time being remaining unsold. The court found these forward looking words were only necessary if the college's interpretation was correct. Also, the vendor reserved to himself the exclusive right to release, waive or alter any of the covenants. Such reservation would have been a nonsense if all subsequent purchasers had been intended to enjoy the benefit of the covenants.

New government proposals for tenants of repossessed properties

As part of the government's stated aim to lessen the effect of the inevitable increase in the number of repossessions, it has issued a consultation paper proposing further protection for tenants where their landlord's property is being repossessed.

The rights of a tenant of mortgaged property broadly depend on when and how the tenancy was created. Generally, if the tenancy is in place at the time the mortgage is entered into or is granted after the mortgage is in place, with the lender's consent, where required, or under a buy-to-let mortgage, where the lender's letting requirements have been complied with, the lender must adhere to the notice provisions in the tenancy agreement in order to obtain vacant possession. If, however, the tenancy was granted after the mortgage was completed, either without the lender's consent or not in compliance with the lender's requirements, the tenancy is not enforceable against the lender. The government is concerned that in such circumstances these tenants are entitled to no notice before they are required to move out of the property. The government plans to make a number of changes to assist these unauthorised tenants.

Currently, only the borrower and the lender have a right to make representations in possession proceedings. It is proposed that any occupier should have the right to be notified of and heard at a possession hearing and that the courts would be given power to postpone possession. Other options would require lenders to notify occupiers of their intention to enforce possession and provide a mechanism for occupiers to request a two-month delay.

The popularity of buy-to-let purchases in recent years has greatly increased the number of tenants in privately rented accommodation charged to lenders. The government has promoted the benefits of a strong and well managed private rented sector. News stories of families returning home to find themselves locked out of their rented home do not sit well with this.

The consultation paper can be found at www.communities.gov.uk/documents/housing/pdf/1304815. The consultation period ends on 14 October.