Christmas 2007

In this issueInheritance tax changesCompanies Act 2006: Latest changes for directorsDevelopment agreements: Fair dealing and good faithNo trust when the decks are ‘stacked’Building contracts and residential occupiers

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Inheritance tax changes

In his pre-budget speech on 9 October Alistair Darling announced changes to the inheritance tax treatment of estates for married couples and civil partners.

The position before 9 October.

In its simplest terms, before 9 October a married couple were able to gift their entire estate to the survivor without any inheritance tax being payable due to the spouse exemption. On the second death the survivor could leave an estate up to the nil rate band applicable at the date of death, with no inheritance tax liability. Any assets in excess of the nil rate band would be charged at 40%.
If an individual left his entire estate to charity and the estate exceeded the nil rate band, no tax was payable as gifts to charity are inheritance tax exempt.

The current position

From 9 October 2007, it will be possible for married couples and civil partners to transfer their nil rate band allowances so that any part of the nil rate band that was not used when the first spouse or civil partner died, can be transferred to the individual’s surviving spouse or civil partner for use on their death.

For example; Mr Smith died in 2001 leaving an estate of £400,000 to his wife Mrs Smith. No other legacies were given in his will and no lifetime chargeable transfers were made before death.

Mrs Smith died on 10 October 2007 leaving an estate of £600,000 to her children.

Mrs Smith’s estate will not be chargeable to inheritance tax as the Executors apply 100% of Mr Smith’s unused inheritance tax threshold at the rate applicable on Mrs Smith’s death i.e. double the threshold for 2007-2008 of £300,000.

I have a Nil Rate Band Discretionary Trust Will: do I need to change it?

Not necessarily.

Nil Rate Band Discretionary Trust (‘NRBDT’) Wills are still useful for inheritance tax planning and for potential long term care issues.
If you decide to change your will to remove the NRBDT and make an outright gift to the survivor (e.g. a wife) followed by a gift to the children upon the second death, you should bear in mind that:

• The wife could remarry and the assets could pass to a new husband in the event of her death. She would then be the first to die so potentially the new husband’s children would benefit from the double threshold on his death.
• The survivor could gift money to individuals during her lifetime so that there were no monies to leave to the children upon the second death.
• If the survivor required care in a nursing home, the joint estates could be assessed and be “eaten away” in care home fees.

What if the first spouse died 30 years ago? Are records still in existence to prove the value of the estate and what if deeds of variation were used? The Probate Registry would not have copies of such documents and it is doubtful that the solicitor’s file would still be in existence.

With a NRBDT Will you can still protect the value of the nil rate band on the first death within a trust, of which your children and the surviving spouse can be potential beneficiaries. The trust assets could not be assessed for long term care purposes and if the spouse remarried, the trustees may decide to call in any loan that had been made to the surviving spouse in order to protect assets for the other potential beneficiaries.

In conclusion, if you have made NRBDT Wills, we suggest that you contact us to arrange a meeting to discuss whether it would be appropriate to make changes to your wills.

We should add that the issue of Inheritance tax remains to be something of a political football and as with any legislation, it can all change in the future!.

For further details please contact Anna Molter or Samantha Piper on 0117 926 4121 or email on am@meadeking.co.uk

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Companies Act 2006: Latest changes for directors

On 1 October the next phase of the new Act was implemented. Shortly thereafter the government announced yet further delays to the introduction of this supposed simplification of company law.

And the reason for this delay? Apparently the changes are too complex for Companies House and other governmental bodies to handle without a further 12 months’ preparation. Which means that for at least another 12 months the rest of us will have to continue to cross-refer to 2 weighty statutes (the 2006 Act being the longest yet) and further transitional regulations to paper over the cracks between them.

October 2007 saw the arrival of the much debated “new” directors’ duties (or at least some of them). We are told that the Act is not intended to change the duties which directors already owed to the company, just to replace them using different wording (more simplification!). Despite the efforts of some commentators who predict chaos and unlimited litigation, the general consensus is that the rewriting of these duties and enshrining them in a statute will make little difference to the law or the way in which directors should deal with their company.

However here are a couple of practical changes to the Articles of Association which a company and its directors might want to consider if that company is part of a group in which there are minority shareholders or if the company is part of a consortium or joint venture (including corporate franchise type operations):

• authorise a director to represent the views of a person or body who had appointed him/her.
  
  Unless authorised by the company’s constitution (i.e. its Articles of Association or a shareholders agreement), a director who represents a shareholder or other consortium member on the board of the joint venture runs the risk of breaching his/her duty to exercise independent judgement by voting in accordance with the wishes of the person they represent.
• acknowledge that the objects of the company include the advancement of the interests of the group as a whole.
  
  Even if a decision or action is contrary to the immediate short term interests of the company in isolation, the director taking that decision should not be treated as being in breach of his duty to promote the success of the company if that decision were to benefit the larger purpose or interests of the group or consortium to which the company belongs.

Please contact James Hawkins on
0117 926 4121 or jnh@meadeking.co.uk if you would like to discuss how these proposed changes might impact you or your business.

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Development agreements: Fair dealing and good faith

The case of Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch) established that a High Court injunction could be granted to prevent a land owner from reneging on a deal with a developer by selling the land to a third party after the developer had carried out substantial work.

The case involved the development of an 840-acre farm in Ashford. In 2003, the owner entered into a development contract with the developer. The agreement obliged the developer to obtain planning permission for the development of 520 acres of the farm. Having obtained the planning permission, the farm would be sold on and the developer would receive a substantial fee from the proceeds of sale.

Subject to certain conditions the agreement was to remain in effect until 2016. It did not contain any express clause to prevent the owner from selling the land prior to planning consent but stated that only the owner (and not its successors in title) would be responsible for paying the developer’s fee on the sale. The agreement obliged the owner to:

• use reasonable endeavours to assist the developer
• not do anything that would prejudice the developer in obtaining the planning permission
• promote the property for development
• act in good faith
  

After the developer had carried out a great deal of work in relation to the land and its planning potential, but before planning consent was obtained, the owner received an offer from a third party buyer for the site at a price of £35m. The developer sought an interim injunction to prevent the sale of the land.

Morgan J held that the agreement was not binding on any third party purchaser. The third party would not be under any obligation to assist the owner in obtaining planning permission by, for example, entering into any local authority (section 106) agreements. If the owner sold the land it would breach its contractual obligations to use reasonable endeavours to assist the developer in obtaining planning permission.

The time and expense incurred by the developer in its efforts to obtain the planning permission had significantly increased the value of the owner’s land. If the owner were to sell the land it would be in breach of its contractual duty to act in good faith. Additionally, the judge expressed an opinion that he could imply terms into the agreement to prevent the owner from selling its land until the provisions of the agreement had been satisfied. The sale envisaged by the owner did not observe reasonable commercial standards of fair dealing or faithfulness to the agreed common purpose and was not consistent with the developer’s justified expectations. Accordingly, the judge held that the owner would breach the agreement if it completed the proposed sale of the land and granted an injunction to prevent the sale.

Many development agreements will contain complex arrangements to protect the interests of developer and landowner. Even without such restrictions however, the courts can use implied terms to produce a fair and equitable result.

If you require any more information on commercial property and development agreement matters, please contact Julie Scott or Catherine Ainley either on 0117 926 4121 or by email at jhs@meadeking.co.uk.

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No trust when the decks are ‘stacked’

A recent decision of the House of Lords has provided very helpful clarification of the law in relation to jointly owned property.

Before the decision of the House of Lords in the case of Stack v Dowden [2007] 2 WLR 831 the House of Lords had never before considered circumstances such as apply in this case, where joint owners registered a property at the Land Registry in their joint names without explaining the relative shares but subsequently alleged that true ownership was other than in equal shares.

Notwithstanding what may have been registered at the Land Registry it is not uncommon for joint owners to allege that in reality a property is owned other than in equal shares. This leads to many disputes (particularly in the field of personal insolvency) as to the nature of true ownership. The legal position has always been that it is possible for true ownership to be other than in equal shares, and cases have been decided (or settled) on the basis of their particular facts.
In Stack v Dowden the court was asked to decide:

• Whether a statement in a transfer of property that a surviving co-owner could sell amounted to a declaration that the property was owned in equal shares; and
  2
• If such a statement did comprise such a declaration whether an occupying owner should pay compensation to a non-occupying co-owner..

The first issue is by far the most important and the House of Lords (by a majority) held that other than in exceptional circumstances, true “beneficial” ownership is decided by reference to the document registered at the Land Registry. Proving “beneficial” ownership to be different from legal ownership is a heavy one.
The court was divided as to whether compensation was due to Mr Stack as a result of being excluded from the property. However the majority view prevailed and it was held that the father (Mr Stack) had an obligation to house his child and it was not appropriate to require Ms Dowden to pay compensation to him.

While the decision in Stack v Dowden applies only to joint owners in a “domestic, consumer context” the decision provides much needed clarity in determining where true ownership lies. Specifically, the decision will assist trustees in bankruptcy faced with allegations by non-bankrupt spouses that “beneficial” ownership is such that he or she is entitled to receive more than 50% of the net proceeds of sale of a jointly owned property sold following the bankruptcy of a co-owner.

For more information please contact Keith Mahoney on 0117 926 4121 or by email at kwm@meadeking.co.uk.

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Building contracts and residential occupiers

Those who have become embroiled in adjudication proceedings and have had recourse to the Housing Grants, Construction & Regeneration Act 1996 will be aware that construction contracts with residential occupiers are excluded from the statutory provisions for adjudication.

Certain of the standard form building contracts used by the smaller contractor contain clauses permitting referral to adjudication. The JCT Minor Works Contract 1998 edition is one of these. However this does not necessarily preclude challenges to referrals to adjudication.
So on to our tale of Mr Dyason and Domsalla¹

• Mr Dyason’s property was severely damaged by fire. His insurers agreed that the property would be reinstated.
• The loss adjustors prepared the tender documents and dealt with the tendering process for the insurers.
• Eventually Domsalla was recommended and Mr Dyason, having dealt with the formalities with his insurers and the loss adjusters, was handed at the initial site meeting a JCT Minor Works Contract 1998 edition for his signature.
• That contract incorporated the standard JCT adjudication clause and contained withholding notice provisions.
• The project did not go well. The works were delayed. There were a variety of defects. Interim Certificates were not paid. The contractor commenced adjudication.
• Although Mr Dyason had signed up to the JCT adjudication agreement he said the adjudicator had no jurisdiction. He relied on the Unfair Terms and Consumer Contract Regulations 1999 (“the Regulations”).
• The adjudicator proceeded none-
  theless and awarded the contractor
  a sum of money.
• Mr Dyason refused to pay and the contractor started enforcement proceedings.
• Mr Dyason opposed enforcement.
  He relied on the statute to contend that the operation of the adjudication and, for that matter, withholding notice clauses, were not binding.
• For the first argument, the court found that as there was a contract to adjudicate the parties were bound by it. The agreement took precedence over statute.
• As for the second argument, Mr Dyason was not instrumental in negotiating
  the contract or determining its format.
  He had received no advice on the existence or necessity of using withholding notices and he was unable to prepare or serve them. The contract administrator was appointed by the insurers and so owed his duty to the insurers rather than to Mr Dyason. Mr Dyason was a consumer.
• Conversely, the contractor contended that the loss adjusters were acting as agents for Mr Dyason and he could and should have read the terms of the contract. He had loss adjusters available to deal with the dispute. The contract administrator could have dealt with the certificates on defective works and Mr Dyason could then have issued the appropriate notices.
• The court found for Mr Dyason.
  The contractor knew when Mr Dyason signed the contract that he was doing so as agent for the insurers, had no right to instruct the contract administrator and no authority to issue the withholding notices. Further the insurer would make all payments direct. Finally, Mr Dyason had not been involved in selecting the contract documents and had not received any
  or any significant advice as to their terms. He was acting as an agent.
• The court did not find that the adjudication provisions within the contract were unfair. They did not substantially alter the balance of the parties’ rights and obligations.
• The decision on the withholding notice clauses was somewhat different. Here the judge decided that the withholding notice clause was unfair. Mr Dyason had no input in selecting the clause. He had no advice as to its existence or meaning, and he was not shown the contract terms and conditions until he was provided with a copy for signature. Further, he was not involved in the certification or payment and he was not entitled to issue withholding notices. His only entitlement under the contract was to receive the reinstated home. The insurers had the benefit of the claim. The fact that he had not served withholding notices did not preclude any cross-claim for defects or delay as a defence to a claim against a particular interim and/or final payment.

The case highlights again the care with which construction contracts need to be drawn when operating with residential occupiers. It also reinforces the current line of recent authorities. Although adjudication provisions may be seen as procedurally unfair they do not cause a significant imbalance in a party’s rights and obligations. They are effective.

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(1) Domsalla v Kenneth Dyason TCC HHJ Thornton QC 4th May 2007
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For further details contact Philip Burbidge on 0117 926 4121 or e-mail pjb@meadeking.co.uk

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