27 May 2014

How practical and careful do real estate transaction solicitors have to be?

The 3 recent break clause cases of Friends Life-v- Siemens Hearing (3 April 2014), Friends Life –v- A&A Express (9 May 2014) and M&S –v- BNP Paribas (14 May 2014) have all highlighted omissions or practical difficulties caused by the drafting of the break clauses in the Leases.

These include:- 
a) Not providing for re-imbursement of overpaid rent for the period beyond the break date. In the M&S case, over £1 million was at stake. 
b) Not dealing with the position re apportioning service charges or insurance or other charges. In the Friends Life-v- A&A case, this resulted in the tenant having to contribute to expenditure on major works incurred after the break date. 
c) Not providing as to whether sinking fund contributions not expended by the break date are re-imbursable. d) Making valid service of a break notice full of practical difficulties due to including various conditions re its contents and/or service or compliance with lease covenants.

Of course, there are still numerous old Leases where the break is subject to the almost impossible condition of the tenant having complied with all its covenants and where no regard has been had to the fact that undertaking all repair works may be a complete waste of time and money if the landlord intends to redevelop or refurbish.

Furthermore, many leases do not clearly or properly provide for re-instatement at lease expiry as, for example:- 
a) A landlord may not have to give any notice, or any specified period of notice if it requires re-instatement; 
b) Re-instatement obligations don't always require tenants to remove alterations (such as partitions) which were installed without needing consent; 
c) Tenants may have no actual obligation to remove all their fixtures and fittings.

Few Leases require tenants do deliver up Asbestos Surveys, maintenance records, transfer licences etc on Lease expiry and, despite the fact that the landlord and tenant at the end of the Lease may well not have been original parties to the letting, many Leases still do not record fully what the premises comprised at the date of the letting (such as, was it carpeted and did it have a fire alarm?) and exactly what is to be valued on rent review.

Leases rarely refer to additional security provided by the tenant so that, years later, it may not be known whether there was a rent deposit or bank guarantee.

Many Leases either refer to Schedules of Condition that are not attached or have Schedules that are unclear and of little use. And, where repairing liability is limited, no one has really thought what is actually required to be given back as, for example, is the tenant expected to do repairs to plaster damaged during the Lease but leave plaster that was already damaged so the wall has a complete patchwork effect? The same applies to lighting etc.

In the M&S case in the Court of Appeal, the Leases were granted in 2006 and the Court made 2 findings which are of particular importance to real estate lawyers as follows:- 
1. It said that it should have been appreciated that rent would be payable beyond the break date and re-imbursement should, therefore, have been expressly provided for if this was intended; and 
2. That there was case law preceding the transaction that made it clear rent paid in advance is not apportionable.

Accordingly, it could be the case that M&S are holding their real estate lawyers liable for their losses if they feel that it was intended they would receive "a cashback" in this respect? .

In the recent case of Wellesley Partners-v- Withers LLP (11 March 2014), the solicitor dealing with the matter made no attendance note of an important conversation with the client and misunderstood the instructions given and drafted the agreement incorrectly as a result. The solicitor did not get the client to check what he had drafted and the client was held not to have been contributory negligent because he did not read through the whole agreement and spot the error.

Even more recently in Darby & Darby-v-Joyce (20 May 2014), the Court of Appeal confirmed a solicitor had been negligent in advising a client as to the existence of restrictive covenants in relation to the house she was buying. This solicitor had also failed to keep an attendance note and did not recall what he had said to the client and the Court did not accept his evidence he would always have advised a client of any covenants before proceeding with a purchase...

Where Leases or Agreements contain some complicated formula for calculating the rent or a profit share or suchlike, they all too frequently either:- 
1. Don't have a worked example of the formula to clearly set out what is intended; or 
2. Have a worked example that is wrong in one or more respects.

With blocks of flats, it is all too frequently the case that service charge contributions do not add up to 100% and tenants on the ground floor query why they are contributing to lifts and balcony repairs when they do not benefit therefrom. Many basement tenants in converted houses have their own entrance and make no use of the common parts but still have to contribute to their maintenance. And the service charge provisions can be unfair to landlords as well as they may limit the ability to recover unexpected expenditure or shortfalls due to some tenants defaulting.

Whilst it is always open to a solicitor to argue that their duty does not include giving commercial advice and/or the client should have been alive to the position, such arguments are best avoided and, anyway, are often unsuccessful. In E Surv-v-Goldsmith Williams (10 April 2014) the Defendant solicitors were held liable for not pointing out when reporting to the lender that there was a difference between the valuation of a property at £725,000 and its recent previous sale price of £450,000 despite the mortgage company having being aware at the initial stage of the process that there was a substantial discrepancy.

So, what should real estate lawyers do? 
1. First of all, purely in terms of risk management (if not client service), it is essential to ensure that clients are fully advised in writing, provided with copies of all relevant drafts and final documents, and attendance notes kept of important conversations. 
2. Secondly, thought needs to be given to the characteristics of the property in question and the proposed terms of any sale or lease and as to what practical issues need to be considered and dealt with (and how they can be dealt with to stop problems arising in the future)? 
3. Thirdly, not to use precedents without considering if they are appropriate and, in particular, not to hesitate to ask for input from the client and its agents and advisers as to their requirements and concerns re issues such as rent review, service charges, use and alienation etc. 
4. Keep up with and learn from case law. Look at the way drafting of break clause conditions and assignment/AGA requirements has changed due to recent cases and how rent on insolvency needs to be dealt with in light of the GAME decision and the cases before it.

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