Property Law roundup
Welcome to the October issue of Anderson Strathern's Property Law roundup.
Housebuilders left with no alternative: land swap ends up in court over “like for like” provision
Briefings
Business Premises Renovation Allowance
News
Current Scottish Government consultations
Case Comment
Housebuilders left with no alternative: land swap ends up in court over “like for like” provision
Persimmon owned a large development site at Wester Cowden, Dalkeith. The site being too large for a single developer to build out effectively, Persimmon sold a development parcel to Bellway. Bellway owned an area of land at Broomhouse, Glasgow and sold it to Persimmon. In this way, each developer was able to maintain a steady and programmed supply of development sites which were of a size capable of effective development.
The sale of Wester Cowden by Persimmon to Bellway proceeded without difficulty. The sale by Bellway to Persimmon of Broomhouse was more troublesome. The site infrastructure was not yet in place. Settlement of the sale was therefore to take place 28 days after Bellway completed the infrastructure works – these being the installation of roads, footpaths, services, the upgrading and realignment of a nearby road, and the construction of a roundabout, all as acceptable to the local authority.
The deal provided that Bellway would complete these works by a certain date. It was anticipated that completion of the infrastructure required to render Broomhouse developable would be costly and was not entirely within the control of Bellway. Since part of the commercial rationale for the deal was to provide Persimmon with a site it could develop, the contract stipulated that if the infrastructure works at Broomhouse were not completed on time then Bellway would be obliged to offer Persimmon another residential development site within Central Scotland. That site would be of comparable size and value to the Broomhouse site.
It became obvious that the infrastructure at Broomhouse could not be provided to the satisfaction of the local authority and at acceptable cost to Bellway by the due date. Bellway therefore wrote to Persimmon inviting them to acquire an alternative Bellway-owned site in Airdrie. This suggestion was not taken up by Persimmon, the due date for completion of the infrastructure works at Broomhouse passed and Persimmon sued Bellway for £1.8M in damages arising from Bellway’s breach of contract.
Bellway successfully argued that there was no breach of contract merely from the fact that the due date for completion of the infrastructure had passed. A breach of contract by Bellway would arise only if Bellway also failed to offer the alternative site. (The position might have been different if there had been any evidence to suggest that Bellway had deliberately procrastinated on completing the infrastructure works in order to avoid selling Broomhouse to Persimmon.)
Having disposed of that initial question, the Court had to determine whether correspondence by Bellway amounted to making an offer to sell a residential site of comparable size and value to Broomhouse. It was not required by the deal that such an offer be accepted by Persimmon, only that it be made by Bellway.
It was decided that, in the absence of any specific provision in the contract, the offer did not have to be in any particular form and the informal offer in correspondence by Bellway to Persimmon was sufficient. It was not required that a price be agreed given that this could be arrived at by other means and was ultimately subject to court determination. The two sites were of comparable size, the difference in size amounting to 6.07% or 13.4% depending on whether one looked at the gross area or the net developable area. However, after lengthy consideration of expert evidence, consideration of various valuation methods and various valuations, consideration of the valuation date to be used and consideration about how to treat any abnormal development costs it was eventually decided that the Broomhouse site was worth between 17% and 23% more than the Airdrie site. On either of these figures, the value of the Airdrie site was not comparable to the value of the Broomhouse site. Bellway had therefore breached the missives – though it had made an offer to Persimmon, it had not offered what was required by the contract. Persimmon was entitled to claim damages.
Neil Fraser, Senior Associate in our Strategic Land and Housing team, comments:
“Bellway did well to establish that no particular form of offer was required and that the discussions in correspondence were sufficient. However, informality always begs the question as to whether a communication is an offer or just another round in an ongoing negotiation. That question could have been avoided if Bellway had made a formal offer with a statement of the price, stating a date of entry and addressing the other details that buyers and sellers wish to agree before tying up a deal.
The Judge decided that the sites were comparable in size although the discrepancy in net developable area was 13.4%. It was also decided that the sites were not comparable in value where the discrepancy was 17%. That is a pretty fine judgement to make.
We might be tempted to welcome this as clear guidance as to what is “comparable” and what is not (a discrepancy of about 15% seems to be the tipping point). However, developers will also be aware that even the best valuations do not admit of that kind of mathematical certainty. Valuations always involve an exercise of judgement which may become less secure when underlying assumptions are examined or shortcomings are exposed in cross-examination. Also, it is not clear from the judgement whether the “comparability” of the sites was influenced, in some way, by the nature of the sites themselves. Would the guidance hold good for substantially larger or smaller sites where the values and acreage may differ by a greater or lesser amount in real terms? After all, 15% of £40M is a lot more than 15% of £4M.
The guidance as to the meaning of “comparable” is therefore not quite as definitive as it might first seem.”
Case referred to: Persimmon Homes Limited v Bellway Homes Limited [2011] CSOH 149
A full text of the decision is available on the Scottish Court Service website accessible here.
Briefing:
Business Premises Renovation Allowance
The Business Premises Renovation Allowance (BPRA) is a useful tax break created to stimulate the conversion and renovation of empty business properties, in identified development areas, by affording 100% tax relief for capital expenditure made in bringing them back to business use.
The tax relief came in with the Finance Act 2005 and was targeted to end on 10 April 2012. However, given the prevailing climate in the commercial property sector, the coalition government opted to allow it to continue for a further 5 years. It will now end on 11 April 2017.
Conditions for Relief
The capital expenditure must be made in carrying out works of renovation, repair or conversion of existing premises. Being a tax relief aimed at money spent on bringing properties back to life, it cannot be claimed for demolishing and rebuilding a site. Indeed, there is no scope for the relief to apply to any part of the cost of a acquiring a property or extending it.
The geographical location of the property is central to the availability of the relief. To benefit from a claim, your property has to be located in a “designated disadvantaged area” – those that are set out in the Assisted Areas Order 2007. This includes specified local authority “wards” in Glasgow, Dundee and Inverness. You can easily check if your target property lies within a designated area by using the Department for Business Innovation & Skills postcode search which can be accessed here.
The target property must also meet the following conditions:
- it must have been unused for a year or more before the renovation project is started;
- it must have been last used for the purposes of a trade, profession or vocation, or as an office (and not as a dwelling); and
- it must be used for one or more of those purposes after the renovation or conversion has been completed.
- it must be retained for seven years after completion of the renovation works, to avoid clawback of any tax gains.
Properties which are used in some types of trade cannot qualify for the relief. Non –qualifying trades are fisheries and aquaculture, shipbuilding and the coal, steel and synthetic fibres industries.
No relief is available for projects already receiving a public grant towards the expenditure.
The Relief
An initial allowance of 100% can be claimed in the year in which the expenditure on the property is made. If this allowance is not claimed in full in the first year, a writing-down- allowance of 25%, based on cost can be claimed in the years after the renovation until tax relief has been claimed for the total capital expenditure incurred on the project. Clawback of the relief will apply if the property is sold, demolished or is no longer used for a qualifying purpose within 7 years of its first use after the renovation or conversion that benefited from the tax relief. However, sales and lettings after the end of this 7 year period will not lead to a clawback of allowances.
Where it is a company carrying out the renovations and the initial allowance creates either a trading or property rental loss, this can be used to reduce corporation tax liability.
In the current property sector climate, BPRA relief can be an attractive proposition to investors who that operate in syndicates. Syndicates make effective use of the relief by funding a renovation project as a group but making the tax relief claim on the development costs as individuals – offsetting any losses against their income tax liability.
The legislation governing the relief can be found in the Finance Act 2005, Section 92 and Schedule 6. More guidance can be found in the HMRC Capital Allowances Manual.
Conclusion
It may be time to take advantage of the new lease of life in this incentive - 11 April 2017 is the end date.
If you are tempted by the hook in sales particulars that the opportunity offered benefits from potential BPRA relief, seek professional advice on the point as with any other tax planning.
Please get in touch with Dawn Henderson, Partner in our Commercial Real Estate Department, if you would like any further detail or advice.
Briefing:
For accounting periods on or after 1 January 2007, the UK REITS (Real Estate Investment Trusts) regime enables qualifying companies and groups of companies to obtain an exemption from tax on the income profits and capital gains of its qualifying property rental business. The distributions of income profits and capital gains are treated as UK property income in the hands of shareholders in the REIT.
Until now, the take-up of REIT status by property investment companies has not been extensive. The perceived reasons are that the weighty conversion charge of 2% of the gross value of the property assets transferring in, operates as a barrier to smaller enterprises and the regulatory burdens, imposed by the regime, generally stand as disincentives. The "balance of business assets" rule whereby at least 75% of a REIT's total income profits and of the value of its assets must relate to its property rental business is one such burden oft complained of.
In the coalition Government’s first budget in March this year, the Treasury undertook to look at the REIT regime to see if improvements could be made. One of the objectives was to consider facilitating investment in the residential property sector. An informal consultation with the industry followed and the Treasury’s response to that with its proposals has now been published.
In brief the proposals are:
- to remove the 2% conversion charge for companies joining the REITs regime.
- to relax the listing requirement to include non-regulated stock exchanges – such as the AIM or PLUS exchanges (or their overseas equivalents) as this should increase accessibility for small companies and reduce regulatory and administrative requirements.
- to introduce a diverse ownership rule for institutional investors which will enlarge the pool of potential investment in property.
- to allow cash to be a "good" asset for the purpose of meeting the "balance of business asset" test and allow REITs to make spending decisions that are commercially based rather than tax based.
- to extend the time limit for complying with the distribution requirement – pushing it out from three months to six to fall in line with most REITs dividend payment cycles.
The substance of the proposals will appear in the Finance Act 2012. As always, the devil will be in the detail and whether or not the call to more REITS will be heard depends on what devils are in the published detail.
Details of the government’s responses and proposals can be found on HM Treasury’s website accessible here.
If you would like any further detail, please get in touch with Stephen McDonagh, Senior Associate in our Commercial Real Estate Department.
News
The Scottish Ministers have given us new guidance on compulsory purchase orders. The guidance is aimed at local authorities and, separately, members of the public.
It has been 35 years since government guidance on CPO was last refreshed and an earlier consultation highlighted uncertainty amongst those bodies with CPO powers about their use. The consultation also revealed a lack of proper engagement by authorities with people who are affected by CPO proposals.
The new guidance stresses the importance of early, meaningful and ongoing engagement with the people affected. It appears together with an “easy to read” guide which explains the process, how long it should take, the rights people have and where they can go for advice.
Compensation is a key element of CPO and therefore, the Scottish Government has also issued an updated Planning Circular 5 2011: Disposal of Surplus Government Land - The Crichel Down Rules which sets out the non-statutory arrangements under which surplus government land which was acquired by, or under a threat of, compulsion should be offered back to former owners and their successors.
The new CPO guidance can be found on the Scottish Government’s website accessible here and Planning Circular 5 2011: Disposal of Surplus Government Land - The Crichel Down Rules can be found here.
Current Scottish Government consultations
By way of summary, we set out details of a number of consultations which impact on the property industry which are currently open for comment:
Council Tax on Long-Term Empty Properties and the Housing Support Grant – Consultation on Proposals for Legislation
The Scottish Government proposes to allow councils the discretion to increase Council Tax charges for homes that are left empty for longer than six months and to remove the legislation which currently requires the Scottish Government to provide funds through a 'Housing Support Grant' to local authorities when housing debts reach a certain level. Responses to the consultation are required by 10 January 2012.
The consultation document is available on the Scottish Government’s website, accessible here.
Land Reform (Scotland) Act 2003: Consultation on draft Order to permit temporary closures of core paths.
The Scottish Government proposes a limited amendment to the Land Reform (Scotland) Act 2003 to provide for the option of temporary closure of core paths in the context of wider exemptions from access rights (section 11 Orders). The consultation ends on 11 January 2012.
The consultation document is available on the Scottish Government’ website, accessible here.
Section 63: Energy Performance of existing non-domestic buildings: Climate Change (Scotland) Act 2009
The Climate Change (Scotland) Act 2009 s.63 requires regulations to be made for the assessment of the energy performance of existing non-domestic buildings and the emissions of greenhouse gases produced. It also requires building owners to improve the energy performance of their buildings and to reduce emissions.
This consultation sets out proposals for measuring both energy performance and emissions. In particular, it proposes that eligible existing non-domestic buildings would be subject to an Assessment of Carbon and Energy Performance (ACEP) which would consist of: Energy Performance Certificate (EPC); a Recommendations report; and an Action Plan. Thereafter owners would either carry out physical improvement work to the building or make arrangements to measure, report and display operational ratings.
Comments are to be made by 20 January, 2012.
The consultation document is available on the Scottish Government’s website, accessible here.
Consultation on Implementation of the Energy Performance of Buildings Directive (EPBD Recast).
The Scottish Government’s Building Standards division is seeking views on the implementation of the recast Directive 2010/31 on the Energy Performance of Buildings.
The original EPD became law in the UK in 2003 with the objective of promoting improvement in the energy performance of buildings and to reduce carbon dioxide emissions from the built environment. Now the EU has recast the EPD to drive forward further improvements in the energy performance of its building stock with a view to achieving the EU-wide agreed targets for carbon emissions’ reductions.
The current consultation looks at securing uniformity in the approach taken to measurement across the EU and, in particular, proposes that from 2020, all new buildings should be nearly zero rated energy buildings, with an earlier target date of 2018 for new buildings owned and occupied by a public authority.
Comments are to be made by 20 January 2012.
The consultation document is available on the Scottish Government’s website, accessible here.
Property Factors (Scotland) Act 2011: Draft Code of Conduct for Property Factors.
This consultation seeks views on the proposed Code of Conduct for Property Factors.
The Property Factor Code of Conduct is one of the central provisions of the Property Factors (Scotland) Act 2011 and its aim is to set minimum statutory standards of practice for the property and land management industry.
Comments are to be made by 16 December 2011.
The consultation document is available on the Scottish Government’ website, accessible here.
This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.
