Property in dispute - January 2012

In this month’s emailer I have highlighted three recent cases which provide practical tips and useful reminders for property practitioners. As always, if you would like further information on any of the cases featured please do not hesitate to contact me.

Dilapidations Protocol adopted under the Civil Procedure Rules

The Dilapidations Protocol has now been adopted by the Civil Procedure Rules as a Pre-Action Protocol with effect from 1 January 2012.  The Dilapidations Protocol must be used in connection with claims for damages relating to the physical state of property at the end of a commercial lease.  Practitioners have commonly used the protocol issued by the Property Litigation Association and it was considered best practice by those working in the property litigation industry.  However after the adoption of the Dilapidations Protocol into the Civil Procedure Rules there will now be sanctions for failure to follow the protocol before issuing a dilapidations claim in the Court.  Sanctions for failure to follow the Dilapidations Protocol will usually take the form of cost penalties for the defaulting party rather than preventing a party from pursuing or defending a claim. 

I would advise you to cast an eye over the Dilapidations Protocol as although it is similar to the Property Litigation Association’s protocol there have been some changes. 

Complying with a break clause – has the tenant paid all sums due?

In Avocet Industrial Estates LLP v Merol Ltd and another [2011] EWHC 3422 (Ch) a tenant owed default interest on late payments under a lease.  The landlord had not issued any demand for default interest. Further to the tenant exercising a break clause in the lease the landlord disputed the validity of the tenant’s right to break the lease. The High Court held that as the tenant had not made all payments due under the lease as required by the break clause, the tenant's right to break had not been validly exercised. This meant that the tenant remained bound for the remainder of the lease term, even though the amount of default interest was negligible. The judge admitted that the result in this case was a "harsh one" and that the conditions attached to the break clause represented "something of a trap for a tenant".

Reference to the payment of default interest is commonly seen in existing leases. Therefore landlords and tenants should consider this issue carefully at the point of negotiating a new lease and when exercising such break clauses in an existing lease.

What are the relevant considerations when assessing rateable value?

In the recent case of Whitechapel Valuation Tribunal v Jo Coll (Valuation Officer) [2012] UKUT 5 (LC) (12 January 2012) the Tribunal made it clear that that the actual motives of landlords and tenants are not relevant when assessing the rateable value of a property. The value is calculated on the basis of a hypothetical landlord and tenant.

Rateable occupation has to be established before a rateable value (RV) assessment is necessary and requires:

• Actual occupation or possession;
• Possession that is exclusive for the purposes of the possessor;
• Possession that is of some value or benefit to the possessor; and
• Possession that is not too transient.

Once these basic preconditions are satisfied, the Tribunal confirmed that the actual motives of a landlord and a tenant are irrelevant. The RV calculation is based on a hypothetical negotiation between a hypothetical landlord who is able to let the property and a hypothetical tenant who wants to occupy it. The reason why the actual tenant wishes to take the lease is irrelevant: even if taking possession is unprofitable or there are inflated, irrecoverable maintenance costs.

However, high overheads can indicate that the occupation is of value or benefit to the occupier, satisfying one of the basic preconditions.

The main point to note is that when using the hypothetical test the landlord or tenant’s actual position is of limited value when trying to reduce a RV.