Commercial Property Update September 2019

Introduction 

In our September edition we consider the First Tier Tribunal case of Hyman v Revenue and Customs which provides interesting consideration of the extent to which garden and ground surrounding a dwelling can be considered part of the house (and therefore included in the Stamp Duty Land Tax calculation). 

We also take a look at the case of London Kendall Street (Number 3) Limited v Daejan Investments Limited which considers the grounds on which a landlord can fairly oppose a commercial lease renewal based on an intention to redevelop the property. 

Finally, we also provide a brief update with regard to recent government consultation papers on shared ownership and in relation to Capital Allowances against non-residential structures.

Our House?

The recent decision of the First Tier tribunal in the case of Hyman v Revenue and Customs provides useful guidance to those interested in the extent to which land surrounding a residential house can be considered “part of the dwelling” (and therefore chargeable at the higher residential rate for SDLT purposes).

The Facts

The Hymans purchased a house for £1.5 million. The house came with 3.5 acres of land. The purchasers paid Stamp Duty Land Tax (SDLT) on the basis that the surrounding land was part of the residential dwelling (with the higher rate of SDLT therefore being payable). 

Tax advisers suggested that the taxpayers challenge the amount of SDLT originally paid, arguing that the transaction qualified as “mixed use” (and therefore was subject to SDLT at the lower rate). The Hymans submitted a claim to HMRC for repayment of £34,950.00 which they claimed had been overpaid. The claim was rejected by HMRC on the grounds that the land consisted entirely of residential property. 

The “Dwelling”

The property consisted of a house, its garden, an adjoining meadow, an old barn and a bridleway between the garden and the meadow. It was acknowledged that the meadow was overgrown and used for walking the family dog and for the keeping of hens on a non-commercial basis. The barn was in a poor state of repair and had been used for storage of items ancillary to the maintenance of the garden and the meadow.

The Argument

Counsel for the Hymans argued that the meadow, barn and bridleway did not qualify as “garden or grounds” of the house and thus should not have been classified as part of the residential dwelling under section 116 (1) (b) of the Finance Act 2003 and included in the main SDLT calculation (at the residential rate).

In addition, they contended that:

• the meadow, the barn and bridleway were physically separated from the house by hedges; 

• the bridleway was a public right of way (and therefore open to use by members of the public); 

• the meadow and barn were not integral parts of the house and garden and;

• the barn itself (if viewed in isolation) would be classified as non-residential in nature. 

The Decision 

The Tribunal Judge disagreed and found that, the meadow, barn and bridleway were all part of the “grounds” of the dwelling. The Judge felt that the word “grounds” mentioned in the Finance Act 2003 was intended to have a wide meaning, namely: 

“land attached to or surrounding a house which is occupied with the house and is available to the owners of the house for them to use. The expression “occupied with the house” [means] that the land is available to the owners to use as they wish. It does not imply a requirement for active use.” 

The Tribunal held that it was not necessary that the land was used with the house for any ornamental or recreational purpose. The fact that the meadow had grown wild had no effect. Turning to the bridleway, the Tribunal Judge was equally dismissive and held that even though the bridleway may impinge on the owner’s enjoyment of the grounds (and even impose obligations on them) such rights did not of themselves make the surrounding grounds any less the grounds of the dwelling. 

“Residential Property”  

The definition of residential property for SDLT purposes is located at section 116 (1) of the Finance Act 2003. It is defined as:

“(a) a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use; 

(b) land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land); or

(c) an interest in or right over land that subsists for the benefit of a building within paragraph (a) or of land within paragraph (b).

Non-residential property, means any property that is not residential property.” 

The question therefore is: when does land cease being part of the “garden or grounds” of a dwelling?

In the above case, the Tribunal Judge held that the land: “would not constitute grounds to the extent that it is used for a separate, (e.g. commercial) purpose. It would not then be occupied with the residence, but would instead be the premises on which a business is conducted”.

HMRC guidance states that the question is whether: 

“an identifiable use precludes enjoyment of the part of the grounds. A paddock that is not used for anything else remains available for the enjoyment of the dwelling because there is no other identifiable use. A meadow that has been planted as a wild flower meadow as part of a grant scheme is still for the enjoyment of the occupant; there is no other identifiable use. On the other hand, a formal arrangement involving the granting of a lease or licence to graze the land is more likely to prevent the owners enjoyment of that land”.

Comment

The SDLT treatment of residential property and of mixed use and commercial property is significantly different. Residential property faces the highest SDLT burden whilst commercial, or mixed-use developments have a significantly lower rate for SDLT. Being able therefore to treat a transaction as non-residential can have significant benefits. However, this case shows that very careful thought and application is required where a residential property is involved. In this case, specialist tax advice had been sought, however the Court (and HMRC) took a very different view!

Specialist guidance can also be sought from HMRC prior to, or after submission of an SDLT payment. 

Ref: Hyman v Revenue and Customs (2019) UK FIRST TIER TRIBUNAL 469 (TC).

Landlord and Tenant Act 1954 – Redevelopment 

In the recent case of London Kendall Street (Number 3) Limited v Daejan Investments Limited the Central London County Court considered a landlord’s opposition to a tenant’s application for a commercial property lease renewal on the basis of an intention on the part of the Landlord to redevelop (pursuant to section 30 (1) (f) of the Landlord and Tenant Act 1954).

Whilst only a County Court level case, the case follows on from the 2018 Supreme Court decision in S Franses Limited v Cavendish Hotels (London) Limited in which the Court decided that a landlord’s subjective intention to redevelop the tenant’s premises must exist independently of the right of the tenant to renew its lease. The Court held, in that case:

“The test is whether the landlord would intend to do the same works if the tenant left voluntarily”. 

In the current case, the premises were let to a tenant at Marble Arch, London under a lease expiring in March 2018. The tenant served a Section 25 Notice applying to Court for a lease renewal. The notice was opposed by the landlord using Ground (f) of Section 30 Landlord and Tenant Act 1954 – (landlord redevelopment). The landlord’s proposed redevelopment project related to redevelopment of the basement of the building. The tenant queried whether:

• the landlord could evidence the required level of intent to carry out its works 

• whether there was a realistic possibility of its being able to do so; and

• whether the works would be commenced within a reasonably short period of time following recovery of possession. 

Decision 

The Court held that the Section 30 (1) (f) ground of opposition was made out by the landlord and that it had demonstrated sufficient intention to carry out the works. Furthermore, the Court noted that the landlord had no difficulty in funding the works and that a significant contract for works had already been entered into. The Court felt that the timescales for commencement of the works were realistic and within the limitations imposed by the Court. 

Our View

Landlords must, when seeking to rely on ground (f) of Section 30 (1) of the Landlord and Tenant Act 1954 be able to clearly demonstrate that they intend to carry out works “on the determination of the current tenancy”. The courts have held that such works must also be shown to be able to commence within a short time of the tenancy terminating (which, pursuant to section 64 of the 1954 Act means a date that is 3 months after the tenant’s application is finally disposed of, plus a 21 day period for the making of an appeal). In addition, the Landlord must be able to demonstrate that an intention to redevelop exists independently of the tenant’s desire for a new lease.

Further Consultation on Shared Ownership

The Ministry of Housing, Communities and Local Government has published a consultation paper aimed at introducing a new national model for shared ownership. 

The consultation includes proposals to ensure that there is one preferred national model for shared ownership, and to allow purchasers to acquire property through shared ownership in increments of 1%. The consultation closes on the 29th September 2019 and can be found by following of the link below:

https://www.gov.uk/government/consultations/new-national-model-for-shared-ownership

Capital Allowances – Guidance on Non-Residential Structures 

If you build, buy or lease a structure and all construction contracts were signed on or after 29 October 2018, you may be able to claim tax relief.

The Capital Allowances (Structures and Guidance Allowances) Regulations 2019 introduce a new Capital Allowance against income or Corporation Tax for new non-residential structures and buildings (known as the “structures and buildings allowance”). This allowance is available for qualifying expenditure incurred by businesses from 29 October 2018 that are newly built, converted or renovated non-residential structures and buildings. 

To qualify for the allowances the building must be used for a qualifying activity (e.g. a trade or property business) and must not be used as a residence. HMRC have published technical guidance on the new allowances which can be found by following the link below:

https://www.gov.uk/guidance/claiming-capital-allowances-for-structures-and-buildings