Spring 2018 ISSUE
FIRST COMMENT IN THIS ISSUE: • HOW DO YOU SOLVE A PROBLEM LIKE LEASEHOLDS? • WHEN IS A POSITIVE COVENANT ACTUALLY AN EASEMENT? • MISSING A PIECE OF THE JIGSAW? • UNDERWRITER CASE STUDY - LACK OF ACCESS • CLAIM CASE STUDY - ADVERSE POSSESSION, UNREGISTERED LAND
Leading Title Insurance
Welcome to the first edition of our newsletter for 2018. In this issue we have contributions from our regular writers. Paul Butt, of Rowlinsons Solicitors, gives his thoughts around leaseholds and Kevin Lee, of Hill Dickinson LLP, talks about ‘fencing easements’ and ‘reasonable endeavours’. Our underwriter contribution for this quarter comes from Emma Southall who offers an insight into a case where a developer required protection in the event of a challenge to the development of agricultural land.
How do you solve a problem like leaseholds? by Paul Butt Consultant Solicitor Rowlinsons Solicitors
I was looking at a contract pack for a new house recently – 999 year lease at a ground rent of £300 per year increasing every 20 years in accordance with changes to the Retail Prices Index. There was the usual requirement that contracts had to be exchanged by a certain date in the very near future. It started me thinking about the Government’s plans to ban such house sales – remember the announcement that sales of leasehold houses would be banned and that the ground rent on new leases for both houses and flats would be reduced to zero. What does one say to someone buying this house now, today – wait until – who knows when – and you can buy with no ground rent – indeed you can buy the house as a freehold property because of the ban? But will the developer put up the price to compensate? But the big question, of course, is what is going to happen to those people who already own a leasehold house or flat with a ground rent – and particularly those with the kind of rents which have received all the bad publicity – doubling every 10 years for example? All the Government has said so far about existing leases is that ‘it ‘will also make it cheaper and easier for existing leaseholders to buy-out their freehold and there will be better information available about redress for those consumers who face the most onerous
terms’. No suggestion at the moment of reducing those rents – although one would have thought that it would be relatively easy to introduce a provision that the rents cannot exceed a certain amount or a certain percentage of the capital value. But are leaseholders owning such properties on estates still being developed going to see the value of their properties fall if some houses on the same development are being sold on a freehold basis? Government figures show that there are about 1.4 million leasehold houses in England – most of which will not be on the ‘onerous terms’ that have received all the publicity. What impact will this have on the values of those properties? And what about those ‘onerous’ terms – are they going to be changed? In relation to these existing long leaseholders the emphasis is on ‘redress’ – but redress against whom? Who is at fault in these cases? We have a contract entered into between two parties both of whom had legal advice as to its terms. Is it possible to argue that the ground rent provisions are an ‘unfair contract term’ within the meaning of the Consumer Rights Act? And yes it does apply to long leases – a lease is basically a contract after all – and most house buyers will be consumers – they are not buying for business purposes.
The basic definition of an unfair term is: “A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” Note the requirement of a term not being individually negotiated. As conveyancers will be well aware, most flat leases are proffered by developers on a take it or leave it ‘we won’t change anything’ basis. However, a term of a consumer contract may not be assessed for fairness ‘to the extent that the assessment is of the appropriateness of the price payable under the contract’. Does that rule out the ground rent? And if not the developer, who else can the leaseholder claim redress from? Of course – the conveyancer – and indeed, I understand such claims are already being made. We have seen leaseholders claiming that they had no idea that their ground rents were so excessive – indeed the writer has seen cases of leaseholders claiming that they did not even know that they had bought a lease! Now, of course if a buyer’s conveyancer has not told the client that the property is leasehold or about the amount of the ground rent, then they would indeed appear to have been negligent – but has this actually happened in all these cases? It just seems inconceivable that so many conveyancers could have omitted to tell clients about such issues – assuming that all those complaining did not use the same conveyancer. People’s memories can play strange tricks, especially when money is concerned.
Much more likely is that, at the time of the purchase, it was not appreciated that the escalating ground rent would have such an impact. But how is the conveyancer liable – the buyer is just as capable as the conveyancer of working out that a ground rent of £500 per year doubling every 10 years will result in a rent of £2000 in 20 years. And as to the impact on the value of the property, well, we are not valuers. We are not expected to advise on the price being paid for the property, so why should we advise on the future value? Indeed, it would be negligent of us to advise on such issues that we are not qualified to advise on. However, possibly, we ought to advise that the buyer should seek valuation advice as to the impact that such increasing rents may have on value.
FIRST COMMENT It is easy now to see that it might – particularly after all the publicity – but at the time? And if a valuer had been asked for such advice, what answer could have been given? The impact of the ground rent on future value will all depend upon the unforeseeable – rates of inflation, increases in property values etc. 20 or more years into the future. And a few more comments on the proposals. We are told that new houses must be sold as freehold “apart from a few exceptional circumstances where leasehold is still needed – such as houses that have shared services or built on land with specific restrictions.” This is covering the situation where there are shared services such as a sewage plant or an environmental strip which need maintaining on an on-going basis. It is good that the Government advisers realise that due to the archaic rule that positive covenants do not bind successors in title to freehold land, leasehold houses are sometimes ‘necessary’ to secure continued enforcement of such obligations. But why not just change that archaic rule; make such covenants bind successors in the same way as restrictive ones do? And, dare one say, leases are not ‘necessary’ in such cases anyway. The obvious – and often used way – of making positive covenants bind successors is to have a Restriction on the Register requiring a successor to enter into a deed of covenant with the provider of the services. We find these all the time with leasehold flats, (where of course they are NOT necessary to make the covenants bind!) But they work in freehold as well. The Restriction prevents any disposition being registered without a certificate that such a deed has been entered into. Leasehold is not ‘necessary’ at all. So why not just ban long leases for houses altogether? But that will just leave flats as leasehold – why not do something about Commonhold? The basic idea is sound. Some lenders, however, will not lend on it, so a developer’s conveyancer can hardly recommend it. But many lenders WILL lend on it. Why not find out what the problem is here – and sort it? And whilst I am ranting about these things, can I just add something about ‘zero’ ground rents. Can someone please tell the Government that a rent is
NOT essential on the grant of a lease? So we should be talking about leases with NO ground rent, rather than leases with a zero ground rent. The effect is the same, I know, but I am a lawyer! One good suggestion being made by the Government is the proposal to make sure ‘freeholders have equivalent rights to leaseholders to challenge unfair service charges’. Service charges in a lease are subject to much statutory protection – they must be reasonable and services provided to a reasonable standard, for example, but there are no similar protections for those freeholders paying service charges. There should be. There is also a proposal to work ‘with the Law Commission to support existing leaseholders and make the process of purchasing a freehold or extending a lease much easier, faster and cheaper.’ The writer’s view on this is that the main problem at the moment is that people do not use the current system. Leaseholders only realise that a lease needs extending when they come to sell – and at that stage there is simply not the time to follow the statutory procedure. So the freeholder is asked for a price to extend which is often excessive compared to the price that would be fixed under the statutory procedure. I suppose that the procedure could be improved, but it is difficult to see how this could work in the rush to complete a sale. Raising the awareness of leaseholders that they will need to extend before they can sell would help – maybe estate agents could be required to look into the unexpired residue before marketing the property. If an application was then made at the time of marketing, then in many cases it could be completed using the existing procedure before a buyer is found. But of course, a seller might be reluctant to incur expense in case a buyer cannot be found. It will be interesting to see what suggestions the Government / Law Commission come up with. And one final thought. All of the above is relevant only to England. In Wales, such issues are devolved to the Welsh Government – and don’t forget the new Land Transaction Tax coming into force in Wales as from April 1st in place of SDLT. There is no information yet on what (if anything) the Welsh Government intends to do about these issues. If they have any sense they might well be advised to 5 wait and see what happens in England!
When is a positive covenant actually an easement? by Kevin Lee Hill Dickinson LLP
This was the issue that came before Mr Justice Birss sitting in the High Court in February 2018 in the case of Churston Golf Club v Richard Haddock. This was an appeal from the County Court at Torquay and Newton Abbot. As any student of property law will remember, positive covenants do not run with the land. This is the consequence of the rule in Austerberry v Corporation of Oldham (1885), which is authority for the proposition that a covenant which imposes a positive obligation on the land owner, such as
to spend money, does not run with the land. It is a purely personal contractual obligation between the parties to the document. Positive covenants are therefore different to restrictive covenants, where the burden of a covenant will run with the land if various conditions are met. However, there is an anomaly when it comes to fencing covenants. An obligation to build and maintain a fence is a special type of obligation that can, in certain circumstances, run with the land and be enforceable against subsequent land owners.
The principles had been revisited by three cases decided by the Court of Appeal in the 1960s and 1970s which had found that a fencing obligation between neighbours can in fact be an easement, an actual interest in land, the benefit and burden of which will run with the land. But in all of these cases the easement had been acquired by long user or custom, not by a covenant in a conveyance and as the book, Gale on Easements, recognises,
“Although not a true easement, this right is commonly referred to as a fencing easement. The obligation has been established by proof of long usage under which the quasi-servient owner or occupier has consistently repaired the fence when told to do so by the quasi-dominant owner or occupier.”
In the Churston Golf Club case, the dispute was about an obligation to fence the boundary between the two parcels of land. In 1972, the former owners of the golf club sold the golf club land to the local authority. Mr Haddock’s predecessors in title were the trustees of adjoining land and were also parties to the conveyance which contained a clause as follows:
“The purchaser hereby covenants with the trustees that the purchaser and all those derived in title under it will maintain and forever hereafter keep in good repair at its own expense substantial and sufficient stock proof boundary fences walls or hedges along all such parts of the land hereby conveyed as are marked T inwards on the plan annexed hereto.”
Mr Haddock was a successor in title to the trustees and the golf club was the successor in title to the purchasers as tenant of the local authority. A dispute arose as to the maintenance of the fences and Mr Haddock sued the golf club in the local County Court, relying on the fencing covenant which he said took effect as an easement. The judge held that the covenant in the 1972 conveyance did indeed take effect at law as a fencing easement and that the burden of that easement had passed to the golf club. The Judge therefore found for Mr Haddock. The golf club appealed to the High Court. The two issues before the Court were whether it was legally possible for a clause in a conveyance to create a fencing easement at all and whether, on its true construction, the clause in the 1972 conveyance had this effect.
The issue for the Judge was whether a covenant in a conveyance could take effect as an easement in the light of Austerberry v Corporation of Oldham (1885). On the first point, the Judge found that it is possible to create a fencing easement by way of a covenant in a conveyance, even though it is expressly said to be a covenant and even though the word “covenant” is used. Previous cases which had rejected the suggestion that a positive covenant could be an easement (for example, cases where a positive covenant to maintain a roof was held not to be an easement), could be distinguished because they were not concerned with fencing easements and fencing easements are a special species. As to whether or not the covenant in the 1972 conveyance did in fact create a fencing easement, the Judge agreed with the County Court judge. Again, law students will know that there are four requirements for an easement: 1. There must be a dominant and servient tenement; 2. The easement must confer a benefit on or accommodate the dominant tenement; 3. The dominant and servient tenement must not be owned or occupied by the same person, and 4. The easement must be capable of forming the subject matter of a grant. The judge was satisfied that all four requirements
were met. He was particularly persuaded by the use of the words in the clause “maintain and forever hereafter keep in good repair”. These words showed that the parties intended that the obligation was to last into the future, even if the purchaser ceased to exist. But what about the fact that the 1972 deed expressly states that the purchaser “hereby covenants”? Does that not suggest that the clause was to be a covenant and not an easement? The Judge dealt with this by finding that an objective approach was required to determine the intention of the draftsman in 1972 and in doing so, the obligation to maintain the boundary wall or fence “forever hereafter” was sufficient to create a fencing easement. So Churston Golf Club v Haddock provides a timely reminder that fencing easements can, and do, look suspiciously like positive covenants. When you come across such a fencing covenant, bear in mind that it can in fact be an easement and if you are purchasing the land with the burden of such a covenant, then your client may well be liable to comply with it forever and at some considerable cost.
Reasonable endeavours The second case for discussion is Gaia Ventures Limited v Abbeygate Helical (Leisure Plaza Limited) [2018 EWHC118]. This is a case concerning that old chestnut “reasonable endeavours”. The case was a dispute over overage provisions in a transfer and whether or not the overage payment
FIRST COMMENT of £1.4 million was payable. The essential question was whether the developer had used “reasonable endeavours” to achieve “as soon as reasonably practicable” the satisfaction of certain conditions, upon the fulfilment of which the developer became obliged to make the overage payment. As may be expected, the developer after entering into the commercial agreement became less keen to pay the overage payment and indeed did what it could to avoid the payment. The overage payment in question became payable if the overage conditions were satisfied before 4 July 2013. As it happened, the overage conditions were satisfied, but not until four days after the longstop date. Accordingly, the developer claimed that it was not liable to make the overage payment. What was also relevant was the fact that it was the developer who effectively retained control over the whole planning process. Its conduct was, therefore, put under the microscope. Had the developer used reasonable endeavours to achieve the satisfaction of those conditions as soon as reasonably practicable? The judge revisited the meaning of “reasonable endeavours”. He concluded that this involved the Court making a value judgment in light of all of the facts of the particular case. He was assisted by the earlier decision of Rhodia International Holdings v Huntsman (2007) which held that an obligation to use reasonable endeavours to achieve a stated aim requires the party to take one reasonable course and not all of the reasonable courses that may be available to that reasonable person. An obligation to use “best endeavours” probably requires a party to take all reasonable courses, so it may well be said
that an obligation to use “all reasonable endeavours” equates with using “best endeavours”. Whether a relevant step is feasible and whether in all the circumstances it is reasonable to take it, or indeed unreasonable not to take it, involves balancing the risk of adverse consequences against the obligation to perform. When assessing the adverse consequences of taking a certain course of action, the Court will want to see whether the effect of taking a particular step would be unreasonably impractical. Something that merely affects the profit margin of a developer would not formally be taken into account. In addition, any party who is under an obligation to use reasonable endeavours to achieve something must, by implication, not by its own actions, make it more difficult. In this case, the obligation was to use reasonable endeavours to satisfy the overage conditions “as soon as reasonably practicable”. This, the Court found, did not mean “when convenient” or “at the time best suited to the developer”. Having taken all of the evidence into account, the Court found that the simple truth of the case was that what lay behind the developer’s approach in satisfying the obligations was not a desire to take steps “as soon as reasonably practicable”, but rather a desire to leave things as late as possible. If matters had been driven by desire to do things as soon “as reasonably practicable” then it was highly probable that the overage obligations would have been satisfied prior to the longstop date. Accordingly, the Claimant was entitled to their overage payment and obtained judgment of the damages of £1.4 million together with interest at 2% per annum and costs.
Missing a piece of the jigsaw? All property buyers need to be able to make an informed decision as to whether to go ahead with their intended transaction. To make a fully informed decision whether or not to proceed, the buyer needs as much information as possible about the property and its current ownership – particularly the ‘title information’.
So what is the situation for a buyer if there is a lack of title information, and what are the risks if proceeding in the absence of title information?
What is title information? The title information relating to a property is the information about the legal and equitable (beneficial) rights in the property. These rights include, for instance, the legal ownership of the registered proprietors, any beneficial interests of third parties, easements (rights of way), and restrictive covenants. Whether it’s a small residential property or a large commercial development – the buyer can typically expect to be provided with the necessary title information before the contract stage. However, this is not always possible. In many transactions, the particular circumstances of the sale mean important information is either unknown or not available.
Why might title information be missing? There are various scenarios where the seller may not be able to produce the required title information relating to the property, for example, where: •
the seller is the executor, and the sole registered proprietor has died
the seller has lost the title deeds and the land is unregistered
the title deeds have been destroyed
the seller is a bank or building society selling as mortgagee in possession, exercising its power of sale
the seller is acting as administrator or liquidator on an insolvency
the superior leasehold title is not investigated in a leasehold transaction
In these cases, the seller is unlikely to have all the title information relating to the property, and will probably be unable to obtain it.
What are the risks? In the event that not all the information as to title is known, it is effectively like a jigsaw missing an important piece. There may be issues which are not known which, if known, could change the whole picture for the potential buyer. The risk of missing title information is that something later comes to light, and the buyer is then liable to a third party who asserts an interest in the property. If there is missing title information, particularly if that information is potentially significant (for instance, concerning a missing legal owner or a third party right of way over the land), there is a title defect. To give a leasehold example – if a superior title is not, for some reason, investigated, there is the risk that the head lease was not validly granted, or there are unknown third-party rights and interests affecting the freehold title. A defective title is a title where there is a risk that a third party could try to assert a legal or beneficial interest in the property which is adverse to the rights and interests of the property owner. If such a claim proved successful, the property owner will probably be liable for compensation and may have to relinquish at least part of their legal title. There is also the risk that their enjoyment and use of the property will be severely curtailed. In the commercial context, this could be disastrous in the absence of title insurance.. 11
First Title, for instance, recently assisted a commercial client (a property fund) who was seeking to buy a large entertainment complex which comprised restaurants, bars, a cinema and other entertainment areas. However, the development was being sold by administrators in an insolvency, and there was a minimum amount of information and disclosures during the pre-contract stage of the transaction. The seller could not provide a title guarantee on completion, but First Title covered the risks (see below) to enable the buyers to go ahead with the transaction.
What is ‘title guarantee’? Title guarantee is an important principle in a property sale and purchase. In the contract of sale, the seller’s solicitors must provide that the seller sells the land with full title guarantee, limited title guarantee – or no guarantee. Full title guarantee will be given where there is no missing title information, and means the buyer has the benefit of various covenants implied by the Law of Property (Miscellaneous Provisions) Act 1994. These covenants (promises) include that the seller has the right to dispose of the property, and will do all it can reasonably do to give the title it purports to give, at its own cost. Perhaps more notably in the context of title information, the seller promises that the sale is “free from … all known encumbrances”. Encumbrances include burdens, interests, rights or claims adversely affecting the use of, or the ability to transfer, property. Where there is a title defect in the absence of title information, full title guarantee cannot be given because of the seller’s limited knowledge of the property and of any third-party rights. If the seller is a personal representative or mortgagee in possession, limited title guarantee may be given (the buyer then benefits from limited covenants under the 1994 Act).
However, typically no title guarantee will be offered by administrators and liquidators, and other sellers who simply cannot provide good title to the property. Where no title guarantee is given, the buyer cannot sue on any of the implied covenants given in the case of full or limited title guarantee. This leaves the buyer in a risky position, but robust title indemnity insurance is available for buyers (and any lenders) in these scenarios.
How can indemnity insurance help? It is important to understand that indemnity insurance cannot cure the title defect, but it will protect the buyer – and any lender – against the risks. In the case of our client’s entertainment complex, First Title was able to provide a bespoke Property Owner’s Protection Policy (POPP) which was additionally endorsed with other known risks. The property fund buyer, as well as the bank providing finance to fund the acquisition, wanted to protect themselves from any unknown risks given they were buying from administrators. Importantly, the policy was structured to cover the immediate successor to the property fund to enable them to dispose of the asset within a five-year time period.
How can First Title help? Robust title defect insurance from experienced legal indemnity insurers is vital where there is missing title information. Where the seller cannot provide the whole picture, there is no reason for the transaction to fail: First Title provides conveyancing clients, developers and their lawyers with title insurance to protect many different types of risks that could arise where title guarantee cannot be given on completion.
Lack of access by Emma Southall Commercial Underwriter
WHO IS THE INSURED?
WHAT IS THE LAND?
Agricultural land to be developed as residential housing
DID THE INSURED HAVE PLANNING?
WHAT IS THE ISSUE THAT BROUGHT THE CLIENT TO US FOR AN INSURANCE SOLUTION?
The insured was the proposed residential housing developer of a piece of agricultural land. Part of the land was registered with possessory title, not title absolute and was subject to rights in favour of third parties. Historic deeds also burdened the land. The acquisition and development of the land was supported by a title insurance policy to protect the developer and successors in title in the event that any adverse claims affected the development and subsequent use of the land.
FIRST COMMENT Ramifications of risk Possessory title: As part of the land has been registered with an inferior grade of title, a third party could claim ownership of the land and further, the parcel could be subject to unknown rights and covenants that may prevent the land being developed for housing or lead to a large settlement claim. Reserved rights: As part of the land is subject to rights in favour of third parties, there is a risk that the development may obstruct the future exercise of those rights.
Missing Deeds: Part of the land is subject to unknown rights and covenants that may prevent the land being developed for housing or lead to a large settlement claim.
Outcome The transaction was supported by a Known Risk title insurance policy to protect the developer in the event of a challenge to the title or a claim from third parties, which prevented the land from being developed.
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First Title Insurance plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. First Title Insurance plc is registered in England under company number 01112603. Registered office: ECA Court, 24-26 South Park, Sevenoaks, Kent, TN13 1DU.
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Claim Case Study:
Adverse Possession Unregistered land Background
The insured purchased a detached house.
The insured had not possessed the unregistered strip of land exclusively or for long enough to raise a claim of adverse possession against the neighbour. Therefore, no action could be taken against the neighbour. Instead, however, First Title was able to look at the loss to the insured. In order to do so, they needed to ascertain the diminution in value caused to the house by not having this strip of land within the insured’s ownership. First Title obtained a professional valuation of the house and the surveyor’s report concluded that the loss was £5,000.
To the rear of the house were three garages, which served the house and the two neighbouring properties. At the front of the garages was a fenced-off forecourt that formed part of the insured’s title but was used by all three properties for access. A small strip of the forecourt was unregistered land and no one knew who owned it. The policy was obtained to protect the use of this land by the insured.
Challenge A couple of years later, one of the insured’s neighbours constructed a garden shed on the strip of land. The insured requested that their neighbour remove the shed as it was land that the insured claimed to own. The neighbour claimed the land was not in anyone’s ownership and refused to remove the shed.
First Title paid the insured £5,000 in settlement of their claim against the policy.
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First Title Insurance plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. First Title Insurance plc is registered in England under company number 01112603. Registered office: First Title Insurance plc, ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU.