Property Industry Update September 2008
Village Green Preservation Society Strikes Again
While Scotland has had its own community right to buy controversy for a few years now, the Commons Act 2006 (the Act) recently introduced a regime for the registration of new town and village greens in England and Wales which has caused further controversy amongst developers and landowners.
The Act has provided a route for members of the public to attempt to block proposed developments in England and Wales by registering the land as a town or village green.
Importantly, even where land in England and Wales has not been used by local inhabitants for several years, an application for registration as a town or village green may succeed.
The new rules were recently tested in the High Court in England, when an applicant attempted to prevent the development of a former golf course for housing and leisure by registering the land as a town or village green. Even though the application was eventually rejected, the costs to the developer of defending the registration application, and of the delay to the development, were significant.
So it is important for developers and landowners in England and Wales to ensure that thorough investigations are made into whether potential development land could be open to an attempt to register as a town or village green. Due to the scope of the new rules, the investigation of the land should go back at least 5 years.
Unless it is possible to obtain absolute confirmation that the land does not qualify for registration as a town or village green, developers must be aware of the risk of serious delay and unforeseen costs or, in the worst case, blocking of the development altogether.
A summary of the previous rules:
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A town or village green is an area of open space which by immemorial custom has been used by local inhabitants for recreation. Historically, no formalised system of registration existed.
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The Commons Registration Act 1965 introduced a regime for registering town and village greens. Registration had to be made by 31 July 1970 and in most cases if the land was not registered by this date it ceased to be a village green, although some classes of green could be registered after this date where a number of factors could be proved.
A summary of the new rules:
The Act provides that anyone can now apply to register land as a town or village green where “a significant number of the inhabitants of any locality have indulged as of right in lawful sports and pastimes on the land for a period of at least 20 years” and any one of the following applies:
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the land continues to be used for that purpose at the time of the application to register
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the use of the land for that purpose ceased before the application was made but after 6 April 2007 (the application mast be made within 2 years of the land ceasing to be used by local inhabitants)
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the use of the land for that purpose ceased before 6 April 2007 (the application mast be made within 5 years of the land ceasing to be used by local inhabitants). Note that this does not apply to any land where planning permission was granted before 23 June 2006.
The effect of registration:
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Once registered as a town or village green, the land is protected by long standing legislation which effectively means it cannot be developed.
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Under the legislation, it is an offence wilfully to do anything to interrupt the use of the land for recreation or to encroach, enclose or build on the land unless this enhances the enjoyment of the land for recreational purposes.
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Although it is possible to apply to the Secretary of State to deregister the land, this must usually be accompanied by a proposal to register an alternative site in exchange for the release of the land and must take into consideration the interests of the local inhabitants.
The rules outlined above are now in force (and currently being tested in the courts).
Driving the Tax Efficiency Road
If you’re thinking of buying or selling a property then it’s worth investigating how that property is to be held – with a view to packaging it in a structure that will be tax efficient upon exit.
One of the most efficient ways of doing this has traditionally been to put the property into a Single Purpose Vehicle (SPV) – which will mean that any onward sale of the SPV (rather than the property) will shield the transaction from any Stamp Duty Land Tax (SDLT).
Common SPV models used in SDLT saving schemes over the last few years have included Jersey Property Unit Trusts (JPUTs) and Limited Partnerships. However, in recent years the government has been busy closing the loopholes in legislation which allowed for those JPUT and Limited Partnership schemes, and has now introduced SDLT charges in respect of disposals of interests in virtually all UK property investment partnerships.
But one vehicle that remains roadworthy in the world of SDLT saving for UK investors is the humble UK limited company. While there have been discussions around the possibility of introducing SDLT in respect of the transfer of the shares in residential property SPVs, there are no current proposals regarding SPVs holding commercial property.
SDLT Saving
The buyer of shares in an SPV (or any company) is liable to pay Stamp Duty of just 0.5% of the consideration – as opposed to the SDLT rate which goes up to a whopping 4% for properties worth over £500,000.
The saving can be increased further by reducing the consideration due for the shares by an amount equal to any outstanding debt, therefore the Stamp Duty payable is on the net amount only. This reflects the true value of the SPV to the buyer as it will be acquiring the SPV subject to the debt.
Often the saving will be shared between the buyer and the seller resulting in the purchase price increasing by, say, 2%, meaning that the seller will end up paying 2% less than the 4% SDLT. The Stamp Duty will remain payable – but if this is reduced due to the debt being taken off the purchase price, then this amount may be very low.
So how do you get a property into an SPV?
The short answer is that the property is simply transferred into the ownership of the SPV. However, this will usually attract SDLT in itself – and in many cases this will simply be paid with the benefits being postponed until exit.
However it is possible for a company to transfer a property into a newly formed SPV that is its wholly owned subsidiary and incur no SDLT. That’s subject to the important caveat that if the SPV leaves the group of the transferring company within 3 years, SDLT on the original purchase will be payable. But even then, if the property has been developed or has risen in value for any other reason while in the SPV, the SDLT payable on such an exit is based on the value when the property was put into the SPV, and not the amount that would be due on any enhanced value of the property at the time of such exit – and so (assuming the value of the property has risen) will be less than the SDLT which would be due by the purchaser if it bought the property instead, which would be based on the enhanced value.
But what about the Pregnant Gain?
The problem with an SPV from a taxation point of view is that the value of the property within the SPV is the price at which the SPV acquired it – the base cost.
So if a buyer agrees a price for the shares in the SPV which is based on a property value which is higher than the base cost, then the buyer is inheriting a contingent capital gain within the structure, i.e. the excess of the current property value over the base cost.
However this is only relevant if the buyer of the SPV ever chooses to sell the property (rather than the SPV), because the gain within the SPV will crystallise and will be larger than the gain which would have been realised on a sale of the shares in the SPV.
The gain can be a particular issue when the SPV has been transferred several times but the property has not – which usually means that the difference between the property value on which the price paid for the shares is calculated and the base cost of the property could be large.
So how do you deal with the Pregnant Gain?
Usually if there is a Pregnant Gain within an SPV at the point of purchase then there will be negotiation between the buyer and seller as to how this will be dealt with in the purchase price. Typically a buyer will argue that they are inheriting a large gain and will want compensation for this on a pound for pound basis. However, the seller will usually argue that the gain does not crystallise unless the buyer sells the property itself, rather than the SPV – therefore it is within the control of the buyer not to do so.
The outcome of such negotiations will depend on the commercial bargaining power – but typically a middle ground will be found and a reduction in the price agreed.
Planning for the Pregnant Gain
It is sometimes possible to structure the SPV, from the point at which the property is originally purchased, in such a way that the accounting treatment can significantly reduce the gain which the buyer of the SPV inherits. Such accounting requires that there are borrowings and that the SPV has a trade of property dealing or development (as against a business of property investment). The costs of the borrowing can be capitalised in the accounts of the SPV – so the base cost of the property is increased, reducing the difference between the base cost of the property and the property value on which the price to be paid for the shares in the SPV is based. As ever with tax planning, this could have other tax consequences, and it is essential to take advice on all the ramifications.
And, as we highlighted earlier this year, the current downturn in the financial markets means that commercial property values have generally been falling – which may present an opportunity for some tax planning by restructuring investments without incurring significant costs now.
A much reduced Pregnant Gain makes an SPV sale and purchase a much more attractive proposition for buyer and seller alike.
"Name-Shopping"
Recent press reports have suggested a change in the way that trade marks are registered to allow them to be registered for "shopping centre services".
But while a particular point was being argued in these cases, registering the name of a shopping centre as a trade mark is nothing new – and many shopping centres throughout the UK already have their name registered as a trade mark for services relating to the bringing together of retail and leisure outlets and property management services.
You may think it unlikely that anyone would choose to copy the name of another shopping centre – but not all names relate directly to geographic location (and indeed if they do it might be difficult to register them as place names are, of themselves, not registrable, though can be perhaps in logo form and with evidence of goodwill).
However the owner of a trade mark is the first one to register it, not the first to use it – and so there is always a risk that your existing shopping centre name could be registered by a third party, forcing you to change your own.
But that is not the only reason for registering.
The shopping / leisure experience of the Centre itself could itself build up a reputation which could be exploited further. "New Covent Garden Market" and the "Metro Centre" are examples of names which have built up goodwill in other areas, so that products themselves can benefit from being marketed under the name whether as souvenirs or otherwise. And the name could be licensed on (for a fee) to retailers or service providers.
By registering for add-on services, you can also ensure that others do not hijack your own goodwill.
For example, you don’t necessarily want someone offering crèche facilities nearby using your own name but outside the Centre itself. Not only will they be benefiting from your marketing, but if they get bad publicity for any reason there is a high risk it will be associated with the Centre itself. If the Centre name is not registered, in order to take any action you require to establish goodwill in the name, show confusion in the minds of the public and make a claim of "passing-off" – notoriously difficult and costly. By contrast, if the name is registered as a trade mark, infringement action and an interdict / injunction is much more straight forward.
Scott Kerr, a partner in Semple Fraser’s Corporate & Commercial Team, is an accredited specialist in intellectual property. He points out:
“The cost of registering a trade mark can be less than £1,000 including filing fees; the cost of re-branding should your name be registered by someone else or of dealing with a business which uses your name for its own benefit can be very, very costly, not only in monetary terms, but also management time.”
Going Underground
One of the fundamental principles which most of us understand in relation to an FRI lease is that the tenant is granted exclusive possession of the premises let, and can expect not to be dispossessed by actions of the landlord.
Most leases do however contain standard wording entitling the landlord to enter the premises to inspect their state of condition and repair, and then to serve notice upon the tenant as to remedying of any defects found for which the tenant is responsible under the lease.
As a landlord, would you think that such a provision entitles you to enter the leased premises to drill boreholes, thus disrupting the tenant’s business over a period of days and possibly causing further inconvenience as subsequent monitoring takes place?
That was the issue which arose recently in the recent Scottish case of Possfund Custodian Trustee Limited v Kwik-Fit Properties Limited.
The case involved premises in Falcon Road West, Edinburgh, leased to Kwik-Fit in 1993 for a period of 25 years and used for the sale and fitting of tyres and exhausts, MOT testing etc. However, the site had previously been used as a garage and when a new landlord acquired the premises in 2007, it decided it wanted to assess possible environmental contamination arising from underground petrol storage tanks which still existed beneath the surface.
So the landlord served notice on the tenant as to the works it wanted to carry out. The works were pretty substantial – they involved the sinking of five shallow boreholes, and one extremely deep rotary borehole on the site. The works were scheduled to take four days to complete.
Kwik-Fit objected to the landlord’s plans on the basis that the proposals amounted to partial eviction from the premises and that such intrusive work was not permitted by the lease.
Attention focused on the lease clause entitling the landlord to inspect the premises which ran in fairly standard terms as follows:
"To permit the landlord and its agents at all reasonable times with or without workmen on giving 48 hours' written notice (except in emergency) to the tenant to enter upon the premises generally to inspect and examine the same, to view the state of repair and condition thereof and to take a schedule of the landlords' fixtures and of any wants of compliance by the tenant with its obligations hereunder."
Was the landlord entitled to carry out the works proposed?
The clause in question made no specific mention of any right to carry out intrusive works, and certainly did not refer to a right to sink boreholes.
However the Scottish judge held that the power to inspect and examine implied a power to carry out intrusive work for that purpose and thus included the right to sink boreholes. The reference to “workmen” was seen as significant, as the power to open and inspect might include doing work to open up suspect areas of walls or floors and this would still constitute “viewing” the condition of the premises. The fact that this was a 25 year lease also seemed to be relevant, as the judge noted that “the condition of the premises may materially alter over time” and it may be in the interests of the parties to know about this.
The only limitations applicable seem to be (1) the judge does suggest that the investigations must be done “with reasonable regard for the tenant’s business” and (2) the judge also referred in passing to the possibility of limitations upon the extent of the intrusive investigation which the landlord can carry out. The judge may therefore not have agreed to works which were in any way more significant or disruptive.
So if you own property, and are concerned that there could be “nasties” lurking in or under the premises which you’re about to lease, what should you do?
The safe advice would be to ask your lawyers to adapt the standard inspection clause in the draft lease – so that it incorporates specifically any rights which you anticipate may be required to undertake intrusive investigations of the leased premises.
However, one could equally well argue that this is not necessary given the terms of this decision, which vindicated the landlord’s position – but given the judge’s reliance on the length of the lease (and presumably the nature of the premises as a former garage) one cannot be sure that a different conclusion might be reached were the circumstances different, eg if the lease was much shorter or where the judge could not see the logic for carrying out the type of investigations proposed.
With a former petrol filling station it is clear that this historic use might well have led to contamination and that it could be in the interests of both landlord and tenant to establish the position – but other circumstances may not present such a strong argument.
The Kwik-Fit case is a good illustration of the fact that sometimes the traditional wording found in a lease might in fact require greater focus from the parties during the lease negotiation process in order that the parties’ rights and liabilities can be accurately agreed and both parties know what to expect. Of course, if the landlord does seek to amend the lease to provide enhanced inspection rights it will probably find itself having to negotiate further wording limiting its rights to carry out intrusive works, and possibly (if the tenant is well-advised) providing for compensation to be paid in respect of any loss caused to the tenant’s business.
Vincent Brown, a Partner in Semple Fraser’s Environment Team, comments:
“It’s also worth noting that the judge in the Kwik-Fit case mentioned that his decision has no bearing upon any question between the landlord and Kwik-Fit as to actual liability for environmental contamination – and it’s likely that any lease provisions dating from 1993 will not be clear in this respect. Modern lease wording is now available which can help to clarify where such responsibility lies. So once these boreholes are sunk and the results analysed, we may find that Round 2 of the litigation commences, as the landlord and Kwik-Fit seek to establish mutual liability for any historic contamination found at the site.”
For further information please contact: Roland Smyth