Real Estate Legal Update : UK Real Estate Lawyer & Attorney : Reed Smith Law Firm : Corporate Property, Planning Law

Kwik-Fit has tested this in the past year in both England and Scotland, and the result was the same.  In the case heard by the English High Court Heronslea (Mill Hill) Ltd v Kwik Fit Properties ltd, the Kwik-Fit unit had been a petrol filling station at one time, so the potential for soil contamination was high.  The landlord wanted to drill 13 boreholes to a depth of five metres and one 20-metre deep borehole.  The potential for disruption was high so Kwik-Fit refused access.

The lease granted in 2000 reserved for the landlord a right to enter onto the premises to inspect and make surveys and drawings.  The landlord hoped this would cover its intrusive environmental survey.  The High Court held that it could not, saying:

• No reasonable person would have thought that a right granted in the year 2000 to enter to survey would have expected that to cover the drilling of boreholes and taking of samples
• The ordinary meaning of a right to enter ‘on’ to property to ‘survey’ dating back to 2000 did not include a survey of what was under property
• The tenant had a right to quiet enjoyment, which the investigations would disrupt

Given the significant due diligence now required when potentially contaminated land is sold or financed, landlords of land that may be contaminated need to think ahead.  Do they want to keep quiet when granting a lease and hope that the usual tenant covenants cover any liability for historic contamination; or do they want to raise the issue and reserve the right to carry out environmental investigations?  If they do that, they will have to expect the tenant to exclude liability for historic contamination.

In our opinion, it is appropriate for landlords to reserve rights and consider all the issues at the outset.  Hoping that contamination is covered by implied lease terms may be simplistic and might lead to trouble if a tenant cannot pay the costs in any event.

Tenants of leases drafted some time ago may receive requests from their landlords to allow them onto the property to investigate, but do not have to consent unless they have a very unusual lease covering the point.  Tenants may be able to use this as a bargaining chip.  They certainly should require the work to be undertaken in line with a pre-agreed method statement containing provisions to minimise disruption, consider requiring a rent cesser, and obtain an indemnity from their landlord for loss or damage suffered as a result of the investigation.  They may want an exclusion for any historic contamination discovered there (unless they caused it).

Landlords facing a refinancing requirement to produce environmental investigations before a loan can be made, may have some difficult negotiations either with the lender or the tenant.

First of all, the case: Ansari v New India Assurance Ltd. The facts are unlikely to be repeated, but a less extreme set of facts could cause a similar problem.

• The building owner took out insurance declaring that the building had a sprinkler system
• The occupier turned the sprinkler system off to avoid water damage to his goods, and ‘fixed it’ by jamming a filing cabinet under the control handle so it could not be turned back on
• The water supply to the building was later cut off
• The owner saw the building at regular intervals
• The use of the building changed from the storage of kitchenware to mini-motorbikes without the insurers being made aware
• The building was damaged by fire
• The owner claimed on the insurance
• The insurers rejected the claim and cancelled the policy
• The Court of Appeal agreed with the insurers. The owner was not entitled to any compensation for the fire damage.

As ever with insurance, the insurer has to be provided with all material facts that might influence its decision to insure or the amount of the premium. There was a clause in the insurance policy obliging the owner to notify the insurer of any change to the facts stated in the proposal form, and to give notice to the insurer if it became aware of any act or neglect that increased the risk of destruction or damage.

The owner did not notify the insurers about the new use or the non-functioning sprinkler system.

How is this relevant to well-organised property investors in this market? Insurance contracts containing these clauses are common. Sadly, we are seeing an increase in the number of tenants vacating premises as businesses go under in this economic climate. Sometimes the leases are brought to an end in an orderly way, but often there is a legally untidy situation where no tenant occupies or pays the rent, but the landlord is not in control of the premises. Landlords would need to notify the insurers that the property had been vacated, as this could increase the risk of damage to the building by trespassers.

How many landlords are checking that no other material changes need to be notified once premises are vacant, like the disconnection of a water supply to a sprinkler system by a tenant who has failed to pay its water bills (as well as the rent)?

Agents inspecting properties on behalf of landlords need to provide their clients with clear reports of any issues that need reporting to the insurers. Investors need to ensure that they know enough to do this.

Where leases remain, even though the tenant is not in occupation, the landlord may think it can rely on the lease clause requiring the tenant to notify them of anything that could invalidate the insurance. But the tenant may be away from the property for a long time, may not know themselves, and ultimately may not be worth suing for any loss that their landlord suffers if the insurer fails to pay out.

So landlords:

• Do make sure the tenants you have know what they need to notify you about to keep the building insured
• Brief your agents to notify you of any concerns they have following inspections
• If in doubt, notify the insurers of what you think might be a material change in circumstances