Real Estate Bulletin - December 2022

High Court grants relief from forfeiture in relation to a terminated option agreement

The tenant of a restaurant premises in Mayfair obtained relief from forfeiture in relation to an option agreement which had been terminated. The option agreement, which entitled the tenant to call for a new lease of the premises in the last year of the term of its existing lease, was drafted so that the landlord was entitled to terminate the option if any ‘forfeiture events’ in the existing lease occurred. In this case, due to the pandemic, the tenant fell into rent arrears, which was a forfeiture event under the lease, and the landlord terminated the option. The landlord (who had published plans to redevelop the property by 2025) did not forfeit the lease which was set to expire in 2024 – only the option agreement. Prior to the case the landlord and tenant had reached an agreement and settlement in relation to the rent arrears.

The High Court held that the clause in the option agreement which permitted the termination was a forfeiture provision in respect of which the court could grant relief from forfeiture. In order for the court to have jurisdiction to reach this decision and grant relief from forfeiture the tenant had to establish two pre-conditions had been satisfied:

• that through the option the tenant had a proprietary interest in the premises: It was held that the option did give rise to a relevant interest in land – the court noting in support of this position that the tenant could and had noted the option against the freehold title to the property at the Land Registry. The Court held that the proprietary interest did not have to have a ‘particular quality’.
• that the termination provision in the option secured the performance of the tenant covenants in the lease, in particular the rent payment obligation: Again the court was satisfied that this was the case. The construction of the documents indicated that the ‘parties to the Option intended that the Option and the Lease would go hand-in-hand in practice’. The Court noted previous case law supported a termination provision being in the nature of security where it operates on a breach of a primary obligation and ‘can operate indiscriminately and mirrors a forfeiture clause in a lease’. The clause in the option had these qualities and the judge was therefore satisfied that it ‘was intended to secure, and was security for, the performance of the tenant covenants in the Lease.’

Having established jurisdiction, it was then a question of determining whether the equitable remedy should be exercised. The court held that in this case it should, noting that had the landlord forfeited the lease, rather than the option, because of the rent arrears, it is very likely that the tenant would have been granted relief from forfeiture. It was also highlighted that the parties had quickly reached settlement in relation to the rent following termination and the judge commented that it would be ‘particularly unfair’ in this case for the tenant not to be granted relief from forfeiture because by not forfeiting the lease at the same time as they terminated the option, the landlord had deployed its security but retained the benefit of the tenant's primary obligation.

Hush Brasseries Ltd v RLUKREF Nominees (UK) One Ltd and another [2022] EWHC 3018 (Ch).

December 2022 Building Safety Update: consultations

As noted in last month’s update, the Government has announced a consultation on the Building Safety Levy, which it is now proposed will fund a scheme for works to existing medium rise (11-18m) residential buildings in certain circumstances. See our update here for more details. The consultation closes on 7 February 2023.

This is an opportunity for a reminder of the two other consultations that the Government has established in relation to key items of secondary legislation to be produced under the Building Safety Act 2022:

• a consultation on the definition of what should (or should not) be a “higher risk” building for (i) building works, and (ii) buildings in occupation (as a reminder, under the BSA, “higher risk” building means different things in each context); and
• a consultation on the proposed changes to the building regulations and Building Act 1984 for new works, including in relation to the new “dutyholder” roles and changes to the building control process. A summary of the key proposals from this consultation is set out in this placemat.

VAT and supplies to nominees

The FTT has held that input VAT on rental payments under a lease formally granted to a shell company owned by a partnership was the input VAT of the partnership actually occupying and using the premises: Ashtons Legal v HMRC [2022] UKFTT 422. The FTT rejected the argument that the arrangement involved supplies to and from the shell company leading to irrecoverable input VAT.

More generally, the decision highlights some of the difficulties in applying a VAT analysis to circumstances involving a nominee or bare trust arrangement.

You can read more about this decision here.

Codifying the VAT exemption for fund management

The Government has published a consultation document setting out its plans to codify the definition of the existing VAT exemption for the management of special investment funds. VAT treatment of fund management services: Consultation contains a technical consultation detailing proposed reform of the legislation that provides for the VAT treatment of fund management which runs until 3 February 2023.

In essence, the Government intends to replace the existing definition with one that will not require reference back to EU law and jurisprudence, providing a clean and simplified rule allowing investment managers to determine with greater certainty whether they fall within the exemption. The proposed approach is expressly intended not to amount to a change in policy on the scope of the current VAT exemption (nor, indeed, does it address other matters such as industry requests for zero rating of fund management services to support the UK as a competitive jurisdiction for asset management).

You can read more about this here.