The Orchard - Summer 2007

Home information packs were due to become mandatory on 1 June 2007. Less than two weeks before their launch the government, not for the first time, decided to alter the content of the HIP and postpone its start date to 1 August 2007. Ruth Kelly, announced in the House of Commons on 22 May that HIPs would only go ahead in England and Wales from 1 August and only for larger houses with four or more bedrooms. There is no start date for HIPs for smaller houses.

The government appears to be in some disarray. There is no legal definition of what constitutes a four bed house and unless a tight legal definition is provided the way appears open for a number of houses to be sold as three bedroom houses with an upstairs study or box room.

One of the key elements of the HIP is the energy performance certificate (EPC). The EPC replaced what had originally been called the Home Condition Report, which would have been a far more comprehensive report and which had initially been part of the HIP, until the government watered down the content of the HIP some 18 months ago.

The main reason for the delay in the introduction of HIPs is the fact that there are insufficient accredited inspectors qualified to carry out the EPC. By May 2007 there were only just over 500 accredited energy inspectors and the government had little alternative but to postpone the introduction of HIPs until more inspectors had qualified.

The fact that HIPs are only compulsory on larger properties with four or more bedrooms, coupled with the fact that they only become mandatory from 1 August, means that there should be sufficient time for HIPs to be introduced without causing undue disruption to the housing market. The government plans to extend HIPs to smaller properties in due course, but has not set any date for that introduction. As a further concession the government has said that until the end of this calendar year people can market their properties as soon as they had commissioned a HIP, rather than having a completed HIP available by the time the property is put on the market.

Meade King has its own HIP provider and should you be thinking of selling your property and that property has four or more bedrooms then we would recommend that you contact a member of our conveyancing team who will guide you through the HIP minefield, explain whether or not you need a HIP and advise on precisely what needs to be done before you put the property on the market.

For further information please contact Richard Boulding at rjb@meadeking.co.uk or by telephone on 0117 926 4121

Powerhouse or power failure? Can you guarantee your guarantee?

Decided in May, the case of Prudential Assurance Company Limited v PRG Powerhouse Limited raised substantial concern amongst commercial landlords which have now been alleviated – but only in part.

Powerhouse was in difficulty and wanted to restructure its debts without going into liquidation. It proposed a company voluntary arrangement (CVA) which was approved by the requisite majority of creditors. The CVA proposed that the company would close 35 of its stores. The guarantees given by the parent company to those 35 landlords would be released. The landlords did not have sufficient votes to influence the outcome of the CVA but applied to the court challenging the CVA on the basis that it was unfairly prejudicial.

The case raised the prospect that a CVA could release a third party guarantor from its liability against the landlord’s will.

The High Court held that in the particular circumstances the terms of the CVA were prejudicial because the landlords had been offered the same dividend whether or not they had the benefit of a guarantee. It gave no added value to the guaranteed landlords for giving up their rights. In short the effect of the CVA was to prejudice most the class of creditors who would have suffered the least in the liquidation. That was unfair.

The judgment came as an enormous relief to commercial landlords. It was estimated that had the case gone the other way property values might have diminished by £38 billion.
But companies in financial difficulty might learn the lesson and in future structure a CVA differently so as to preserve it from challenge. Here are some practical tips for landlords of commercial property:

When granting a lease or licence to assign, remember that a good guarantee does not cure a poor tenant. Ensure that the person with the good financial status is the one that will be the tenant, not the guarantor;
If you are concerned about the strength of the tenant’s covenant, consider a rent deposit as well as a guarantee;
Take advice on the best way of drafting a guarantee, e.g. consider proposing that the parent company will forgo its rights against the tenant. In this way the tenant could not argue that a release is necessary for the tenant to remain in being. The prospective guarantor may object but that should itself sound a warning bell about the financial viability of the tenant.
If things go badly and you receive notice of a tenant going into a CVA or IVA react immediately and certainly within 28 days. Participate in the CVA process. Do not assume your guarantee is safe;
Claim not only the amount already owed but potential loss e.g. future rent, dilapidations and costs of re-letting. Consider securing a valuation.

For further information on commercial property issues please contact Sheila Hardingham at smh@meadeking.co.uk.

For insolvency matters Chris Mitchell at cm@meadeking.co.uk or on 0117 926 4121.

Divorce and bankruptcy: High Court places creditors before former spouse

On 3 May 2007 the High Court handed down judgment in the case of Hill & Bangham v Haines (2007) and fundamentally re-stated the approach to be adopted when property is transferred in the course of matrimonial proceedings and a bankruptcy order is subsequently made.

It is the duty of a trustee in bankruptcy to investigate transactions that took place in the period prior to bankruptcy. The Insolvency Act 1986 grants powers to a trustee in bankruptcy to apply to court to overturn certain such transactions in order to recover funds for the benefit of creditors. This includes the power to issue proceedings for a declaration that a particular transfer constituted a “transaction at an undervalue”.

A transaction at an undervalue occurs when an asset is transferred by a debtor up to five years prior to formal insolvency, either as a gift or in exchange for value that is significantly less than the value of the property being transferred.

The court in the case of Haines considered whether an agreement in matrimonial proceedings or a matrimonial order itself could constitute good consideration for a transfer of property. In the case in point the bankrupt’s wife sought to defend a transaction at an undervalue claim on the grounds that a transfer of property from her husband was in exchange for her agreeing not to pursue claims available to her in matrimonial proceedings.

It was held that foregoing a “right” to apply for ancillary or other relief could not constitute consideration for the transfer of an interest in the matrimonial home and that the bankrupt had effectively gifted his interest to his former spouse. Further, the court held that the position was the same whether an order was concluded in matrimonial proceedings by consent or following a contested hearing, holding that “in neither case does the receiving party give, nor the paying party receive, consideration”.

The decision in Haines is important for both trustees in bankruptcy and those who have divorced. It is understood that the decision may be the subject of an appeal but for the time being any non-bankrupt spouse who has received property from a bankrupt within five years of bankruptcy will not be able to defend a transaction at an undervalue claim by a trustee on the ground that consideration was given for the property transfer by foregoing a claim in matrimonial proceedings. This is likely to lead to more challenges by trustees in bankruptcy in the future, and as a result an increase in recoveries for the benefit of creditors.

If you have any concerns about bankruptcy or other insolvency issues, please contact Keith Mahoney on kwm@meadeking.co.uk or by telephone on 0117 926 4121

Under age sales

The Licensing Act 2003 has been amended with effect from 6 April 2007 to introduce a new criminal offence.

It is now a specific crime for alcohol to be sold on three or more occasions within a three-month period to one or more people aged below 18 years old.

The new offence is committed by the holder of the premises licence, and is thus aimed squarely at the business owner rather than at the individual barman or till operator.

Police or trading standards will be able to prosecute premises licence holders where there is evidence to establish the new offence, but as an alternative, the business may be closed for alcohol sales for up to 48 hours.

Enforcing authorities have no power to impose a closure unless the premises licence holder consents. If consent is not forthcoming a prosecution will be undertaken in the usual way, but it is possible that 48 hour closure will be a more attractive option than prosecution, which could lead to a fine of up to £10,000, together with the suspension of the premises licence for alcohol sales for a period of up to three months.

The new offence can be committed without the defendant itself having any actual knowledge that the unlawful sales have taken place. There is no defence of due diligence available. It is likely that evidence will usually be gathered as at present by regular test purchase exercises. Given the requirement to identify three transgressions within a three month period, business owners should expect test purchases to take place with increased frequency. It is not a requirement that the result of one test purchase is revealed before a re-visit takes place.

The new offence is an extremely effective weapon for enforcing officers, and is therefore likely to be used extensively. When a premises licence holder has accepted temporary closure he cannot also be prosecuted in respect of the same three incidents even if he is also a personal licence holder directly involved in one of the sales. Other sales staff and/or personal licence holders may still however be prosecuted or served with fixed penalty fine notices. The sales could also be referred to on an application to the Licensing Committee for review of the licence.

Best advice for premises licence holders as ever is to avoid trouble by designing and implementing a robust system for the supervision of alcohol sales.

For further information or assistance on licensing law please contact Judith Kelly by email jhk@meadeing.co.uk or by telephone on 0117 (926) 4121

More leave, more pay

Earlier this year the DTI announced its intention to increase the minimum holiday entitlement under the Working Time Regulations 1998 from 20 days to 28 days per annum.

The DTI estimates that 6 million workers will benefit from this change. However, responses during the consultation process indicate that the proposals are being met with some resistance, chiefly in view of increased cost pressures on businesses and in particular in the health and social care sectors.

Consequently, the original plan to increase the statutory holiday entitlement in two phases will proceed, but the second stage will now be delayed by a year. Hence, from 1st October 2007:

the leave entitlement rises from 20 to 24 days as planned, and from 24 to 28 days on 1st October 2009, rather than in 2008 as initially proposed.
As a temporary measure, employers will be able to pay in lieu of the extra 4 days, but only between 1 October 2007 to 1 April 2009. Thereafter this will not be permitted, except on termination of employment as is the current position.
Holiday will be calculated on a pro-rata basis for part-time workers, regardless of whether or not they usually work on bank holidays.
Increases from October 2007 and 2009 will be calculated proportionally depending on when the leave year starts (e.g. if the employee starts in January, and is entitled to 20 days inclusive of bank holidays, based on a 5 day week, there will be 1 additional day’s entitlement between October 2007 and December 2007).
Some or all of the additional holiday may be carried over to the following leave year with the agreement of both the employer and the employee.
Employers who already offer 28 days leave or more will not be bound by the new legislation provided that: (i) all staff are already entitled to at least 28 days per annum; (ii) any payment in lieu is only provided in excess of 28 days, if at all; and (iii) where the employer allows carry over of holiday leave between 20 and 28 days, it is only to the following year.

how to introduce the changes from this year,
the precise wording of the written employment contracts (for example to ensure employees do not end up with an express entitlement to 24 days holiday ‘in addition to bank holidays’), and
the effect on part time workers and any pro-rata calculations.

Currently mothers whose babies were born after 1 April 2007 are entitled to 52 weeks maternity leave, 39 weeks of which may be paid leave, whereas paid paternity leave is limited to 2 weeks.

The Work and Families Act 2006 however, made provision for new mothers to take up to 52 weeks paid maternity leave, and for new fathers an entitlement of up to 26 weeks paid additional paternity leave (APL), if the mother did not take the full year.

Under the APL scheme it is envisaged that where a mother wants to return to work during the second six months of the baby’s life she will be able to pass on some of her statutory maternity leave and pay to the father.

Further consultation is under way on the DTI’s proposals for implementation of the scheme to consider how this will be brought into force and administered. The DTI proposes a ‘light touch’ approach involving a self-certification process, under which the father and mother will certify to the father’s employer key facts confirming the father’s eligibility for APL. The consultation closes on 3 August 2007.

The negligent professional

This issue covers the first in a series of articles covering various aspects of professional negligence.

The articles can only offer a preliminary introduction to this complex and developing area of law; we hope however that they will help highlight some of the central issues.

In order to establish a claim in professional negligence it is necessary to prove that:

the professional owes of a duty of care;
the professional is in breach of that duty;
the client has suffered a loss;
the breach of duty has caused the loss (causation); and
the claim is brought in time (ie is not statute barred).

This article deals with the existence of a duty of care. Future articles will deal with the other elements necessary to prove a claim.

Where a professional provides services to a client, he does so pursuant to a contract. Engagement letters are commonplace and advisable for both parties, for they are clear evidence of the scope of the retainer and should identify the particular tasks which the professional is to undertake.

But a contract does not need to be in writing. It can be oral and the professional can in exceptional circumstances find that he has entered into a contract even though he is not personally aware of it. In one case¹ in which a solicitor had acted for the client for some years, the client telephoned the solicitor on a number of occasions, asking him to deal with a matter. The solicitor did not return the calls; his staff had not advised him of the messages left. The matter was urgent (it involved a court application for a new business tenancy) and the court was prepared to find that a retainer arose. Any decision to decline instructions must be made promptly and the decision communicated clearly, or the professional may run the risk that a retainer will be inferred.

Informal retainers may arise in another way. For example, where a solicitor had been formally retained by a company, the Court of Appeal found that a retainer between the solicitor and the controlling shareholder existed in circumstances where there was a long-term relationship between the parties.²

The professional can owe a duty of care to his client, even if he does not himself provide advice. If he delegates work to another, he is responsible to the client for ensuring that care is taken by the other person. An architect has been held liable to a client for design defects caused by the negligence of a specialist contractor to whom the architect had delegated part of the design.³ The judge explained that if an architect retained to design a building was unable to undertake part of the design himself:

“He has three choices open to him. One was to say to his employer “This is not my field.” The second was to say “This is out of my line. I would like you to employ a Structural Engineer to deal with this aspect of the matter”. Or he can, whilst retaining responsibility for design, himself seek advice and assistance of a Structural Engineer”.

The architect chose the third option and was liable. If he had chosen the second option, the relevant aspect of the design would have been removed from the scope of his retainer.

The identity of a client is relevant to the existence of a duty of care. The professional may owe a more extensive duty of care to an inexperienced client. It has been held⁴ that the vulnerability of an elderly client and the willingness of her inexperienced son to accept a substantial reduction in the price of a property being sold should have led the solicitor to advise the client to have the land valued. The court has explained⁵ that:

“an inexperienced client will need and will be entitled to expect a solicitor to take a much broader view of the scope of his retainer and of his duties than would be the case with an experienced client”.

Conversely, the more experienced the client, the less need to spell out obvious risks.

It is not always necessary to prove a contractual relationship for the professional to be liable. Professionals have fiduciary duties to clients in that they owe obligations:

not to have a conflict of interest;
to put the client’s funds to proper use;
to respect the client’s confidence; and
to account to the client for all property placed under his control

A professional may owe a duty in tort to those other than his client. He can owe a duty of care to a person reasonably relying on advice given, even if that person is not the client, provided a special relationship exists between the parties.⁶

Whether such a “special relationship” exists has been the subject of numerous court decisions and is an area of developing law. Whilst the courts have been reluctant to make decisions which extend radically the liability of the professional, there has over the years been a significant extension of liability (particularly where the professional voluntarily assumes a responsibility to advise even if he is not paid for doing so).

Two landmark decisions show how the principle can operate. In one case⁷ solicitors failed to advise a testator client that the will could not be witnessed by the spouse of an intended beneficiary. The will was witnessed by the claimant’s husband and as a consequence he lost the benefit under the will. The solicitor was liable. In another case⁸ the claimant lost his job as a result of a negligently prepared reference sent by his ex-employer, the House of Lords holding that:

“Where … a reference is provided by an employer, it is plain that the employee relies on him to exercise due skill and care in the preparation of the reference before making it available to a third party”.

Many of these decisions arise because the court is unwilling to contemplate a “legal black hole” into which good claims disappear simply because the party that suffers the damage is not the party to whom the duty was owed. The establishment of a duty of care outside a strict contractual relationship can however be frequently difficult to establish. There is no substitute for detailed advice.

Adam Chivers is a regional committee member of the Professional Negligence Lawyers Association: a group of solicitors dedicated to the provision of expert advice to claimants in professional negligence cases. He can be contacted on (0117) 923 4028 or ajc@meadeking.co.uk

(4) Johnson v Bingley, Dyson and Finney (a firm) [1997] PNLR 392
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(5) Carradine Properties Ltd v DJ Freeman & Co Ltd [1999] Lloyds rep PN 483
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(6) Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
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Summer 2007

Home information packs: More confusion

Powerhouse or power failure? Can you guarantee your guarantee?

Divorce and bankruptcy: High Court places creditors before former spouse

Under age sales

More leave, more pay

The negligent professional