Competing interests in 'commercial property

The recent case of Lazari Investments Ltd v SSRL Realisations Ltd (in administration) [2015] EWHC 2590 (Ch) raised the spirits of landlords and their advisers by providing a reminder that a moratorium during a tenant’s administration can be broken, and that the competing interests of the parties will be taken into consideration. 

Lazari was the landlord of one of the branches ?of the restaurant chain Strada. The tenant entered into a pre-pack administration and placed a group company (Groupco) in occupation while the administrators sought the landlord’s consent to assign the lease to Groupco. The landlord refused consent, arguing Groupco had no covenant strength and was unlawfully occupying the premises, and then applied for permission to forfeit the lease. 

The court considered the balancing test set out in Re Atlantic Computer Systems PLC [1992] 2 WLR 367: would the purpose of the administration be impeded if permission to forfeit was granted, ?and if so, which party stood to lose more?

The administrators argued forfeiture of the lease would result in a loss to the tenant’s creditors of £650,000 (the amount the administrators claimed would be an appropriate guide price premium ?for the lease). They contended there had been ?no real loss to the landlord as a result of the administration or occupation by Groupco because the landlord had continued to receive rents due under the lease in the usual manner. Further, the administrators claimed the landlord was looking to obtain a windfall from the administration by granting a new lease to a third party at a higher rent rather than allowing an assignment of the lease to Groupco.

The courts held in favour of the landlord ?and granted forfeiture on the basis that it would ?not impede achievement of the purposes of ?the administration:

• There were no grounds to believe the administrators would be able to obtain ?a premium of the level claimed by the administrators by assigning the lease from Groupco to another third party. The judge preferred the landlord’s argument that the premium which could reasonably be expected on assignment would be ‘non-existent or modest at best’;

• If a premium was achieved, this would pale into insignificance when compared to the estimated shortfall due to the tenant’s creditors (estimated to be around £11m), making such premium insufficient to impede the purpose of the administration; and

• Even if the grant of permission to forfeit would impede the purpose of the administration, ?the landlord would suffer greater loss if permission was refused than the loss to the administrators if permission was granted. ?The administrators failed to persuade the court that the lease had such value that its loss would have a detrimental impact on ?the administration. 

It is clear that the value of a lease, both on its ?own and within the wider portfolio of a company ?in administration, will play a crucial part in the decision-making process of the courts. 

The court also noted any valuation must be ?the true open market value of a lease, rather than the figure a group company has offered (which ?the administrators had claimed to be the market value). Interestingly, the administrators’ concern that the landlord would be getting a windfall by being able to attract a new tenant at a higher rent was not a consideration in the court’s decision.

Energy efficient taxes

Under the carbon reduction commitment (CRC) energy efficiency scheme, large organisations defined as ‘non energy-intensive’ (i.e. not industrial energy consumers) are required to monitor and annually report on their energy use and carbon dioxide emissions, buying allowances for every tonne of carbon dioxide they emit. Such organisations will include landlords of multi-?let properties. 

While compliance with the CRC scheme alone may not be particularly problematic, ensuring compliance with the energy efficiency tax regulations as a whole can be both time consuming and confusing. The inter-relationship between the various energy policies and regulations – introduced at different times ?and for different purposes – has resulted in a system that is seen as inefficient and unworkable by businesses and environmental bodies alike. 

The overlap between the regulations can ?result in businesses being required to report ?on the same data more than once in differing formats, placing them under an unnecessary administrative burden. In some cases, the reporting organisations may not have the resources or the expertise to implement the statutory requirements correctly, which will be ?of particular concern given that failure to comply can result in both civil and criminal sanctions. 

Rates of tax and compliance requirements ?can also be affected by the sector in which organisations operate, or the nature of their energy use. This can result in companies of similar sizes with similar operations paying differing levels of tax, with the regulations perceived as inequitable and unclear. 

Such factors can disincentivise business ?leaders from prioritising energy efficiency, with consequences beyond the obvious environmental concerns. Put simply, energy efficient businesses spend less money, and are consequentially likely to be more profitable. 

A HM Treasury consultation, which concludes ?in early November, considers the relationship between the various energy-efficiency taxes in place, including, most importantly for commercial property lawyers, the climate change levy ?(CCL) and the CRC. Among other things, the consultation invites comments on a key proposal to replace the CRC and the CCL with a single energy consumption tax based on the CCL. ?The variation in tax costs across fuels (the CCL and CRC are currently much higher for electricity than for any other fuel) is also under consideration.

More broadly speaking, the consultation looks towards ‘a simplified landscape that minimises overlap so that a single business or organisation faces one tax and one reporting scheme’. ?The aim is to move to a more accessible scheme, which is quicker and cheaper to comply with, ?in order to dispel mistrust towards energy-?saving schemes among business leaders and incentivise involvement. 

Quite how the current systems are to be streamlined into a single, transparent scheme ?in practice is yet to be seen, but one hopes the consultation is a step in the right direction. 

Art mystery

Creative Foundation v Dreamland Leisure Ltd and others [2015] EWHC 2556 (Ch) concerned a dispute over who was the rightful owner of a mural on ?the wall of a leased building – the owner of the building or the tenant.

The landlord (Creative Foundation) granted ?the lease to the tenant (Dreamland) for a term ?of 20 years from 24 June 2002. The demise ?included the structure and exterior of the building. In September 2014, during a public art project organised by the tenant, the mural painting ?Art Buff was spray-painted on an external wall of the building. The mural was attributed to Banksy and was considered to be of significant value. Shortly thereafter, the tenant severed the spray-painted wall from the building, made good the damage, and shipped the artwork off to be sold.

The tenant argued the wall was in ‘disrepair’ ?and it was complying with its repairing covenant by removing and replacing the wall. Further, ?once the wall was removed, it became a chattel belonging to the tenant, who was entitled to dispose of it as it wished. 

The lease included a standard repairing covenant obliging the tenant to keep the whole ?of the premises ‘in good and substantial repair ?and condition’. The tenant was also obliged to ?carry out external redecoration and was prohibited from ‘maiming or injuring’ any walls without the landlord’s consent.

The court found that while the existence of the mural might give rise to disrepair, the tenant’s method of remedying the disrepair by removing the wall was unnecessarily invasive. Accordingly, the tenant could not establish that it was complying with its repairing covenants in removing the wall.

In terms of the ownership of the removed wall, the court upheld the principle that, prima facie, ?a landlord retains ownership of every part of the leased premises. It was common ground that ?any parts of the structure removed from leased premises became a chattel. Accordingly, the court held it was for the tenant to justify implying a term into the lease that would transfer ownership of such a chattel. 

The court’s decision ultimately turned on the significant value of the removed wall. The court found that while a term may be implied that a tenant retains ownership of chattels of minimum value, it did not follow that the same implied ?term would apply to chattels of significant value. On this basis, the landlord retained ownership of any chattel with material value and was therefore entitled to the return of the mural.

Denize Akbulut, pictured, Katherine Ochynski, and Hannah Rickard are solicitors at Forsters @ForstersLLP www.forsters.co.uk

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