Real Estate Quarterly Update - Winter 2019

1.1  Who can grant code rights?

We now have judicial authority that only the occupier of land can grant Code rights to an electronic communications operator pursuant to the Electronic Communications Code 2017 (the Code).

Cornerstone Telecommunications Infrastructure Ltd -v- Compton Beauchamp Estates Ltd [2019] was a dispute about who was the correct party to grant Code rights. 

Following expiry of its lease Vodafone continued to occupy and share a mast with Telefónica.

Cornerstone, (a joint venture company between Vodafone and Telefónica) served notice on the landowner asking for a new Code agreement pursuant to Paragraph 20 of the Code. However the Code says that Code rights can only be granted by the occupier (paragraph 9). On that basis Cornerstone should not have served notice on the landowner, but instead should have served notice on Vodafone (its JV partner) who was the actual occupier of the mast.

In the Court of Appeal Lewison L.J explained that the Code's focus is on an occupier granting Code rights, because they are most affected and most easily identified. Indeed, "it is not self-evident that a squatter cannot grant Code rights … Whether such a grant binds anyone else is a different question".

The Court did appreciate the risk of a "sweet-heart" deal between an operator and occupier where they were connected parties. But this risk could be mitigated by the fact that any such deal would not automatically bind the landowner. If the operator asked the Tribunal to compel a landowner to agree to such a "sweet-heart" agreement, the Tribunal's powers (under Paragraph 23) would extend to modifying the operator's agreement, so as to mitigate its effect on the landowner.

However the Court's approach did mean that there would be an issue where an existing occupier (following expiry of its agreement) is the operator and is seeking a renewal of its Code rights.

Lewison L.J. made the point that "It is legally impossible to enter into a contract with oneself" – but Part 5 of the Code sets out a separate procedure which should be followed for the renewal of rights over an existing site as opposed to a new grant of rights which is governed by paragraph 20 of the Code. Under Part 5 of the Code an application for Code rights must be made to the "Site Provider" who is defined under the Code as the landowner – thus avoiding the problem of an operator applying to itself as the occupier.

1.2  Can a licensee be granted relief from forfeiture?

A landlord will usually have an express right to forfeit a lease where the tenant is in breach of covenant or should other events occur which will be set out in the lease the tenant may be able to apply to the courts for "relief from forfeiture" – which essentially means that the lease is reinstated. The court has absolute discretion as to whether to grant relief and the court will look at all the circumstances of the case including whether or not the landlord might receive a disproportionate windfall as a consequence of the forfeiture of the lease. 

Relief from forfeiture is only applicable where the party applying for relief is a tenant or has some other proprietary or "possessory" right. The case of Manchester Ship Canal Co Ltd v Vauxhall Motors Ltd [2019] went all the way to the Supreme Court for a ruling on whether a licence qualified as a possessory right. 

In 1962 Vauxhall was granted a licence in perpetuity to discharge surface water and effluent into the Manchester Ship Canal for an annual payment of £50. Manchester Ship Canal could terminate the licence if the licence fee was unpaid. In October 2013 Vauxhall failed to make a payment and Manchester Ship Canal Company terminated the licence and were only prepared to offer Vauxhall a new licence at the significantly higher annual fee of £440,000.  Vauxhall made an application for relief from forfeiture.

The dispute ended up in the Supreme Court where the Manchester Ship Canal Company claimed that Vauxhall was not entitled to relief because it did not have a proprietary or possessory right. It argued that Vauxhall simply had a licence. The Supreme Court agreed with the lower courts and found that Vauxhall had a "possessory" right. The court applied the definition of "possession" in JA Pye (Oxford) Ltd -v- Graham [2003].  Vauxhall could show that it had both factual possession and an intention to possess. The fact that the licence had been granted in perpetuity prevented it from being a lease but that did not stop the licence granting possessory rights. The rights granted in the licence to construct and thereafter maintain, alter and renew the drainage pipes and other infrastructure were possessory in nature so Vauxhall was entitled to apply for relief from forfeiture and was granted relief.

However it should be noted that this particular licence was unusual in that it was exclusive and had been granted in perpetuity so it does not follow from this decision that the termination of all licences will give rise to rights to claim relief from forfeiture.

1.3  Opposing lease renewal on redevelopment grounds

The County Court decision of London Kendal Street No 3 Ltd -v- Daejan Investments Ltd [2019] is interesting because it was the first decision on ground (f) since the Supreme Court decision in S Franses -v- Cavendish Hotels [2018].

A landlord can oppose a lease renewal on the basis of section 30(1)(f) of the Landlord and Tenant Act 1954 where it needs the tenant's premises back in order to carry out redevelopment works.

A landlord seeking to rely on ground (f) has always had to prove that it has both a firm and settled subjective intention to do the works and that objectively there is a reasonable prospect of carrying out the development. Following  the Supreme Court decision in France the landlord must also now prove that its intention to undertake the works is held independent of the tenant's right to a new tenancy. This means that the landlord's intention to carry out the works cannot be conditional upon whether the tenant chooses to seek a new tenancy. The test is whether the landlord would still do the works if the tenant left voluntarily.

In this case the tenant held a number of leases in the same building which it used as part of its business as a serviced office provider. All the leases had security of tenure under Part II of the Landlord and Tenant Act 1954. One of the leases had expired and the landlord was opposing the renewal of that lease on the basis that it wanted to carry out refurbishment works which included the premises comprised in that lease. The landlord was therefore opposing the renewal on redevelopment grounds and therefore the court had to decide if the landlord had satisfied the intention test for ground (f).

The Judge was satisfied that the landlord’ had established that it had the necessary subjective intention to carry out the works. Considerable weight was given to the fact that the landlord had entered into a contract for the works for £1.6 million and had tendered an undertaking to the court to carry out the works. The landlord had planning permission and the necessary funding in place so there was no question that objectively the landlord could actually carry out the works.

However, when it came to deciding if the landlord had made out the France's element of the intention test, the Judge simply concluded that there was no evidence that the landlord's intention was conditional and the landlord had not designed a scheme of works just to get the tenant out of the particular premises.

Therefore the landlord had satisfied the intention test for ground (f). It is perhaps unfortunate that there was little by way of explanation as to how the Judge had applied France's in this particular case as this would have been useful for those of us who are trying to interpret the law going forward.

However, as already mentioned, the tenant also had other leases in other parts of the building and although the landlord had satisfied the intention test for ground (f) the tenant argued that the landlord had no reasonable prospect of being able to carry out the works as this would adversely interfere with its ability to continue to carry out its business in the other parts of the building and would breach the tenant's right to quiet enjoyment and would constitute a derogation from grant. If the landlord were to go ahead with such works then the tenant's position was that they would have no choice but to seek a prohibitory injunction.

The Judge accepted that there was a real possibility that the tenant would seek an injunction. However, on the particular facts of the case, the Judge thought that any injunction likely to be awarded would not be absolute but would allow the works to proceed in such a way which would limit potential disruption. 

Ground (f) claims will always be very fact-specific but proving the requisite intention to do the works (and particularly that such intention is unconditional) is key to success. However landlords should also address the possibility that the tenant may have other avenues of challenge and the landlord should be ready with the necessary evidence to deal with these.

1.4  Preventing Code rights on redevelopment grounds

EE Ltd -v- Sir James H E Chichester [2019] is the first case to deal with the operation of Paragraph 21(5) of the Electronic Communications Code 2017 which precludes the Tribunal from imposing Code rights if the site provider "intends to redevelop all or part of the land to which the Code right would relate and could not reasonably do so if the order were made".

Sir James Chichester and his co-trustees were the owners of an estate in the New Forest in Hampshire. Following the expiry of its lease EE Ltd continued to occupy a telecoms mast on the estate. Negotiations for a new lease had faltered when the new Electronic Communications Code came into force in December 2017. The new valuation assumptions in the Code meant that the operator was only prepared to pay a significantly decreased rental for the renewal lease.

So the trustees worked up a scheme which involved the trustees erecting their own masts (in place of the existing masts) with a view to offering the operators the right to install telecoms equipment on those masts. Code rights can be obtained against a site provider's land, but not against electronic equipment on the land. Therefore, by only offering the operators rights to install equipment on masts installed by the landowner the trustees would not be restricted by the valuation assumptions in the Code and could charge market rents for the right to install equipment on the masts which belonged to the trustees. 

Unsurprisingly the operator was not interested in the trustees' offer and applied to the Tribunal for an order imposing Code rights on the trustees to allow the operator to retain its own mast and equipment on site. The trustees objected citing paragraph 21(5).

The Tribunal noted that the drafting of paragraph 21(5) was similar to the drafting of ground (f) under the Landlord and Tenant Act 1954 (which allows landlord's to oppose lease renewal on redevelopment grounds). Although these were two different statutory regimes the Tribunal accepted that, for the purpose of assessing the landowner's intention, it should interpret paragraph 21(5) in the same way as ground (f). This meant that:

• did the site provider have a fixed and settled intention to do the works (subjective test)
• was there a reasonable prospect of carrying out the works (objective test) and;
• was this intention unconditional – would the landowner still do the works had the operator not sought to rely on its Code rights.

The Tribunal were prepared to accept that the landowner had satisfied the objective intention test. It had the necessary funding and planning permission and therefore had a reasonable prospect of carrying out the development.

However the trustees failed to convince the Tribunal that their intention to do the works was unconditional. The Tribunal found that "in reality the development plans are conceived in order to defeat the claim for Code rights". Therefore the trustees were unable to use paragraph 21(5) of the Code to block the operator's application for Code rights.

1.5  Rateable value of unoccupied property

The rateable value of premises is the amount equal to the rent at which it is estimated they might reasonably be expected to be let. The rateable value is important as it determines the level of business rates that are payable for commercial property. The rateable value of Mexford House in Blackpool had initially been recorded as £490,000. The premises became vacant and the Court of Appeal agreed that this should be reduced to £1. The Supreme court in Telereal Trillium -v- Hewitt [2019] has overturned the Court of Appeal ruling.

The valuation officer's appeal was allowed by a majority of three to two, with Lord Carnwath giving judgment for the majority and Lord Briggs offering a dissenting judgment.

The issue for the Supreme Court was whether to take into account the general demand for property in an area when ascertaining a property’s rateable value notwithstanding there was no actual demand for the particular premises – in this case - Mexford House. The Supreme Court considered that whether the building is occupied or unoccupied, or the fact that the actual tenant has not been identified at the relevant date, is not critical.

The Supreme Court concluded that there was no reason why the value of rent should not be assessed on the general demand for other office properties with similar characteristics. Even in a saturated market the rating hypothesis should assume a willing tenant who is sufficiently interested to enter negotiations in order to agree a rent on the statutory basis.

So the rateable value for Mexford House was increased from £1 to £370,000.

In their dissenting opinion, Lord Briggs and Lady Black came to a different conclusion. The fact that similar properties existed with substantial rents should have prompted an inquiry into whether one or more of those tenants would be prepared to relocate to Mexford House for a reduced – but still more than nominal – rent.

This decision will mean that owners of vacant, hard-to-let buildings will need to consider how they can legitimately mitigate their rates liability.

1.6  Can you continue to use a right of way after development?

The acquisition of a prescriptive right of way usually depends on uninterrupted use for at least 20 years.  In addition, the claimant must show that the use was "as of right" (without force, secrecy or consent). Unlike express easements which will be construed according to the words used in the written deed of grant, the extent of the prescriptive right will be limited to its original use.

It is also the case that if there is a sufficiently significant change in the character or identity of the benefitting land and that results in a substantial increase in, or alteration of the burden on, the land burdened by the prescriptive easement then the continued use of the easement for those purposes will be unlawful.

These principles were applied in the recent case of Stanning -v- Baldwin [2019]. In this case the benefitting land had a right of way over a track on the burdened land which had arisen by prescription. The benefitting landowner obtained planning permission to demolish the existing single dwelling house on his land and construct four terraced houses with underground parking for nine cars in its place.

The burdened landowner accepted that the development did not represent a radical change in the character or identity of the dominant land and so the continued use of the track by the dominant land owners after the development was not unlawful.

However, while an increase in the intensity of use would not on its own be objectionable it is the case that if the burdened landowner was able to establish that the increase in volume of traffic was interfering with the reasonable enjoyment of the burdened land such that the use was excessive then the burdened landowner would have a claim in nuisance against the benefitting landowner.

The judge concluded in this case that although the development was likely to increase the use of the track (both in the construction phase and thereafter for access to and from the benefitting land) there was no reason to conclude that this would result in excessive use.

This is a reminder that when a development is proposed it is important that the developer checks that the development site has all the necessary easements and that those easements will accommodate the use of the land once the development is finished.

1.7  Validity of e-signatures

The Law Commission recently published its report on the validity of e-signatures.  The Law Commission's report focused on two aspects of the electronic execution of documents:

1. the use of electronic signatures to execute documents where there is a statutory requirement that a document must be "signed"; and
2. the electronic execution of deeds, including the requirements of witnessing and attestation and delivery.

However, the project did not extend to registered dispositions under the Land Registration Act 2002.

The Commission concluded that:

1. An electronic signature is capable in law of being used to execute a document (including a deed) provided that (i) the person signing the document intends to authenticate the document and (ii) any formalities relating to execution of that document are satisfied.
2. Save where the contrary is provided for in relevant legislation or contractual arrangements, or where case law specific to the document in question leads to a contrary conclusion, the common law adopts a pragmatic approach and does not prescribe any particular form or type of signature. In determining whether the method of signature adopted demonstrates an authenticating intention the courts adopt an objective approach considering all of the surrounding circumstances.
3. The Courts have, for example, held that the following non-electronic forms amount to valid signatures:

• signing with an ‘X;or
• signing with initials only.

1. Electronic equivalents of these non-electronic forms of signature are likely to be recognised by a court as legally valid.  There is no reason in principle to think otherwise.
2. The courts have, for example, held that the following electronic forms amount to valid signatures in the case of statutory obligations to provide a signature where the statute is silent as to whether an electronic signature is acceptable:

• a name typed at the bottom of an email;
• clicking an "I accept" tick box on a website; and
• the header of a SWIFT message.

However in relation to deeds and the witnessing requirements thereof, the report indicates that a deed must be signed in the physical presence of a witness who attests the signature. This is the case even where both the person executing the deed and the witness are executing/attesting the document using an electronic signature.

Contracts for the sale or other disposition of an interest in land are required to comply with the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 which essentially means that the contract must be in writing and incorporate all the terms and be signed by all the parties.

Until recently we did not have a court decision on whether an electronic signature would satisfy the requirement for signature pursuant to section 2.  So the recent County Court decision of Neocleous -v- Rees [2019] garnered much publicity. Although it is only a County Court decision and therefore not binding precedent it is highly persuasive as regards the validity of an e-signature for a land contract and is an endorsement of the view that the purpose of a signature is to authenticate the document. Function being more important than form.  You can read our summary of the case here.

The decision in Neocleous also highlights that an email (perhaps attaching a final version of a document) and its reply which contains all the express terms and which is electronically signed by or on behalf of the parties could be a valid land contract, unless, of course, the parties did not intend to create legal relations.  Therefore it is just as important to include the "subject to contract" label on email correspondence when negotiating terms for a contract for the sale of land as you would do on any other correspondence if you do not intend to bind the contracting parties until a formal document is executed.