Property Law Roundup
Welcome to the July issue of Anderson Strathern’s Property Law Roundup.
In this month's issue, we comment on a case where a land owner failed in his attempt to bring the lease of his ground to an end on the basis of his tenant’s alleged material breach of contract.
We also provide a briefing on proposals to make changes to the Carbon Reduction Commitment scheme.
We also update you on a number of other relevant news items.
Crieff Highland Gathering Ltd ("Crieff"), the company which runs the Highland Games in the town of Crieff, granted a sixty year lease of the games site, Market Park, to Perth and Kinross Council in April 1983. The lease obliged the council to use the land as recreational facilities for the benefit of the local people. In return, Crieff received a rent of £100 per annum, was relieved of any maintenance responsibilities and could use the site for the annual staging of the Highland Gathering. The council took on responsibility for the upkeep, maintenance and repair of the land, including the car park and the walls surrounding the park. The council could also demolish and build a new pavilion on the land during the lease term and had to repair whatever facilities existed on the site. No rent ever changed hands and there was no irritancy clause contained in the lease.
In the 1990s, Crieff realised that Market Park was of commercial interest to retail developers. It entered into an option with Sainsbury’s and supported the supermarket’s planning application which included a proposal to relocate the recreational facilities to another site in the town. The council were less keen on realising the development potential of Market Park because it did much to meet the local demand for football pitches. The Council favoured a site at Duchlage Farm for the location of any supermarket. Crieff became frustrated by the lack of planning progress and so it looked to its lease to establish a mechanism by which it could take back full control of its land.
Without the benefit of a landlord break option or an irritancy clause in the lease, Crieff had to set up an argument that the council had materially breached the lease - to such an extent to justify terminating the lease at common law. Crieff served a notice on the council detailing an array of wants of repair including repairs needed to the pavilion and the walls the surrounding the site (part of which were listed). Crieff also maintained that the council had been deficient throughout the term in its general approach to keeping the site clean and tidy. The cumulative failures to repair and maintain, shown in the schedule of dilapidations attached to the notice, which had accrued over a long period of time amounted to a material breach, in Crieff’s view.
The question of whether or not Crieff was entitled to terminate on this basis came before the Outer House of the Court of Session. When looking at the issue, the court decided that a landlord could not terminate a lease at common law, on the grounds of material breach, unless all of the following circumstances were present:
- The tenant has committed a material breach of the lease;
- The landlord has given the tenant a fair and reasonable opportunity to fulfil its contractual obligations; and
- The tenant has demonstrated an unwillingness or inability to perform its contractual obligations in the future.
When considering what could amount to a material breach of contract, the court reviewed the historic development of the issue in contract law and summed up the position in this way: “the breach cannot be trivial and it must go to the root of the contract itself”. Whilst the evidence in the case supported the position that there had been a failure to repair as required by the contract, that failure was not serious enough to destroy the basis of the lease agreement between the parties. The main purpose behind the lease signed up in 1983 was to allow the council to provide sports facilities in the town and still allow Crieff to hold the Highland Gathering. The arrangements for maintenance and repair of the site were, in some way secondary or ancillary to that purpose. Over the years, the state of repair of the site had not stood in the way of local people using the facilities for sport and recreation nor had there been any interruption in the staging of the Highland Gathering due to the state of the property.
Additionally, a tenant has to be given a fair and reasonable opportunity to put right the problem which has led to the landlord deciding that there has been a material breach of the lease. The sufficiency of the time period allowed for that opportunity depends on the factual circumstances in each case. At Market Park, a three month time period to make good wants of repair to surrounding walls, which required a specific type of cement work which was not feasible over the winter period, was considered to be insufficient.
Lastly, termination for material breach at common law requires the landlord to assess what the likelihood is of the tenant continuing to fail to meet its contractual requirements in the future – he cannot just look to what has happened in the past. In what is a slightly different approach than that taken with other types of contracts, where lease termination is concerned, the tenant must be incapable of future performance or threatening to fall short on its obligations going forward before the remedy of termination becomes a reasonable response by the landlord. The council had eventually instructed the repairs to the boundary walls, albeit after Crieff tried to terminate the lease, and it had also indicated that it was committed to continuing to operate the park as an important public facility and to keeping to its side of the bargain for the remaining thirty years of the lease.
On the basis that Crieff had failed to make out a good case on all the conditions required to legally terminate the lease on the basis of material breach, the Court decided in favour of the council.
Joan Devine, a Partner in our Property Litigation Team, comments:
It is unusual to have a lease which does not contain an irritancy clause. The irritancy clause in a lease will provide that the landlord is entitled to bring the lease to an end in the event of the tenant failing to comply with its lease obligations. Irritancy is also regulated by statute. If the breach complained of is a failure to make payment of a sum due in terms of the lease, the landlord cannot terminate unless he has first given the tenant a period of at least 14 days to remedy the breach. If the breach is of a non-monetary obligation, such as an obligation to repair, the landlord is not entitled to rely upon the breach as a basis for terminating the lease unless a "fair and reasonable" landlord would seek to rely on that breach for that purpose. The fair and reasonable landlord test does mean that there is more scope for the exercise of judicial discretion in cases dealing with a non-monetary breach. When landlords are considering irritancy of a lease or when tenants are faced with the threat of irritancy, it is important to take specialist advice. The Property Litigation team at Anderson Strathern are well placed to advise.
Case referred to Crieff Highland Gathering Limited v Perth and Kinross Council  CSOH 78.
A full text of the decision is available on the Scottish Court Service’s website accessible here.
On 30 June 2011, following a raft of consultations issued in January 2011, the Department for Energy and Climate Change set out its proposals to make the CRC Order (the Carbon Reduction Commitment scheme) more straightforward and user friendly for participants.
The main proposals impacting on the property industry are as follows:
- The CRC will not, after all, be sidelined. The government has considered whether the CRC should be replaced by a straightforward carbon tax and has decided that a simplified CRC will provide the most effective reputational, financial and energy monitoring drivers. The government says it has good evidence that price on its own does not ensure that organisations will implement energy efficiency measures.
- Those sites covered by Climate Change Agreements (CCAs) and the EU Emissions Trading Scheme (EU ETS) will be excluded from the CRC scheme. When assessing whether an organisation is covered by the CRC, it will no longer have to consider electricity supplied to facilities covered by a Climate Change Agreement or an Emissions Trading Scheme. The government has indicated that it will consult shortly on changes to Climate Change Agreements.
- There will be no auctioning of allowances in Phase 2 of the scheme. The auctioning of a capped number of allowances in Phase 2 will be replaced by two fixed price sales per year (a cheaper forecast/forward sale and a more expensive retrospective sale (i.e you buy at the beginning of a year or in arrears at the end). The fixed price sale of allowances in Phase 1 will be retrospective only, with the first sale taking place in 2012, as was previously announced. Those involved in the scheme can, therefore, choose to buy their allowances at the end of a year. This will be more costly, however, and could get Landlords who are looking to recover the costs of allowances from tenants under service charges into difficulty with those tenants.
- The government has also stood by its previous announcement that the revenue from the sale of allowances will not be recycled back to participants. This is no surprise in the current economic climate.
- There will be league tables demonstrating the relative performance of participants. The first of the league tables will be published in October 2012 as was originally planned. However, the government has said it may review the reputational element of the league tables when it has had an opportunity to assess how the scheme has operated in the early years.
- The rules on organisational structures and compliance will be simplified. At the beginning of each Phase, the top parent organisation in a group must notify SEPA/ the Environment Agency of the overall structure of its group. However, the group will have the option to “disaggregate” in a way that better reflects its normal business units. The government believes that this may enable greater alignment of the CRC with company structures used for financial accounts consolidation.
- There will be changes to rules on trusts so that responsibility for compliance with the CRC is allocated to the body with the genuine commercial interest in the property and its use, and with access to the information and the resources necessary for effective and efficient compliance with the scheme.
- There will be no changes to the landlord and tenant rule. Landlords will remain responsible for supplies of energy to their tenants. The government has in the past looked into the possibility of joint responsibility. However, it does not believe that shared responsibility could be operated efficiently. The Government still believes that landlords are better placed to bring in the most cost-effective energy efficiency measures, rather than tenants. However, the government is considering the case for making a limited exception where the landlord only owns the land and the buildings or other structures are built and exclusively occupied by the tenant, the landlord supplies the energy but the tenant is fully liable for its maintenance and, therefore, can control its energy performance.
- There will be no changes to the rules on franchises.
- The number of fuels covered by the CRC will be reduced from 29 to 4. Participants will only need to report on electricity, gas, kerosene and diesel (kerosene and diesel if used for heating only). This will also mean that diesel used by off-road vehicles will no longer be covered by the scheme.
- There are to be changes to the qualification process and reporting requirements under the scheme. Only electricity measured by settled half hourly meters (HHMs) will count towards deciding whether an organisation is covered by the CRC scheme. Additionally, the "90% rule" and footprint reports will be scrapped. Participants will be required to report on 100% of their (non-CCA or EU ETS) supplies of electricity, gas, heating kerosene and diesel. This will mean footprints reports and the residual measurement list will no longer be required.
- There will be no changes in the way renewable energy is treated. The government considers that renewable energy is already incentivised by other schemes (such as the Renewables Obligation and feed-in tariffs (FITs)).
- The evidence pack requirements will be reviewed. SEPA/the Environment Agency will look into what has to go into the evidence packs at the end of the first auditing cycle (end of 2011/early 2012) with a view to reducing the administrative burdens on participants. It is proposed that participants will only be required to keep records of their energy usage for six years, instead of 12 years.
Anyone interested in commenting on the proposals should contact DECC by 2 September 2011. There will be a further consultation in February 2012. That consultation will run until April 2012. The intention is for the changes to the CRC to come into force in April 2013.
Details of the ministerial statement on simplification of the CRC scheme are on the DECC website accessible here.
If you would like any advice on the impact that the CRC scheme may have on your business, please get in touch with Stephen McDonagh, Associate in our Commercial Real Estate Department.
In Bell & Scott’s May 2011 Property Update we provided a briefing on the Scottish Government’s consultation on the planning regulations which exempt certain types of development from the need for an application for planning permission – the permitted development rights (PDR) afforded by the Town and Country Planning (General Permitted Development)(Scotland) Order 1992, as amended (GPDO).
The Scottish Government has now published a report analysing the responses to this consultation. Details are available on its website, accessible here.
The Scottish Government has issued a report on the findings of a five month research study into the potential of development charges in the Scottish planning system. The research team found that the financing of infrastructure is a key constraint to development and used case studies and various models for infrastructure funding to explore the potential of the use of development charges to improve the situation.
Details are available on the Scottish Government website accessible here.
The Scottish Government has issued guidance on the Environmental Impact Assessment (Scotland) Regulations 2011, the regulations which transpose the EIA Directive 2 into the Scottish planning system. The main aim of the EIA Directive is to ensure that the authority granting consent for a particular project makes its decision in full knowledge of any significant effects on the environment. It sets out the procedure for an Environmental Impact Assessment to systematically assess the likely environmental effects of a proposed development.
The Circular supersedes guidance previously contained in Circular 8/2007 (other than Annex E); Circular 1/2003, and Circular 3/2003.
Details are available on the Scottish Government website accessible here.
SEPA is currently seeking views on how the National Flood Risk Assessment informs the identification of areas for flood risk management planning. Comments are to be received by August 15, 2011.
In addition to the permitted development rights consultation responses, the Scottish Government has published responses to a number of other recent consultations on its website.
- Building a Hydro Nation (accessible here);
- Improving Choice in Verification of Building Standards (accessible here);
- Guidance on the Use of Compulsory Purchase (accessible here);
- Right to Adapt Common Parts in Scotland (accessible here); and
- Delivering Sustainable Flood Risk Management Guidance (accessible here).
The Scottish Government has announced that the first contracts under the NHT, the new financing model aimed at delivering hundreds of new affordable homes, have been awarded. The NHT will see developers and local authorities jointly funding the purchase of newly-built homes so they can be made available for rent at below market rates.
Under the first contracts, which have been signed with two developers, almost 100 homes across two Council areas - Scottish Borders and Highland – will be delivered. Further contract signings are expected over the next month that will kick-start even more construction across Scotland. Phase 1 of the initiative is expected to generate around £100 million of investment and support over 1,000 jobs in the construction sector and wider economy.
Discussion papers have been published on the lessons learned through Phase 1 for local authorities and developers, and on further planned variations to the model that have been co-developed with housing associations.
Details are available on the Scottish Futures Trust 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.