Trowers' property litigation weekly update


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This week we report on a valuation issue in an enfranchisement case and the outcome of Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd which concerned the liability of guarantors to a lease in circumstances where the tenant was subject to a Restructuring Plan. All this together with the usual positive news and quiz questions, plus insights from around the firm.

Enfranchisement valuation – an auction price does not determine the value

In Properties AY&U Ltd v Barham House Freehold Ltd the Upper Tribunal (Lands Chamber) considered an appeal concerning the valuation of the premium payable for the freehold by the leaseholders in a collective enfranchisement claim.

The leaseholders made a claim to acquire the freehold in June 2020 just four months after the freeholder had purchased the freehold at auction in February 2020. The auction price paid was £91,000 (against a guide price of £15,000) whereas the leaseholders offered £18,000.

The First Tier Tribunal (Property Chamber) (FTT) had determined a premium payable of £30,000 for the freehold. The freeholder appealed on the basis that the decision had not taken proper account of the auction price paid and that in principle the price achieved on the sale of the subject property shortly before its valuation date indicated its proper value.

The Upper Tribunal determined that the FTT was correct in its approach. The open market value of the freehold on the valuation date was a valuation judgement, not necessarily to be determined by an auction price. It was noted that the freeholder's own expert valuer did not consider the auction price to be a relevant factor and had given no evidence about why his client had paid such a high price.

Auctions create a unique selling environment and, especially given tenants' enfranchisement rights, caution should be exercised when considering the purchase of freehold assets subject to leases.

If you would like further information or advice about enfranchisement in general, please contact our enfranchisement specialist, William Bethune.

A Restructuring Plan did not release guarantors to a lease from liability for rent and other arrears

In some good news for landlords, the High court has handed down judgment in a rent arrears case concerning the liability of guarantors.

In Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd the landlord, Oceanfill, had granted a lease to Nuffield, with Cannons acting as guarantor. In 2000, the lease was assigned to Virgin Active. Under the licence to assign, Nuffield guaranteed that Virgin Active would comply with its tenant obligations under the lease and Cannons guaranteed the performance of Nuffield of its obligations under the licence to assign.

Following widely reported financial difficulties, a Restructuring Plan for Virgin Active was approved in May 2021 pursuant to Part 26A of the Companies Act 2006 (a tool which was introduced in 2020 as a result of the pandemic to try and maximise businesses' chances of survival). The Plan provided that Virgin Active was not liable to pay any past, present or future rent, service charge or other liabilities. Instead, Oceanfill would be entitled to a return under the Restructuring Plan of less than 1p in the pound.

Proceedings for rent arrears were issued by Oceanfill against Nuffield and Cannons as guarantors and Oceanfill made an application for summary judgment.

Nuffield and Cannons defended the claim on the basis that the effect of the Plan was that the rents claimed were not sums that had fallen due pursuant to the Lease because the Plan had varied the lease terms so as to release Virgin Active from any outstanding liability and reduce the rent falling due under the lease to zero for the duration of the Plan.

Dismissing these arguments, the Judge held that a Restructuring Plan takes effect by operation of law as between landlord and tenant. It is not a re-writing of the lease, it simply releases the tenant from liability. Alternatively, to the extent that it is a re-writing, it leaves unaffected the rights of the landlord against third party guarantors – as between them, the lease remains valid and subsisting and the rent continues to fall due. The licence to assign also made clear that the guarantors would not be released by variations to the lease or by "any other matter…by which the tenant would be exonerated either wholly or in part from its obligations under this deed other than a release… given by the landlord". The Judge commented that the Restructuring Plan could not operate "by any stretch of the imagination" as a release of the guarantors by the landlord.

The guarantors' defence therefore failed and Oceanfill was entitled to judgment on the claim. Please note that cases like this are fact specific, and guarantees can be drawn up in a variety of different ways. It is important to take proper advice if faced with a situation like this.

Positive news

  • The billionaire founder of the outdoor fashion brand Patagonia is giving his company away to help fight climate change. Yvon Chouinard has pledged to transfer ownership of the company, valued at around $3bn, to a trust and non-profit organisation committed to using profits to combat climate change and protect undeveloped land around the world. The move is a bold step for a company that has taken a leading activist role for years, with the brand's website now stating: "Earth is now our only shareholder".
  • A pair of airport employees in the USA looked after a passenger's pet fish for four months after it was banned from a flight. Passenger Kira was returning home from college with her fish Theo when she was told it was not allowed to fly. To ensure Kira did not miss her flight, a customer service agent of Southwest Airlines offered to look after the fish for her over the summer. Kira was reunited with Theo in Tampa as she was about to start her sophomore year of college.

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