Road to conflict
6 August 2012 | By Christian Metcalfe
26 September 2013
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As the property market has crashed so real estate litigation cases have ramped up, with landlords looking for any avenue to bump up their earnings
With UK commercial property suffering its deepest downturn since the 1970s, the call on real estate litigators has been typically countercyclical.
The time for filing claims is beginning to run out on those arising from pre-crunch transactions. And banks that restructured and extended loans to avoid crystallising losses are now enforcing their powers of sale.
Apart from negligence claims against advisers, disputes over wording are also popular, as seen in the recent rent review row over One America Square in Scottish Widows Fund and Life Assurance Society v BGC International.
Strict compliance with terms is also a common tactic of landlords during the break notice disputes so popular in downturns, described by Norton Rose real estate litigation head Charlotte Bijlani as, “an absolute minefield for tenants … there is a constant flow of cases on this”.
Recent outcomes that offer stark reminders of how easy it is for tenants to trip up on this include Avocet Industrial Estates LLP v Merol Ltd and another, Gemini Press Ltd v Cheryl Lindsay Parsons and Intergraph (UK) Ltd v Wolfson Microelectronics Plc.
The need of landlords to maintain income streams in the downturn means that anything which gives an opportunity to extract money from a tenant is being pursued. Although dilapidations claims tend to settle before litigation, landlords are becoming increasingly aggressive in negotiations.
The uncertainty and nuisance of litigation means that developers continue to be vexed by “rights of light” claims; agency commission disputes continue to arise; while misrepresentation and fraud claims are being pursued vigorously.
In better markets, clients are focused on putting together deals and making money from them. In a worsening market, however, if there is an argument to be had and the client can afford litigation then it will go for it to maximise its income.
Capita Alternative Fund Services (Guernsey) Limited & Ors v Drivers Jonas (a firm)
Court: Court of Appeal
Date of hearing: 14 May 2012. Judgment awaited.
Judges: Lloyd LJ, Moore-Bick LJ and Gross LJ
For the claimant: 4 New Square’s Sue Carr QC; Bond Pearce partner Anna Maxwell
For the defendant: 4 New Square’s Roger Stewart QC; Berrymans Lace Mawer partner Simon Hilditch
The claimant paid £62.8m for a factory outlet shopping centre in Chatham Historic Dockyard in 2001 on the basis of advice from property consultant Drivers Jonas (DJ). The valuation was based on the site receiving enterprise zone tax allowances, without which it valued the site at £48.1m.
Ordering DJ to pay £18.05m in damages and interest, the High Court found that DJ did not have the expertise to advise upon the site and the valuations were “inexcusably incompetent”. A competent valuation without any enterprise zone allowance would have been between £32m and £37m.
DJ has appealed, arguing that there was no adequate basis for the judge to calculate the true value as he did and that its valuation did not fall outside the reasonable range of the true value.
It says Capita’s claim must fail, irrespective of how careless DJ may have been in taking on a project for which it was not qualified and regardless of the judge’s multiple findings of negligence.
PCE Investors Limited v Cancer Research UK
Court: Court of Appeal
Date of hearing: Window of 17 October 2012 to 18 February 2013
Judge: Not assigned
For the claimant: Falcon Chambers’ Stephen Jourdan QC; MacRae & Co partner Robert Gaskell
For the defendant: Landmark Chambers’ Katharine Holland QC; Squire Sanders partner Will Laurence
The tenant, PCE Investors Limited, served the appropriate notice in writing to break its lease, but the right to break was subject to a condition that the tenant must have paid the full quarter’s rent prior to the break date.
When the rent became due for the rental period in which the break date fell, the tenant paid what it thought was the correct amount of rent – an apportioned amount calculated for the period up to the break date – and asked the landlord for confirmation that its calculation was correct.
The landlord did not respond until after the break date when it advised the tenant that its failure to pay the full quarter’s rent meant that the break had not been validly exercised and the lease continued.
The tenant is now appealing the decision of Peter Smith J for the landlord.
Westbrook Dolphin Square Ltd v Friends Provident Life and Pensions Ltd
Court: High Court
Date of hearing: TBA
For the claimant: Falcon Chambers’ Nicholas Dowding QC and Anthony Radevsky; Pemberton Greenish partner Kerry Glanville
For the defendant: Falcon Chambers’ Stephen Jourdan QC; Maples Teesdale partner David Stevens
US private equity group Westbrook, which bought the long leasehold to the 1,250-flat Dolphin Square block in Pimlico, SW1, for £176.5m in 2004, has wanted to use enfranchisement laws to acquire the freehold from Friends Provident since 2007 but, in 2009, abandoned its claim a week before it was due to go to trial, citing “unfavourable market conditions”.
It served a new notice to acquire the freehold in April 2010, but Arnold J dismissed Westbrook’s request to make a second application because it “arose out of substantially the same facts” as the first, and constituted an “abuse of process”. He said that Westbrook “both could and should” have pursued the first application to trial.
Reinstating the claim, Lord Neuberger MR said that it would be “surprising” if a rule of court could be invoked by a landlord to deprive tenants of the statutorily conferred benefit to acquire the freehold of their premises.
McKillen v Misland (Cyprus) Investments Ltd and others; McKillen v Barclay and others
Court: High Court
Date of hearing: 19 March 2012 – 29 May 2012. Judgment awaited.
Judge: David Richards J
For the claimant: Serle Court’s Philip Marshall QC; 4 Stone Buildings’ Richard Hill and Gregory Denton-Cox; Herbert Smith partners John Whiteoak and Kevin Lloyd
For the first, third and fourth defendants in the first action and first to sixth defendants in the second action: One Essex Court’s Lord Grabiner QC, Kenneth McLean QC, Jeffery Onions QC, Sa’ad Hossain and Edmund Nourse; Weil Gotshal & Manges partners Matthew Shankland and Jamie Maples.
For the second defendant in the first action: One Essex Court’s Stephen Auld QC and Michael D’Arcy; Quinn Emanuel Urquhart & Sullivan partner Richard East
For the fifth, sixth and seventh defendant in the first action and the eighth, ninth and tenth defendant in the second action: Erskine Chambers’ Edward Davies; Ashurst partner Edward Sparrow
Irish property investor Paddy McKillen claims that Sir David and Sir Trevor Barclay have shown “no mercy” to him in their quest to take over the Maybourne hotel group, which includes Claridge’s, the Connaught and the Berkeley, and tried to bypass his right to buy more shares to get control of the company from Irish National Asset Management Agency without consulting shareholders.
The Barclay brothers publicly acknowledge their desire to acquire complete control and ownership of the group, but deny any wrongdoing, and say that McKillen’s claims are calculated to “embarrass” them and tarnish their reputations.
Humber Oil Terminal Trustee Ltd v Associated British Ports
Court: High Court
Date of hearing: TBA
For the claimant: Falcon Chambers’ Nicholas Dowding QC and Mark Sefton; DLA Piper UK partner Ian Brierley
For the defendant: Wilberforce Chambers’ Christopher Nugee QC and Landmark Chambers’ David Holland QC; Eversheds partner Will Densham
The defendant landlord, Associated British Ports, opposed the claimant tenant’s application for the renewal of its leases of oil terminal premises in the Humber estuary, which handle 25 per cent of the UK’s refining capacity, on the grounds that the landlord intends to reoccupy the premises. It wants operational control of the terminal so it can charge the owners of the refineries for its use. It also wants to use it to supply third parties.
If the landlord is successful, the owners of the refineries will have to come to a different commercial arrangement with the landlord, or move elsewhere. This wide-ranging dispute has already seen two appeals to the Court of Appeal.
In the current difficult economic climate, real estate disputes are becoming both more numerous and litigious for a variety of reasons. The main contentious areas are set out below.
Businesses are understandably seeking to minimise overheads and potential losses. As a result, tenants probably will exercise their break options, either to move to premises with a lower rent or to negotiate a new lease on better terms. Whereas landlords will undoubtedly instruct their advisers to find any means by which to challenge a notice’s validity, as occurred in the recent Avocet case. Similarly the dilapidations arena is becoming more fraught, with landlords reluctant to undertake repairs without the certainty that the premises will be re-let, and tenants arguing that the statutory cap significantly reduces or even extinguishes any damages claimed.
Overhangs from the property boom are also a source of acrimony in respect of overages, options and development agreements which are no longer the fantastic opportunities they once were. Burdened parties are trying to undo the deals in any way they can. Professional negligence claims against valuers are increasing, mainly in the residential sector, as homeowners default on their mortgages leaving negative equity. Not many of these claims are reaching trial, however, due in good part to the fact that the law in the area was examined closely during the last recession.
Insolvency continues to raise challenges, in particular for landlords of retail tenants. Administrations continue to be the process of choice despite the difficulties raised by the Goldacre case, which held that rent is payable as an expense of administration.
Property in central London is in a league of its own, going from strength to strength, but this is generating different issues. Rent reviews are on the increase and are frequently going to third-party determination. Developments are pressing ahead.
So it is clear that real estate litigation is not going away.
Dellah Gilbert, of counsel, is a member of Hogan Lovells’ real estate disputes team.