rosenblatt view

When Termination becomes terminal

12/03/2018 | Lucy Hamilton-James
A recent judgment has brought into sharp focus the importance of giving careful consideration to the reason given for terminating a contract at the time of such termination.  The case, Phones 4U Lim

A recent judgment has brought into sharp focus the importance of giving careful consideration to the reason given for terminating a contract at the time of such termination.  The case, Phones 4U Limited (in administration) v EE Limited [2018] EWHC 49 (Comm), involved Phones 4U which had a trading agreement with EE Limited and, on 15 September 2014, appointed administrators.  On 17 September 2014, EE terminated the agreement citing its right under clause 14.1.2 to terminate the agreement if Phones 4U went into administration.

The administrators subsequently brought a claim against EE for unpaid commission and EE then sought to counterclaim for damages it claimed it had suffered as a result of a repudiatory breach of contract by Phones 4U for its failure to market EE products in accordance with the agreement.

The Judge ruled in favour of Phones 4U on the counterclaim the basis that EE could not recover for “loss of bargain” damages for repudiatory breach, despite the Judge finding that EE had a reasonable prospect of establishing a repudiatory breach.   The Judge decided that even if there had been a repudiatory breach at the time EE terminated the agreement, because the termination letter expressly citied its right to terminate for a contractual reason (the appointment of administrators by Phones 4U), EE could not later claim the agreement was terminated for a breach.

It can be tempting for a party wishing to end its agreement with another to use a clause which gives it the right to terminate without having to show breach, such as termination on the appointment of an administrator.  It can be a clean, no blame and express right to terminate, but if it is the sole, expressly used reason for termination, it can restrict the right to bring other claims in the future and should therefore be used with care.

If you need advice on terminating an agreement for reasons of insolvency without inadvertently waiving your future rights to bring a claim for damages, contact Anthony Field or Lucy Hamilton-James in the Dispute Resolution department.

Incoming costs for employers – 6 April 2018 and beyond

26/02/2018 | Noel Deans & Sean Field-Walton
The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below

The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below.

Payments In Lieu of Notice (a “PILON”)

Whether a PILON is subject to tax and NIC currently depends on the terms of an employee’s contract. If there is a contractual right to make a PILON, any such payment is usually treated as taxable earnings and subject to income tax and NIC. Contrastingly, non-contractual PILONs benefit from a £30,000 tax exemption derived from the current section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

From 6 April 2018 this position is changing. Through the insertion of new sections 402A – 402D to ITEPA employers will now be required to calculate the employee’s total basic pay including in respect of notice (whether or not served), and deduct from that sum income tax and both class 1 and 2 NIC. This means that both contractual and non-contractual PILONs will be subject to the usual tax and NIC deductions. HMRC have however confirmed that this change will not be retrospective.

Tax exemption for payments in respect of injured feelings?

Remaining unchanged despite the Government’s updates to the termination payments regime, is section 406B of ITEPA’s general exemption from tax for payments in respect of “injury to, or disability of, an employee”.

Nonetheless, through the insertion of new section 404B(7) to ITEPA payments by employers in respect of mere injury to feelings will not benefit from this tax exemption from 6 April 2018. Although employers will see this as another source of increased expense this change incorporates what has been the case law position since K Moorthy v HMRC [2016] which ended this debate and held that a payment in respect of injured feelings was taxable.

Mounting auto-enrolment obligations

From 6 April 2018, the mandatory contributions to be made by both employee and employer in respect of the auto-enrolment scheme will begin to increase.

The minimum employee contribution will rise from 1% to 3% and the corresponding minimum employer contribution will rise to 2%. These figures will further increase to 5% and 3% respectively from 6 April 2019.

Much commentary has focused on the potential increased cost to employers of complying with their auto-enrolment obligations. We agree that employers are likely to see balance sheets dented more by pension liabilities than at present, but this impact may be softer than anticipated. This is owing to current inflationary pressures which we expect to lead to an increasing number of employees choosing to opt out.

Foreign Service Relief (“FSR”)

6 April 2018 also sees an end to the application of FSR in relation to termination payments made to employees who had worked overseas but received a termination payment during a tax year when they were resident in the UK.  This is despite some trepidation displayed from influential lobbies, including but not limited to the Chartered Institute of Taxation.[1]

As currently drafted, even where an employee (except if exempted) has served the majority of their employment abroad but receive a termination payment during a tax year when they are resident in the UK no FSR would apply and the total sum would be treated as taxable earnings and subject to tax and NIC. Here we see the potential for significant and unexpected liabilities to occur. As a result, it is possible that employers may be expected to increase or “gross up” termination payments to employees now tax resident in the UK but who have previously worked overseas.

Concluding Thoughts

Employers considering dismissals may wish to expedite these processes especially if they want to offer a tax free inducement as a settlement term.

Potential increased tax liabilities for employers may ultimately be minimal. Yet, given the financial and reputational cost of a dispute with HMRC for contravention of these provisions would probably be significantly more costly, employers should actively take steps to prepare for implementation. This should include making sure that the internal payroll and HR functions are fully abreast and trained in respect of these changes.

The proposed changes to FSR in 2019 are an area we will be proactively monitoring. If the Government does not amend the draft legislation as it relates to FSR, employers, particularly those with an international base will need to plan their human resources and dismissal considerations more carefully to avoid unexpected liabilities falling due.

[1] Termination payments: removal of Foreign Service Relief (FSR) for UK Residents Response by the Chartered Institute of Taxation, 25 October 2017

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Update on Taylor Review and Employee Status in 2018

12/02/2018 | Noel Deans & Sean Field-Walton
In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicati

In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicative of the lack of clarity in the area. As it stands, determining employee status turns on questions of mutuality of obligation, personal service and control. All of these, unsurprisingly, have their own epilogue of related case law attempting to reach an understanding of what exactly each of those phrases means for businesses and employees.

Significant decisions in the area have seen what may on the face of it be divergent outcomes. Uber drivers have been held to be “workers” under the Employment Rights Act 1996 (the “ERA”), Deliveroo drivers were considered not to be “workers” for the purposes of a Union’s application for compulsory recognition under Schedule A1 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the “TULRC”) and plumbers have been held to be “workers” for the purposes of the ERA and the Working Time Regulations 1998 as well as an employee within the extended meaning of that term in the Equality Act 2010. Other decisions such as King v Sash Window Workshop Ltd and another have extended, or arguably just confirmed how existing rights apply. In this case, Mr King’s contract described itself as a “self-employed commission-only contract”. Under that contract, Mr King was paid on a commission-only basis. The Court of Justice of the European Union held that Mr King, despite having been described as self-employed and led to believe he could not take paid leave was actually a “worker” and was therefore entitled to carry over or be paid for the entire sum of that unpaid holiday. This clarified that the right to carry over is not only limited to cases involving sickness or maternity leave. Taken together with the decisions conferring “worker” status on new sections of workers, potentially large retrospective liabilities could be created and businesses may be concerned to understand what are their actual and/or likely exposures are.

As such, it is with perhaps renewed force that we can reflect on the Taylor Review of Modern Working Practices (the “Taylor Review”) published in 2017 and one of its central recommendations which was to codify the case law principles governing “employee” status into primary legislation.

On 7 February 2018 the Government published their response to the Taylor Review which acknowledged the lack of clarity and certainty over employment status (the “Response”). Therefore, this is an area we will closely monitor as 2018 develops.

One thing is for certain; the prevailing wind is in favour of extending or granting new rights to workers who previously would have been considered “casual”. Albeit they may seem minor adjustments, simple proposals accepted by the Response that would among other things oblige employers to provide written particulars and payslips to workers, are new compliance burdens should not be underestimated. Seeing as the general thrust for recognition of workers’ rights seems only to be increasing this may be an area where companies, especially those offering shares on public markets, should be particularly attuned to the risk of reputational damage and consider seeking specialist legal advice in this regard.

Employers may be relieved, however, that in the Response the Government has confirmed it will not (at least for now) be reversing the burden of proof where employment status is in dispute. It will remain the employee’s duty to prove their alleged status. Similarly, the Government has confirmed that despite some rumbles in the area of non-compete restrictions it does not propose to take any action in this area seeing as such restrictions were considered valuable by most respondents to consultations.

Seeing as the advent of both the GDPR and implementation of the extended Senior Managers & Certification Regime are not far off the horizon and given the ripeness and appetite for change in the area of employment status businesses may be prudent to seek specialist legal advice in these areas.

Our employment department has experience and expertise in all of the above areas.

If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Residential Leasehold extensions – valuation and interpretation issues

30/01/2018 | Caroline DeLaney
Owners of leasehold flats have a statutory right to extend their lease under the Leasehold Housing and Urban Development Act 1993.  The procedure of lease valuation is becoming increasingly complex

Owners of leasehold flats have a statutory right to extend their lease under the Leasehold Housing and Urban Development Act 1993.  The procedure of lease valuation is becoming increasingly complex but the principles behind valuation are rarely decided by the courts.  In a recent news piece for Lexis Nexis, Caroline DeLaney looks at the first case of its kind – The Crown Estate Commissioners v Whitehall Court London Limited

 

  • What is the significance of this case? Why is it important for practitioners?

 

This case is an appeal from the First Tier Tribunal (Property Tribunal) to the Upper Chamber (Land Chamber) concerning the apportionment of the premium to be paid by a residential tenant for a lease extension under the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act) between the freehold owner, the Crown Estate Commissioners, and the head leasehold owner, Whitehall Court London Limited.  Whitehall Court is a well-known Victorian mansion block containing  high value residential flats and offices as well as the Farmers’ Club and is located close to Horseguards Parade in London.

The appeal involves technical valuation issues and the tenant did not take part in the appeal as the premium and terms of the extended lease had already been agreed.  The issue in dispute before the Upper Chamber was the allocation of the premium between the freeholder and the head leaseholder.  The 1993 Act allows the freeholder to agree terms with the flat-owner without the agreement of the intermediate lessee but the Crown Estate Commissioners chose not to utilize these statutory provisions and referred the matter to the tribunal instead.

The case is significant because there is little case law on valuation issues under the 1993 Act, particularly at appeal level.  It considers for the first time the valuation assumption of Schedule 6 para 3 (1) (b) of the 1993 Act.

The case is also of interest to practitioners because it considers the arrangements between freeholder and intermediate leaseholder in a mixed- use building where they agree that value can be increased and then shared between them by, for instance, the charging of premiums for change of use, corridor leases and other alterations and retrospective licences and premiums. The case undertakes an exercise in lease interpretation and offers a view on what it calls the “torrential style” of lease drafting.  It considers the definition of “Net Receipts” and looks at the individual categories of receipts that the parties dispute.

 

  • How helpful is this judgment in clarifying the law in this area? Are there any remaining grey areas?

 

The judgment is helpful as it confirms for the first time the valuation assumption of the 1993 Act.  The valuation point before the Upper Chamber was whether the “no- Act” rights assumption extends only to the flat that is applying for the lease extension or whether it extends to the whole block in which the flat is located.  The judgment looks at the authorities quoted by the parties and concludes that commentators such as Hague and Woodfall recite the legislation without actually reaching a conclusion and also that there is no case law on point.

The judgment concludes that the authority on the interpretation of the 1993 Act requires it to apply the 1993 Act fairly against the tenant, but at the same time not to stretch the intention of Parliament and give the tenant an advantage beyond what was intended.

In a similar way to the application of the “presumption of reality” in rent reviews, the Upper Chamber Appeal concludes that “the presence of artificial assumptions necessarily displaces the presumption that any valuation is to be conducted on the basis of reality; but statutory assumptions should not be pressed beyond their natural limits and should be applied to reach a price for the relevant interest that corresponds to market reality as closely as those assumptions permit.”  The tribunal concludes that the “no-Act” rights assumption applies to the whole building, not just the flat.

The judgment contains detailed analysis of the valuation behind this general principle which will be of interest to valuers.

In addition to its decision on the valuation principle, the Upper Chamber considers the interpretation of the specific provisions of the lease in question.  It discusses what it refers to as the “torrential” style of drafting whereby the drafter attempts to cover all possible types of Net Receipts.  It concludes that the whole purpose of that drafting technique is not to miss anything out. The draftsman had tried to pick everything up in the “torrent” and the Upper Chamber concluded that this meant that it would cover categories of Net Receipts not necessarily expressly referred to in the lease.

 

  • What are the practical implications of the judgment? What should practitioners be mindful of when advising in this area?

 

The decision in this case focuses primarily on the issue of valuation and so the practical implication of the case is primarily for valuers rather than legal practitioners.  The supplementary point on the interpretation of the lease, although specific to the drafting of the particular lease and the value sharing assumptions provided for in it, is a useful reminder to practitioners as to how the court approaches the question of interpretation.

 

  • How does this case fit in with other developments in this area of the law? Do you have any predictions for future developments in this area?

 

The decision as a valuation case is consistent with the principles applied in other areas of valuation.  It adopts the favoured interpretation of statutes – to reach a conclusion on the wording of the statute that does not go beyond the intentions of Parliament.  In the case of the valuation itself, it follows the same approach as in other areas, the most obvious being valuation on rent reviews.  It endorses the approach, that there is a “presumption of reality” that should only be departed from in the case of express provisions instructing the valuer to do so.

The decision as an interpretation case is consistent with the principles of general contractual interpretation with the Upper Chamber trying to follow what the lease drafter intended.

In the case of both, future cases will hopefully endorse this consistency of approach.

This commentary was first written for Lexis Nexis on 1 December 2017 and published on the following link (Lexis Nexis subscription required) 

www.lexisnexis.com/uk/lexispsl/propertydisputes/document/412012/5R31-C4M1-DYW7-W3JG-00000-00/Examining_the_valuation_and_apportionment_of_premium__Crown_Estate_Commissioners_v_Whitehall_Court_London_

 

 

 

Unwanted “Pop-ups” – what to do with Christmas Squatters

14/12/2017 | Caroline DeLaney
The decorations are up and Christmas trading is in full swing.  Unfortunately, rogue traders are hoping to cash in on the Christmas spirit. Property owners and retailers need to take extra care o

The decorations are up and Christmas trading is in full swing.  Unfortunately, rogue traders are hoping to cash in on the Christmas spirit.

Property owners and retailers need to take extra care of their empty units or there is a risk that they will fall victim to ‘fly traders’ looking for the ultimate in rent-free “pop-up” shops.

These specialist squatters break into vacant units with the specific purpose of trading for the Festive period, usually vacating after the January sales.  Owners are faced with the dilemma of what to do with their new unwanted occupiers.

Property owners with vacant property need to be vigilant.  So too do retailer tenants with surplus stores. This can present an additional problem for property owners if their tenants will not or cannot take responsibility for unoccupied units. For instance retailers that have gone into administration or are undertaking store closure programmes. In those cases, the landlord may want the trespassers out, but has no right to take action because the property is still let to the tenant.

So what can be done about unwelcome occupiers?

Unfortunately, the criminalisation of squatting introduced in 2012 only applies to squatting in residential premises.  Although the lobbying for the extension of the law to commercial premises is gaining pace, we are currently left with a range of options with fewer teeth.

These include:

  1. Persuasion. Ask the traders to leave. Chances of success? Remote.
  2. Contact the police. Most of the time, the police will be uninterested in shop squatters unless there is public disorder or a criminal act has clearly taken place – for instance, you have seen them breaking in and there is evidence of criminal damage. The police are most likely to consider it a civil matter. Chances of success? Unlikely.
  3. Employ private bailiffs. The common law allows you to use “reasonable force” to remove trespassers from your property. There are bailiffs who specialise in this self-help remedy and you should only use licensed experienced professionals. These rights must be exercised with caution because if the bailiffs exceed reasonable force, you are responsible for their actions. Chances of success? Pretty good although the more experienced the squatters, the trickier it becomes. The plus side is that bailiffs are quick and a cost effective solution. The down side is the criminal and civil sanctions that may be brought against you if it goes wrong.
  4. Pursue court possession proceedings. Once upon a time an action for trespass could be brought in the High Court with minimal notice and expense. An order for possession was easy to obtain and efficiently enforced by High Court sheriff’s officers. Successive law reforms over the years, however, have pushed possession proceedings into the County Court. The County Court is slow and can take at least a week (usually more) to get a first hearing date. Not only is this action time consuming, it is expensive and can run into several thousand pounds, particularly if experienced fly traders actually defend the hearing. It does not take much – a scribbled ‘tenancy agreement’ – to get the Court to adjourn the hearing so that full evidence can be put before it. This will get the trader through to the New Year, when he will mysteriously vanish. Chances of success? Ultimately extremely good, but expensive and usually too slow.
  5. Do nothing. This may be unappealing however given that most fly traders will vacate after the January sales and providing that they are not a security risk and do not damage the premises, sometimes it is better simply to wait it out. In the case of an absentee tenant, by the time the landlord has got the tenant to take action, the New Year will have arrived and the squatters already gone.

Sadly none of these options are ideal. There is no guaranteed way to secure eviction just as we can never be sure of snow on Christmas Day.  As always, prevention remains the best cure and in the run up to Christmas it is far better to ensure that your vacant premises are properly secured against unwanted guests.

Caroline DeLaney is Head of Real Estate Disputes. 

For more information on this or any other real estate related dispute please contact her on carolined@rosenblatt-law.co.uk or +44 (0)207 955 1423

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