Autumn 2006.

In this issue

Europe tells UK workforce: take a break

Diary notes

Fire safety reform - are you ready?

Public Access to Statements of Case

Landlords beware on tenant insolvency

Letters of intent - safe or sorry?

Have a break…

Easy tax planning

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Europe tells UK workforce: take a break

On 8 September 2006 the European Court of Justice ruled that the UK Government has failed to implement the Working Time Directive properly. The ruling stems from a complaint made to the European Commission by the trade union AMICUS.

Though considered a union victory, it is unlikely that there will be thanks for this Kit Kat from employers, or from a great many employees.

DTI guidelines in effect state that whilst employers should ensure that employees can take rest breaks there is no duty to ensure that the employee does indeed take a break. The ECJ's view is that this encourages a practice of non-compliance and undermines the health and safety objective of the directive.

Enforced breaks naturally present employers with practical problems and will also disappoint any employee who for his/her own ambition or financial gain chooses not to take a break. Whilst the ECJ in their ruling went on to say that an employer still cannot force an employee to rest it is unlikely that employers will now be able to rely on a defence along the lines of "you chose not to".

Employers will now need to review their practices, shift patterns and instructions to employees to accommodate the rest break rules and aim to establish that if the employee does not in reality take a rest break it would not be the employer's liability.

As a reminder, the rest break requirements are:

• 20 minutes rest if the worker is required to work more than a 6 hour shift, the rest to be taken during the 6 hours
• 11 hours uninterrupted rest between each working day
• 1 whole day off each working week

There are special rules for transport and young workers, and some flexibility exists in cases of emergency.

For further information or an informal consultation as to whether your practices are compliant with the Working Time Regulations please contact Nicola Hughes on (0117) 926 4121 or by email at .

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Diary notes

1 October - The Employment Equality (Age) Regulations 2006 come in to force to outlaw unjustified age discrimination in employment and vocational training.

1 October - The National Minimum Wage Regulations 1999 (Amendment) Regulations 2006 will increase the national minimum hourly rate of pay to £5.35 for workers aged 22 and over and £4.45 for workers aged 18 - 21.

1 October - Work and Families Act 2006 extends the statutory maternity and adoption periods of paid leave from 26 to 39 weeks, for employees whose expected week of childbirth is on or after 1 April 2007.

31 October - Equality Act 2006 extends to goods and services the discrimination on grounds of religious belief.

31 October - Regulations under the Equality Act 2006 extends to goods and services the prohibition on sexual orientation discrimination.

4 December - Disability Discrimination Act 2006 creates a new duty for public bodies to promote equality of opportunity for disabled people. A Disability Rights Commission Code of Practice will be required to implement the duty.

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Fire safety reform - are you ready?

New fire safety rules apply to all non domestic premises from 1 October 2006, when the Regulatory Reform (Fire Safety) Order 2005 finally came into effect.

The rules amount to a complete overhaul of fire safety legislation. Fire certificates will be abolished and existing certificates will cease to have any legal status. The new rules require a fire risk assessment. The assessment must give particular attention to those at special risk e.g. the disabled and must identify the measures which need to be put in place to protect people against fire risks which cannot be eliminated.

The responsibility for enforcement of the new regime will remain with the local fire and rescue service authority, which will carry out regular inspections. Premises which do not comply with the new requirements may be closed down or ordered to carry out remedial work. Maximum criminal penalties for failure to comply with the order are an unlimited fine and/or up to 2 years imprisonment.

The order applies to all non domestic premises including pubs and restaurants, factories, offices and shops, the common areas in multi household buildings, care homes and the residential sector. If you are an employer, a managing agent, a self employed person working on your own or sharing premises then you can expect the order to apply to you.

The Department for Communities and Local Government (formerly the Office of the Deputy Prime Minister) has produced a series of guides on how to comply with the new rules and these are obtainable from www.firesafetyguides.communities.gov.uk

Please contact Judith Kelly on or (0117) 926 4121 if you would like more information

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Public Access to Statements of Case

From 2 October 2006 any person is able to gain access to certain documents filed at court during an ongoing litigation.

Under the old system, the Claim Form was the only document which a person who was not party to the action might see. If the Particulars of Claim were included in the Claim Form, they were also available.

It has long been the case that any document read out in open court is a matter of public record. Judgments and orders made in open court are therefore available to any member of the public.

The new rules will allow any person to have access to documents comprising statements of case, i.e. the Particulars of Claim (whether appearing on the Claim Form or not), the Defendant's Defence, any Reply to Defence and Requests and Replies to Requests for Further Information.

If a non-party wishes to see other documents, such as Witness Statements they will need the court's permission.

These new rules will have retrospective effect so that anyone can ask to see the court file for any action proceeding before 2 October 2006.

The advantage of the new rules is that third parties will have easy access to information about Claims and Defences which may relate to their own proceedings. For example, it may be relevant to your case that another party has filed a similar claim against the same defendant.

The disadvantage is that parties will obviously dislike the prospect of their court documents being available to the general public. There is a mechanism to apply to the court to restrict access. However, such an application is likely to be successful only if the applicant can demonstrate exceptional circumstances to show the restriction is necessary.

Note that arbitration and insolvency proceedings will not be affected by the rule change. The privacy attaching to arbitrations is therefore unaffected.

Please contact Adam Chivers on or (0117) 926 4121 if you would like to discuss this article.

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Landlords beware on tenant insolvency

Here is a salutary lesson to all landlords of commercial premises who are faced with tenant insolvency. It concerns a court decision about a go-karting race track in Bridgwater¹

The tenant company (T) failed to pay rent due on 1 July 2003. The next day the landlord (L) instructed bailiffs to execute a distress warrant. The bailiffs took walking possession of go-karts and other goods belonging to T. The effect was that L was entitled to retain the benefit of the execution notwithstanding any future liquidation. L would effectively be secured.

T instructed agents and sold various assets, including certain of the assets which were subject to walking possession. After the costs of sale the amount held by the agents was approximately £2,500. In the meantime L and T agreed to re-let the premises through agents. L asked T to clear the premises so they could be marketed.

T ceased trading in September 2003. A Section 98 Insolvency Act 1986 meeting was convened. Creditors were sent the usual proof of debt form.

L duly returned his completed proof of debt. Unfortunately for him (as it turned out) he did not complete the box which requires the creditor to state particulars of any security held.

Some time after the creditors meeting the liquidator contacted L to discuss the property. In the course of this discussion the liquidator became aware of the outstanding distress warrant and the walking possession.

Proceedings ensued to decide whether L or the liquidator should receive the £2,500. The decision of the court, upheld on appeal, was that the liquidator should have the money. L had abandoned its distress by requesting the premises be cleared and by not including details of its security in the proof of debt form.

The evidence in this case suggested that L deliberately omitted to include details of the security in the proof of debt because it had taken the decision to abandon the distress. Certainly, there was no evidence that the omission was inadvertent or an honest mistake. If there had been such evidence, the decision may have been different. Nevertheless, the case shows the pitfalls of not obtaining and acting on proper advice when confronted with tenant insolvency.

Whether as landlord or liquidator if you require any advice in relation to insolvency issues generally please contact our Keith Mahoney or Christopher Mitchell on (0117) 926 4121 or email: or

(1) LCP Retail Ltd v Segal [2006] EWHC 2087 (ch)
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Letters of intent - safe or sorry?

Letters of intent are a common feature in the construction industry. They are issued by employers and contractors alike. But are they really an acceptable way of commencing a building project and are they being used without proper thought and consideration?

There are two distinct types. The first is a letter which simply expresses an intention on behalf of one party to enter into contract in the future with another party but creates no rights and liabilities. It has no binding effect whatsoever.

The second type is expressly designed to give rise to some, albeit possibly limited, reciprocal rights and liabilities between the parties.

It is this second type that can cause problems.

The standard form of such letters traditionally seeks to limit the employer's liability for works to be carried out before the detailed contract is signed. It does so either by limiting the amount of money that can be spent by the contractor or by identifying the specific areas of work that the contractor is to carry out. Often such a letter will be issued where drawings and a specification have been issued but the contract price and/or the scope of works have still to be finally agreed.

So far so good. Obviously there are times when a letter of intent is the best way of ensuring that the works start promptly and where there is a clear timetable both for finalising the contact and for carrying out the work.

But a seed of doubt arises following the decision in Cunningham v Collett & Farmer (2006) EWHC 1771(DCC). The trial judge had to give judgment in an action in which one of the parties (the householder) alleged that the other party (the architect) had been negligent in recommending the use of a letter of intent. In this case the Judge found that the architect had not been negligent in recommending and subsequently issuing a letter.

His view was that

• where the contract works and the price are agreed or
• there was a clear mechanism in place for such works/price to be agreed; and
• the start and finish dates in the contract programme are broadly agreed; and
• there are good reasons to start work before the contract documents have been finalised

then it would be "appropriate" to recommend a carefully drawn letter of intent.

Unfortunately he did not express a view as to when it would be "inappropriate" to do so.

The message is clear. Rather than issuing a letter of intent without proper thought and consideration architects and contract professionals who advise on and issue letters of intent should consider why they are doing so in every case. They should make clear whether it is to have contractual effect and, if it is to do so, be satisfied that it is appropriate having regard to the four criteria laid down in Cunningham.

For further information on this article please contact Philip Burbidge at or (0117) 926 4121

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Have a break…

Tenants' break clauses are common features of modern commercial leases but the law relating them is still developing and they can be fraught with uncertainty. Ideally, from the tenant's point of view, any option should be unconditional. However, the landlord is likely to have been reluctant to concede the break at all, will wish to impose conditions on its exercise and then look for ways of avoiding it when the time comes. A tenant needs to be very careful to comply both with the procedural requirements of the break clause and with any pre-conditions.

Usually those pre-conditions are any one or more of

• payment of rent(s) to the termination date;
• vacant possession; and
• material compliance with the tenant's obligations under the lease

The first two can create their own problems, but it is the meaning and effect of 'material' that has been considered by the courts recently.

In February 2003 the Financial Times gave notice to break its lease of offices in Paul Street, EC2 on 1 April 2004. The lease required that the FT should have 'materially complied' with all its obligations. It spent a lot of money in putting the property in good order and duly vacated. The landlord claimed the lease had not been terminated because there remained some dilapidations on 1 April.

The judge said the lease had been terminated because:

• The outstanding defects were insubstantial - costing at most £20,000 to put right.
• The FT had taken all reasonable steps to put the property in repair and had spent nearly £1m in doing so.
• The FT had tried to get the landlord to agree what repairs were needed.
• The landlord had unreasonably refused to cooperate with the FT so it could be prevented from terminating the lease on a technicality.
• The outstanding defects had no effect on the landlord's ability to relet.
• Given the behaviour of the respective parties, it would be unreasonable to the FT if it was unable to terminate the lease.

The landlord appealed¹. The Court of Appeal held that only reasons (1) and (5) had any relevance. Although the others had been followed in previous cases, the court said they were the wrong tests to apply. Although opposing parties are generally encouraged to cooperate with rather than confront each other, the court said that the judge at first instance was misguided in criticising the landlord for failing to cooperate with the tenant so that the tenant could, effectively, exercise the break. The court concluded that the only test is a short, objective one - "materiality must be assessed by reference to the ability of the landlord to relet or sell the property without delay or additional expenditure". It made no difference to the outcome because the court decided that the FT had complied with that test as well as the others.

The FT case confirmed that it is permissible for a landlord to refuse to cooperate with its tenant in connection with the exercise of a break notice. Another case illustrates that such refusal may be advisable. Legal & General Assurance Society discovered that to its cost earlier this year, after its tenant of premises at Heathrow Industrial Estate had exercised a break clause.² After service of the notice, the tenant's surveyor and Legal & General's surveyor negotiated dilapidations claims and reached a compromise. A settlement agreement was entered into before the termination date and money was paid to Legal & General in full settlement of the dilapidations claims. Nothing was said about the effect of the settlement on the break notice.

When the break date arrived, the tenant had not fully vacated the premises in accordance with the condition in the break clause. Legal & General failed with their argument that the lease had not been broken. The judge decided that, as the dilapidations claims included items which would only arise on termination of the lease, the settlement agreement implied that the break notice was valid and that any other pre-conditions were waived.

The lesson from these cases? Tenants should try to ensure that break clauses are unconditional, or with as few conditions as possible. Once a break notice has been served, a landlord should refuse to cooperate with the tenant if there is a chance he will wish to resist the break. That may, of course, cause uncertainty and commercial reality may dictate that cooperation is the better policy. Both parties should take professional advice on the negotiation of the break clause and its exercise.

For further information on this article contact Peter Watkin on or (0117) 926 4121

(1) Fitroy House, Epworth Street (No.1) & another v The Financial Times Limited [2006] 19 EG 174
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(2) Legal & General Assurance Society v Expeditors International (UK) Limited [2006] 18 EG 151
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Easy tax planning

Although most people are aware of the scope for tax planning on death through the use of tax efficient wills (particularly appropriate for married couples or civil partners) you may not be familiar with the gifts you can make during your lifetime which are exempt from inheritance tax. These are summarised below:

• Annual exemption. Each tax year you can give away up to £3,000 free of tax. This can be in the form of one or more gifts and can be used with other exemptions except the small gifts exemption (see below). If the total value of gifts made in one year is less than £3,000, you can carry forward the surplus to the next tax year but no further.
• Small gifts. In any tax year you can gift up to a total of £250 to as many people as you wish, but the total given to any one person must not be more than £250.
• Wedding gifts. You can make the following gifts free of tax in addition to the annual exemption if they are given on or shortly before a marriage:
  • £5,000 to a child (or step-child) or
    the person he or she is marrying
  • £2,500 to a grandchild or the
    person he or she is marrying
  • £1,000 to anyone else

• Normal expenditure out of income. One of the simplest ways of tax planning, where you have surplus income, is to give it away. If it is shown that the payments are habitual payments (ie regular payments, preferably monthly or quarterly), and that they are made out of your income and that, after allowing for all such expenditure you still have sufficient income to maintain your usual standard of living, these payments will be exempt from tax.
  
  As long as you can show that it is surplus income you are giving away, and that you do not have to dip into your capital to maintain yourselves after giving away the income, there are no restrictions on how much you can give away in any year.
• Potentially exempt transfers (PETs). If you make a gift to an individual (or into an interest in possession or accumulation and maintenance trust) and then survive for 7 years after making it, the value of the gift will not form part of your estate on death.
  
  When deciding to make a PET, it is sensible to make gifts of cash if possible, as there is never any capital gains tax on a gift of cash. If a gift is made of property or stocks and shares, and there is a substantial gain in the value of these assets in the time the individual has owned them, this could trigger a capital gains tax charge of 40% on the gain for the person making the gift. If the individual then does not survive 7 years, there could also be inheritance tax of 40% on the gift, giving a double charge to tax. Assets which have not realised much gain or assets which stand to make a loss can all be transferred without triggering a capital gains tax charge, but it is something that needs to be considered at the time if you wish to make a PET.
• Gifts to your husband or wife (limited to £55,000 if you but not your spouse is domiciled in the UK).
• Gift to charities, housing associations, national museums, The National Trust and qualifying parliamentary political parties

For further information on this article please contact Vanessa Eyre at or on (0117) 926 4121.

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Whilst every effort has been made to ensure accuracy, information contained in the Orchard may not be comprehensive and should not be acted upon without professional advice.