In this issue

Mental Incapacity Issues - Receivers v Enduring Powers of Attorney
How a Victorian 'Flu Remedy May Save you Catching a Cold
Lease renewals
Are Collateral Agreements Effective
Employment Law - Holiday Pay
Employment Law - Tax on termination payments
Employment Law - Discrimination
Prison for Fraudulent Trading

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Mental Incapacity Issues

Receivers v Enduring Powers of Attorney
Mental incapacity can affect not only the elderly but also young people who may suffer brain damage following a serious accident. The affairs of the mentally incapacitated are either administered by an attorney appointed under an Enduring Power of Attorney (EPA), or by a Receiver whose appointment is made pursuant to an Order of the Court of Protection. We should all try and prepare not only for old age but also for any unforeseen inability to cope with our financial affairs.

Receivers
A receiver is appointed where a person is already mentally incapable and it is too late for an EPA to be prepared. The proper and only safe course of action in those circumstances is for an application to be made for the appointment of a receiver to the Court of Protection.

Advantages
The advantage of a receiver being appointed is that it is available in all cases where there is no capacity and relates to all money and property held by an individual.

Disadvantages
The procedure involved in making an application for the appointment of a Receiver is complicated

• the receivership itself is expensive to operate with annual accounts having to be prepared
  
  
• receivers have limited discretion and may need to seek the authority of the Court before taking certain steps

The purpose of an Enduring Power of Attorney is to enable people, while they are still mentally capable, to decide who they would like to deal with their financial affairs after they become mentally incapable. An EPA is a Power of Attorney which, subject to conditions and safeguards, continues in force after the maker of the EPA (called the 'donor') becomes mentally incapable of handling his/her affairs, provided the power is registered.

EPAs
An EPA has considerable advantages

• the power can cover all of the donor's money and property
  
  
• it is easy to set up and operate with no obligation to prepare annual accounts
  
  
• the donor can choose who acts as his/her Attorney
  
  
• the donor can tailor the power accordingly so that if it is felt appropriate the donor can impose restrictions on the attorney's financial powers.

In an ideal world we would advocate Clients making an EPA which we can then adapt to suit each Clients personal circumstances. A fact sheet is available for Clients who would like further information and can be obtained from Richard Boulding or Jackie Martin in our Private Client Department.

Richard Boulding

We are pleased to confirm that our private client department is again recommended in the Legal 500 publication.

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How a Victorian 'Flu Remedy May Save you Catching a Cold

Stamp Duty tax saving schemes have not attracted great attention until recently. When the maximum rates of stamp duty were no more than 2% the cost of implementing schemes often outweighed the savings in duty which were possible. Now that stamp duty rates can rise as high as 4% of the value of the assets, such stamp duty savings schemes have become more commercially relevant.

One of these schemes relies on a principle laid down in a landmark case in 1892 when Mrs Carlill bought a carbolic smoke ball from a pharmacist. The manufacturer of the smoke ball had published adverts promising to pay £100 to anyone who contracted 'flu having used their smoke ball as directed. Mrs Carlill used her smoke ball as directed by the manufacturer, went down with 'flu, survived, and sued for her £100.

It was never suggested that Mrs Carlill had bought the ball from the manufacturer who had placed the advert. In fact the manufacturer would not have known of Mrs Carlill's existence before she claimed her reward so there was no opportunity for the two of them to have signed any contract.

Mrs Carlill was successful in claiming that a contract existed between her and the manufacturer since the offer of the reward of £100 was treated as an offer which Mrs Carlill accepted by her action of purchasing the smoke ball from the pharmacy.

The relevance of all this to Stamp Duty is that duty is only payable on the document not on the underlying transaction. So if an asset can be disposed of without a written contract or memorandum of the contract terms then there is no document on which Stamp Duty can be paid. Land cannot be sold without a written contract or memorandum but goodwill, book debts and other stampable assets may be transferred without a written contract relying on Mrs Carlill's successful contention that an offer may be accepted by conduct and so create a binding contract. Instead of the traditional contract for sale, one party issues an offer on the terms which would otherwise have been contained in such a contract and the other party then accepts that offer by performing some action which is capable of substantiation.

An enforceable contract will exist because the offer has been accepted albeit in a manner which is other than in writing.

Sellers of businesses may willingly agree to participate in such a scheme in return for a share of the stamp duty savings which the buyer would enjoy

James Hawkins

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Lease renewals

On 15 October 2001 new procedures came into force to deal with business lease renewal applications under Part II of the Landlord and Tenant Act 1954. Previously, the applications could be conducted at a leisurely pace with the courts generally taking a relaxed approach on the basis that most applications did not go to trial. The amendments to the court rules will change this.

The substantive law of the Landlord and Tenant Act 1954 remains unchanged but the new rules will vastly accelerate the procedure once an application to the court is made by imposing a strict evidential timetable. The applicant (the tenant) will serve the application (as before). The landlord must then, within 14 days, either request a stay of proceedings for 3 months or, if he contests the claim, set out his grounds for opposing the application. Not much change there. It is the next part that is radically different.

If the landlord files an acknowledge-ment the tenant then has 14 days in which to serve all of its evidence. The landlord must then, within 14 days of receipt of the tenants evidence, file and serve all of its evidence. No written evidence may be relied upon at the hearing of the claim unless it has been served in time or the court gives permission. This presents a number of problems:

• A tenant will often not know with any certainty what the landlord's case will be until he sees the landlord's formal response to the proceedings. The tenant then has only 2 weeks to obtain and serve all the evidence necessary to support his application and rebut the landlord's case.
  
  
• The landlord will gain a tactical advantage of being able to see the tenant's evidence first before he serves his own evidence.
  
  
• The effectiveness of the three month stay (which can only be requested by the landlord) may be undermined by the strict evidential timetable that is to follow. The parties may find that the 3 month period is spent gathering evidence rather than negotiating.

All this means much greater front end loading of costs even in cases which are likely to and do settle. Both parties will need to consider with their professional advisors, as best they can, in advance of the renewal application what evidence they are likely to need to prove their case and plan ahead so that that evidence will be available to serve once the evidential timetable takes effect.

General legal opinion is that these changes are inappropriate to business lease renewals which are not in most cases regarded by the parties or their legal representatives as 'real' litigation but rather a necessary step to protect the tenant's right to renew his lease. They will increase the costs to both parties.

Mark Chawner

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Are collateral agreements effective?

Commercial leases generally require that any subletting shall:

• be at a rent no less than the full market rent without taking a premium or the passing rent under the lease, whichever is the greater;
  
  
• provide for the rent reserved by the sublease to be reviewed on an upwards only basis, on the same dates and in the same manner as in the lease; and
  
  
• contain covenants by the sub-tenant in the same form as those given by the tenant.

If the proposed sub-lease is not on those terms, the landlord is entitled to refuse his consent.

What is to be done if a subtenant will only take on the premises at less than the 'market' or passing rent or with a reduced repair obligation? Usually the answer is to complete a sublease in the terms required by the lease but, at the same time, enter into a collateral agreement under which the terms of the sub-lease are varied or the parties agree that they should not be enforced. It was thought that, as that agreement was personal to the tenant and the sub-tenant, it did not concern the landlord and did not affect his consent to the sub-lease.

The recent case of Allied Dunbar v Homebase has raised doubts about the effectiveness of such schemes. In that case, the sublease provided for the rent to be the same as in the lease and the repair and review arrangement also followed those in the lease. By a collateral deed the tenant and subtenant agreed the rent should be £200,000 per year instead of £323,624; the rent was fixed from the next review date until the end of the term and the repair obligation was qualified by a schedule of condition.

The judge decided that although the collateral agreement was personal to the tenant and the subtenant that agreement and the sublease were 'interdependent' and had to be read together when deciding whether the terms of a subletting comply with the requirements in the lease. The decision is going to be considered by the Court of Appeal, but unless it is overturned there will be a very limited future for collateral agreements as a means of getting around the requirements of a lease.

Peter Watkin

Meade-King is recommended for its commercial property work by the Legal 500 publication

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Holiday pay

The Working Time Regulations introduced in 1998 gave all employees a right to four weeks paid holiday, provided they had already completed 13 weeks of employment. That qualification was challenged and the European Court of Justice has now said that it is unlawful. The DTI have announced that amending regulations will be issued shortly to put this ruling into effect. Once they are issued all employees will be entitled to paid holiday, even if they have not completed the qualifying period of 13 weeks. In practice, this may mean simply that a new employee, on termination of employment, will have to be paid not only for notice but also for accrued holiday which has not been taken.

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Tax on termination payments

In Richardson v Delaney the court has recently considered the tax treatment of termination payments. The general rule is that where a termination payment is made as compensation for breach of contract it will be free of tax up to £30,000. In this case, the employee was entitled to 18 months' notice. The employer told him that he was not expected to continue working and a deal was then negotiated for payment of a lump sum exceeding £30,000. Both parties assumed that £30,000 would be paid tax free.

The Inland Revenue did not agree and the court backed the Revenue: the employee had to pay tax on the full amount of the termination payment because he could not prove that there was a breach of contract preceding the termination agreement. It is particularly important in such terminations to consider whether the employer has a contractual right to pay the employee in lieu of notice: if so, then the termination payment, to the extent that it covers notice pay, will generally be taxable.

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Discrimination

Much of the new development in employment law in recent years has been in the field of discrimination law. Claims for sex, race and disability discrimination are generally unlimited in amount and can lead to very complex litigation with extensive expert evidence.

In the case of Macdonald v Secretary of State the employee obtained a finding from the Employment Appeal Tribunal that the Sex Discrimination Act could affect discrimination against homosexuals. This potential extension to the legislation has been overturned by the Scottish Court of Session which ruled firmly that the SDA applies only to discrimination on grounds of gender not sexual orientation i.e. a male homosexual will only be able to make such a claim if he can show that he has been treated differently from a female homosexual. However, discrimination legislation is likely to be introduced to cover cases of sexual orientation in order to put into effect the relevant EC directive as from 2003.

Richard Holnes

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Prison for Fraudulent Trading

Directors guilty of fraudulent trading are always potentially liable for company debts. Now it has been made clear that terms of imprisonment are appropriate.

Two businessmen were lucky to retain their freedom following a review by the Court of Appeal of the sentences which they received in the Crown Court.

Mr Thompson had been given an 18 month conditional discharge and ordered to pay £750 towards prosecution costs after pleading guilty to fraudulent trading. Mr Rodger pleaded guilty to 3 counts of false accounting involving a sum of £34,000, and was given an absolute discharge and ordered to pay £150 towards prosecution costs. The Crown Court Judge accepted when passing sentence that the defendants were concerned to keep their company trading rather than obtain direct financial advantage from the offences.

The Attorney General referred the sentences to the Court of Appeal Criminal Division on the grounds that they were each excessively lenient.

The Court of Appeal agreed the sentences were too lenient, and advised that Mr Thompson and Mr Rodgers should each have been sentenced to 12 months imprisonment. It was necessary that businessmen should be aware that if they resorted to deliberate fraud they could expect to be imprisoned.

In this particular case, the Court of Appeal declined to increase the sentences originally imposed given that the Crown Court Judge had apparently indicated to the defendants at a preliminary hearing that in the event of guilty pleas he would not be minded to impose custodial sentences.

The principal effect of the Court of Appeal review is to give guidance to Crown Court Judges in future cases. Businessmen succumbing to such temptations should therefore expect imprisonment even where they have no previous convictions and their only motivation was to keep the company trading through a difficult financial period.

Judith Kelly

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