Overriding Interest – Spring 2015
In This Issue:
– Dilapidations—How to Avoid Costly Mistakes
– MIPIM 2015
– Announcements & Events
– Transaction Profile: The Old Royal High School, Edinburgh
– UK Real Estate Structures
– Legal Updates and Cases
– Excerpt from Dilapidations—How to Avoid Costly Mistakes:
Whether you are a landlord or a tenant of commercial premises, it is vital to think about the potential for terminal dilapidations well before the expiry of the lease. This may sound obvious but is something which is often left rather late. The law of dilapidations is complex and, in terms of quantum, there are hurdles for the unwary landlord and tenant which, if not thought about and dealt with properly, can prove to be costly.
Please see full Newsletter below for more information.
Highlighting developments and issues in the real estate industry
2 K&L GATES: OVERRIDING INTEREST SPRING 2015 3
Dilapidations—How to Avoid Costly Mistakes
Announcements & Events
Transaction Profile: The Old Royal High
UK Real Estate Structures
Legal Updates and Cases
Dilapidations—How to Avoid Costly Mistakes
Whether you are a landlord or a tenant
of commercial premises, it is vital to
think about the potential for terminal
dilapidations well before the expiry of
the lease. This may sound obvious but is
something which is often left rather late.
The law of dilapidations is complex and, in
terms of quantum, there are hurdles for the
unwary landlord and tenant which, if not
thought about and dealt with properly, can
prove to be costly.
Since the introduction of the Dilapidations
Pre-action Protocol there are even more
steps which landlords and tenants and their
surveyors need to comply with.
The first, and one might think most
obvious, consideration is to ensure there is
a proper understanding of the contractual
obligations imposed by the repairing
covenant in the lease. However those
obligations may not be easy to construe,
particularly if there is wording which is
slightly out of the ordinary, or the obligation
is by reference to a schedule of condition.
All too often there is a mismatch of approach
or understanding of the lease obligations
between landlord and tenant or building
surveyors and lawyers. This can be a recipe
for an expensive dispute. Even if agreement
cannot be reached, it is important to
understand the respective approaches as
early in the process as possible.
For the unwary tenant, relatively innocuous
sounding repairing obligations can in fact be
much more onerous than they had realised.
For landlords, well before the expiry of the
lease careful consideration should be given
to the obligations of the tenant and how
those may be impacted by plans for the
building after expiry of the term.
In good time the landlord’s building
surveyor should prepare a schedule of
dilapidations, in a form compliant with
the Pre-action Protocol, setting out what
the landlord considers to be the breaches
of the repairing obligations in the lease,
the works required to be done to remedy
those beaches and, if relevant, the
The schedule should be sent within a
reasonable time but that is generally
within 56 days after the termination of
the tenancy. The Pre-action Protocol
imposes a requirement that the schedule
be endorsed to confirm that the work
set out in the schedule is reasonably
required to remedy the breaches and that
the landlord’s intention for the property
is being taken into account and that any
costings are reasonable.
There are obligations on the tenant in
relation to the timing and information to
be included in the response. There is
an obligation for the landlord and tenant
(usually by their respective surveyors) to
meet on a without prejudice basis with a
view to trying to agree as many items in
dispute as possible.
The protocol encourages alternative dispute
resolution as the courts take the view that
litigation should be a last resort.
The common law rule is that, if a tenant
leaves property in disrepair, he will be liable
for the cost of the repair and the loss of
rent for the time it would take to do the
repairs. However, common law damages
for dilapidations are subject to two statutory
4 K&L GATES: OVERRIDING INTEREST SPRING 2015 5
limitations set out in Section 18(1) of the
Landlord and Tenant Act 1927.
The first limitation is well known—but
not always well understood—namely that
damages cannot exceed the diminution
in the value to the reversion caused by
the disrepair. Diminution in value of the
reversion is thought by some to equate to
the cost of repair works but it can be much
more complicated than that.
The second is that no damage shall be
recovered for a breach of any agreement to
leave premises in repair at the termination
of a lease, if it is shown that the premises,
in whatever state of repair they might be,
would at or shortly after the termination
of the tenancy have been pulled down, or
such structural alterations made therein as
would render valueless the repairs covered
by the covenant or agreement.
To benefit from this aspect of Section 18,
the tenant must demonstrate that the
landlord had formed an intention to carry
out superseding works by the termination
date of the lease and had intended to do so
“in whatever state of repair” the premises
Many tenants’ surveyors will return a
schedule of dilapidations denying liability
for repairs on the basis of “supersession”,
i.e. that the works which the landlord is
going to do render the repair works to
remedy the breach unnecessary. This is not
the get out of jail card which some tenants
think and this is an area where great care
needs to be taken both by landlords and
tenants in assessing and deciding what
works will be undertaken and when.
This can have a huge difference on the
amount of damages for dilapidations
ultimately payable. The well advised
landlord will consider his options early but
not necessarily commit to what works he
will undertake. The wise tenant will find out
as much as he can about the landlord’s
intention with a view to making a sensible
offer which may give him costs protection
should a sensible commercial resolution of
the dispute not be achieved.
Careful use of Part 36 offers (without
prejudice save as to costs) can be a
valuable tactic to be deployed by landlords
or tenants even before proceedings
are issued. For a tenant it is a method
of potentially displacing the otherwise
inevitable costs obligation arising from a
dilapidations claim. It is surprising how
rarely this is used as it can place pressure
on a landlord who otherwise is confident
that costs will end up being picked up by
A hotly disputed dilapidations case will often
require the involvement of a surveyor with
Section 18 valuation experience in addition
to a building surveyor. These disputes
are not cheap—hence the importance of
considering Part 36 offers early.
Although the vast majority of dilapidations
cases are agreed by negotiation between
the building surveyors, there are an
increasing number of disputes particularly
where the tenant argues that the landlord
is not going to carry out the works in
schedule and has already decided
to redevelop and generally involving
For landlords with expectations of recovery
of substantial dilapidations from tenants
at expiry of their lease, great care must
be taken not to commit to redevelop too
early since this can afford the tenant an
opportunity to deny liability on the basis
of supersession. Supercession generally is
an area which is fraught with difficulty and
often leads to significant disputes.
Both landlords and tenants involved
with leases due to expire and give rise to
potentially significant dilapidations liability
should seek advice early to maximise
recovery on the part of landlords and
minimise them where it is tenants who are
paying. This is a complex area of the law
and great care needs to be taken.
+44 (0)20 7360 8172
These disputes are not cheap—
hence the importance of
considering Part 36 offers early.
Dilapidations—How to Avoid Costly Mistakes
6 K&L GATES: OVERRIDING INTEREST SPRING 2015 7
MIPIM 2015, Cannes, France
10th—13th March 2015
MIPIM is the leading networking event for property professionals;
its organisers describe it as a “market for international property
trade”—25,000+ real estate professionals attend to view projects,
assess profitable ventures, strike deals, discover commercial real estate
opportunities and seek out market information. The European Real Estate,
Planning and Finance teams are currently pre-planning for this year’s
conference and we are looking forward to meeting with professionals across
all international property sectors.
To arrange to meet with any member of the Team at MIPIM 2015,
please contact a team member directly or get in touch with Bonny Hedderly
To learn more about our Real Estate Investment, Development, and Finance
practice, please scan the QR code below.
Global Real Estate Team MIPIM 2015
Members of the Real Estate, Planning and Finance teams will be attending MIPIM 2015 and
hope to meet you there.
Paul Alger +44 7958 135 774 Paul.Alger@klgates.com
Sebastian Charles +44 7958 117 929 Sebastian.Charles@klgates.com
Bonny Hedderly +44 7932 820 575 Bonny.Hedderly@klgates.com
Amandeep Lafferty +44 7958 135 363 Amandeep.Lafferty@klgates.com
Christian Major +44 7958 135 153 Christian.Major@klgates.com
Barry McHugh +44 7960 161 161 Barry.McHugh@klgates.com
Andrew Petersen +44 7958 694 124 Andrew.Petersen@klgates.com
Georg Foerstner +49 151 1215 9175 Georg.Foerstner@klgates.com
Felix Greuner +49 151 1428 2655 Felix.Greuner@klgates.com
Rainer Schmitt +49 170 922 2869 Rainer.Schmitt@klgates.com
Francesco Sanna +39 329 114 8936 Francesco.Sanna@klgates.com
Joanna Klat* +971 529 218 125 Joanna.Klat@klgates.com
Edouard Vitry +33 6 09 44 83 85 Edouard.Vitry@klgates.com
* Joanna is also based in Dubai
Patryk Galicki +48 600 091 228 Patryk.Galicki@klgates.com
Halina Wieckowska +48 516 149 759 Halina.Wieckowska@klgates.com
8 K&L GATES: OVERRIDING INTEREST SPRING 2015 9
For more information please contact
Steven Cox (firstname.lastname@example.org).
CREFC Spring Conference
On 16th–17th April 2015, the K&L Gates
London office is pleased to be host sponsor
of the CREFC Europe Spring Conference
2015. This conference will be attended by
more than 200 delegates over two days and
provides a platform for commercial real
estate (CRE) finance participants to come
together to learn about and discuss the
latest trends and challenges facing
The conference will be held at our offices in
One New Change.
For more information please contact
Andrew Petersen (andrew.petersen@
Joanna is a senior associate
in the firm’s London office
and is a member of the Real Estate practice
group focusing on investment, development
Her work includes the drafting and
negotiation of sale and purchase
agreements and associated documentation,
the drafting of certificates of title for sales
of properties and carrying out due diligence
and drafting reports on title and advising on
the risks involved on purchases.
Joanna has particular experience covering
investments (acquisitions and disposals),
management, development and corporate
Martina is an associate in
the firm’s Milan office and
she works in the Administrative and Town
Planning law department.
Martina has developed significant
experience in the legal matters related
to administrative law, focusing on the
construction of private and public
works, town planning, environmental
and landscape issues, development of
energy projects, infrastructures, regulatory
compliance, commercial authorizations/
licences and public tenders, advising
Italian and foreign clients with activities
both in court and out of court.
Announcements and Events
Joanne is an associate in
the firm’s London office
and is a member of the Construction and
Engineering practice. Joanne has acted for
major developers and institutional investors
on real estate development work advising
on construction–related matters. She has
particular experience in non–contentious
work which includes drafting and
negotiating construction and engineering
contracts. She also has experience advising
clients in the nuclear, education and
Recent and Upcoming Events
IPD EcoPAS – Q3 2014 Update
On 3rd December 2014, the London
office hosted the IPD EcoPAS Q3 2014
Update breakfast seminar. This seminar
was chaired by Ian Cullen of MSCI and
included a presentation by Peter Hobbs,
Head of Real Estate Research, MSCI
on the latest results from IPD EcoPAS
measurement service. The presentation
was followed by a panel discussion by key
investment and valuation professionals
including Steven Cox of K&L Gates and
senior representatives from Barclays,
CBRE and Mayfair Capital. The panel
discussed the direction of IPD EcoPAS
and sustainability within the UK
For more information please contact Bonny
Hedderly (email@example.com) or
Steven Cox (firstname.lastname@example.org).
AFIRE 2015 Winter Conference
The Association of Foreign Investors in
Real Estate (AFIRE) is a not-for-profit
association representing the interests of
nearly 200 investing organisations from 21
Partners from our U.S. offices will attend
the conference this year. The Winter
Conference is an annual two-day meeting
held on 11th and 12th February in New
York. The topics featured are specific to
the U.S., with a portion directly focused
on New York City and the surrounding
areas. Results of the AFIRE Annual Foreign
Investment Survey and a member survey
highlighting trends in international real
estate investment are also presented.
For more information about AFIRE or the
Winter Conference please contact Matt
or Mike Tomlinson (michael.tomlinson@
Oxford Real Estate Conference 2015
On 18th March 2015, the K&L Gates
London office will be sponsoring the first
annual Oxford Real Estate conference
2015. The conference will assemble a
group of over 25 global real estate experts
to provide insight on “What will the real
estate universe look like in 2025?”.
Andrew Petersen will be presenting at the
conference. The conference is organised by
The Oxford Real Estate Society, an Oxford
Business Network, which is an organisation
made up of real estate professionals and
enthusiasts who share a common interest
in the industry.
For information about our global
events program visit klgates.com.
10 K&L GATES: OVERRIDING INTEREST SPRING 2015 11
K&L Gates Advises on Redevelopment of Landmark Edinburgh Building
K&L Gates is advising Urbanist Hotels on the development of the old Royal High School building
on Calton Hill in Edinburgh. A landmark on the Edinburgh skyline, the building has been vacant for
more than 40 years, having previously been earmarked as a site for the Scottish Parliament. The
building is set to be developed into a luxury hotel by Duddingston House Properties and
Led by London partner Piers Coleman, the K&L Gates team is advising Urbanist on structuring and
tax issues and investment arrangements. Other K&L Gates London team members include Stuart
Borrie (Corporate Partner), Paul Beausang (Tax Partner) and Emma Tuppen (Tax Special Counsel).
David Orr and Taco van Heusden at Urbanist Hotels commented: “We are excited by the opportunity
to develop this key Edinburgh building, delivering what we believe will become Scotland’s finest
hotel. The team at K&L Gates project managed the transaction for us, providing us with both
commercial and practical solutions.”
Piers Coleman stated: “We are proud to be advising Urbanist Hotels on this complex transaction
which will involve revitalising this architecturally important neo-classical landmark building in the
centre of Edinburgh.”
We are proud to be advising Urbanist
Hotels on this complex transaction which
will involve revitalising this architecturally
important neo-classical landmark building
in the centre of Edinburgh.
Transaction Profile: The Old Royal High School, Edinburgh
12 K&L GATES: OVERRIDING INTEREST SPRING 2015 13
because the qualifying conditions
are stringent. REITs are not used for
structuring particular transactions in
the UK real estate market.
• PAIFs – property authorised investment
funds. These are designed for use
where there is widely held ownership.
PAIFs are open ended vehicles which
are tax transparent. They have stringent
conditions. The UK Government has
been consulting during 2014 on the
introduction of SDLT relief for the
seeding of PAIFs, and for the transfer of
interests in PAIFs.
A key tax issue on a number of these
corporate-wrapped property entities is
whether or not they are involved in trading
in real estate in the United Kingdom or
whether there is investment activity.
The level of finance for these structures is
primarily a commercial matter and depends
on the appetite of the investors for gearing,
within prevailing market conditions. The
debt arrangements may be structured so
that there is limited recourse to the ultimate
This article does not constitute legal advice
on any particular situation. For a fuller
version of UK Real Estate Structures,
please contact one of the authors.
UK Real Estate Structures
Key Vehicles used to Hold UK
This article gives a brief overview of typical
vehicles that are used to hold UK real estate.
• limited liability companies, whether
located in the UK or elsewhere.
Where the vehicle is a “clean”
special purpose vehicle (“SPV”), it
will contain nothing except for the
property and the rent, leases and
other contracts, and any registrations
and liabilities associated with
that property. An SPV may be a
convenient way of parcelling up the
real estate in a discrete entity with
its own legal personality, and which
can enter into contracts, including
to finance the property, manage the
property and/or develop it. Recourse
can be contained and limited to the
assets of the SPV. The board of the
SPV can exercise control and make
professional appointments, such as
of an asset manager. By buying the
shares in the company rather than
the property itself, a buyer may make
significant savings by not having to
pay Stamp Duty Land Tax (“SDLT”).
• Jersey property unit trusts (“JPUTs”).
These are constituted by trustees
who are located in Jersey. Usually the
trust instrument follows a well settled
form as there are hundreds of JPUTs
in existence holding real estate all
across the UK. The income in the unit
trusts belongs to the beneficiaries
of the trust provided that the unit
trust is approximately drafted so as
to constitute a ‘Baker Trust’, and
normally this is recognised for the
purposes of UK tax on income. For
capital gains tax purposes, the JPUT
is treated as a company located in
Jersey provided that it is correctly
controlled and managed in Jersey.
The transfer of JPUT units is not
usually subject to SDLT.
• limited partnerships, registered
under the Limited Partnership Act
1907. These protect the investing
partners from liability provided they
do not get involved in the control
and management of the partnership.
Accordingly, a general partner (usually
a company with limited liability) takes
full responsibility for the real estate
and any investment strategy and
makes all decisions (eg whether to
lease the property, who to and on what
terms). The general partner may be
advised by an investment manager.
Sometimes limited partnerships are
used in conjunction with JPUTs.
Partnerships can be more flexible
than corporate vehicles because, for
example, they do not have capital
maintenance rules or strict rules on
dividends. Partnership interests are
usually considered to be real estate for
the purposes of SDLT and accordingly
the transfer of a partnership interest is
subject to SDLT as if the partnership
interests were land itself. Partnerships
are tax transparent for most purposes,
although not for VAT, though some tax
filings are needed.
• REITs – Real Estate Investment Trusts.
Only a small number of very large UK
property investment companies have
reconstituted themselves as REITs
The level of finance for these
structures is primarily a commercial
matter and depends on the appetite
of the investors for gearing, within
prevailing market conditions.
14 K&L GATES: OVERRIDING INTEREST SPRING 2015 15
Legal Updates and Cases
The New Electronic
Proposals have now been
Withdrawn from the
Infrastructure Bill by the
We have previously reported on proposals
for a new Electronic Communications
Code, which was intended to form part of
the new Infrastructure Bill. That Bill would
have introduced a reformed version of the
Electronic Communications Code (Code).
This would have been much welcomed by
the real estate industry. The Code gives
rights to providers of telecommunications
networks to install and maintain apparatus
in, over and under land. In February 2013,
the Law Commission published a report
with various recommendations as to how
the Code should be revised. It was widely
acknowledged that the Code was unclear,
out of date, and inaccessible. Further to an
announcement in January it now appears
that the Code will remain in its current
form, and no announcement has been
made as to any proposed future reforms.
The 2014 Autumn Statement
The Autumn Statement announced a
number of measures that are of interest to
the real estate industry:
• the replacement of old “slab” system
of stamp duty land tax (SDLT)
on residential properties and its
replacement with a number of bands
with effect from midnight 3 December
2014 but an increase in the tax rates.
• a “root and branches” review of the
business rates structure is promised.
• investment in infrastructure for
roads, flood defences, and railways,
particularly in the North with the
intention of building a “northern
powerhouse” in Manchester to
• reforms to the planning system.
• Commitments to increase the
• Improvements to enterprise zones.
DECs and EPCs
The Department for Communities and
Local Government will be publishing
approximately 723,000 records of data
from Display Energy Certificates and non-
domestic Energy Performance Certificates
in response to a request made under the
Environmental Information Regulations
2004. It has given holders of non-domestic
EPCs the chance to opt out of having their
The records will be published at address
level. The use of the data will be subject to
conditions and re-use of the addresses for
commercial purposes prohibited.
The Department for Environment, Food
and Rural Affairs has announced that it
aims to establish Flood Re by July 2015.
The European Commission has approved
the scheme under the EU state aid
rules. A draft scheme document is to be
Repeat Guarantees in
the Context of Excluded
A “new” lease had been granted to T1
and guaranteed by G. T1 then assigned
the lease to T2 in breach of covenant.
All the parties wanted the lease re-
vested in T1 and G again guaranteed the
tenant’s obligations under the lease but
were concerned that the anti-avoidance
provisions of the Landlord and Tenant
(Covenants) Act 1995 might prevent a
The High Court held that T1 could reassign to
T2 supported by a fresh guarantee from G.
Comment: An issue left unclear by
Goodharvest and KS Victoria has
UK Leasing Brighton Ltd v Topland
Neptune Ltd and Zinc Cobham Ltd v Adda
Hotels (an unlimited company) 
EWHC 53 (Ch)
Rescission of a Contract for
the Sale of Land and Damages
The sellers of a property claimed that they
had been entitled to rescind a contract
for sale on the grounds that the buyers
had failed to complete in accordance with
a notice to complete. They also claimed
that they were entitled to recover the
balance of the deposit under the terms
of the contract and further damages for
breach of a side agreement between the
parties. The buyers claimed that they were
entitled to rescind the contract as a result
of (non-fraudulent) misrepresentation by
the sellers, repayment of the deposit and
damages for misrepresentation.
The court held that the sellers were entitled
to rescind the contract and recover the
balance of the deposit. They were also
entitled to recover the sums agreed under
the side agreement.
Comment: The judgment contains a useful
summary of the case law on rescission of
a contract for the sale of land.
Hardy and another v Griffiths and another
 EWHC 3947 (Ch)
A landowner sought to rely on the limitation
period in enforcement proceedings. The
court held that such reliance is subject
to a public policy requirement of good
faith confirmed by Secretary of State for
Communities and Local Government and
another v Welwyn Hatfield Council 
UKSC 15, which in this case the landowner
had not met.
Comment: The court discussed how which
the Welwyn principle may apply to various
circumstances and so the judgment will
be of general interest.
Jackson v Secretary of State for
Communities and Local Government
 EWHC 20 (Admin)
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K&L Gates comprises more than 2,000 lawyers globally who practice in fully integrated offices located on five
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markets participants and entrepreneurs in every major industry group as well as public sector entities, educational
institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations,
practices and registrations, visit klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard
to any particular facts or circumstances without first consulting a lawyer.
©2015 K&L Gates LLP. All Rights Reserved.
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