Let holiday cottage was an investment, not a business property
In an important test case brought by HMRC the Upper Tax Tribunal has ruled that a holiday cottage which was used for letting out was not a ‘relevant business property” for the purposes of inheritance tax business property relief, but was held as an investment and did not qualify for relief.
Business property relief from inheritance tax applies if the property in question is a relevant business property. However, a business will not be a relevant business property if it consists wholly or mainly of making or holding investments.
Before her death the property owner owned a quarter share in a bungalow which was let out to holiday makers on short lets during the year. After her death her executors claimed business property relief on her quarter share of the bungalow claiming that it constituted a business property. The claim was opposed by HMRC which contended that the bungalow was held mainly as an investment.
HMRC’s argument has been accepted by the Upper Tax Tribunal which ruled that the bungalow was an investment rather than a business. Although the holiday lettings involved some active management of the premises, these activities were simply ancillary to holding the property as an investment and did not turn it into a business.
Although this decision is based on the particular facts in the case, it shows that simply letting a building will not amount to a business for the purposes of business property relief even where a degree of property management is involved such as collecting rent, repairs and maintenance and providing services at the property.
Damages for breach of contract for sale of property
Where a buyer fails to complete the purchase of a property, the seller can recover damages for breach of contract to cover the loss which the seller has incurred as a result of the buyer’s breach. Where the seller’s claim is based on a drop in the market value of the property, at what date should the property be valued? Is it the date when the breach occurred or is it a later date when the seller has failed to sell the property again? This can be important in a falling property market.
In a recent case the buyer failed to complete the purchase of a property where the contractual completion date was June 2008. The sellers then unsuccessfully marketed the property for £4 months after which they decided to let the property for 6 months before putting it back on the market for another 6 months.
When they were still unable to find a buyer, the sellers moved back into the property themselves and brought a claim against the buyer to recover the difference between the then value of the property (which had fallen substantially because of the decline in the property market) and the original agreed purchase price. The Judge awarded the sellers damages of over £100,000 which represented the difference between the contract price and the estimated open market value 2 years later when the sellers moved back in. The Court of Appeal endorsed the Judge’s ruling saying that the date of breach would only have been the correct date for assessing damages where there was an immediately available market for the sale of the property. This was not the case here, the sellers had done their best to mitigate their loss by remarketing the property and they were entitled to recover the difference between the original contract price and the much lower market value.
Claims under the Defective Premises Act 1972
Under the Defective Premises Act those involved in building and designing new dwellings must see that they are fit for habitation. The Act imposes a duty on a person who, in the course of a business, takes on work for or in connection with the provision of a dwelling (including the erection, conversion or enlargement of a dwelling) to see that the work taken on is done in a workmanlike and professional manner and with proper materials and so that the dwelling will be fit for habitation when completed. The duty applies only to a person providing or arranging such works in the course of a business, for example, a property developer.
In a recent case a couple had built a house as their dream home, but later decided to sell it and put it on the market. The buyer who brought the property subsequently brought a claim against the couple under the Defective Premises Act when the dream home was found to be defective and required demolition. However, the Judge found that the couple were not property developers and had not acted in the course of a business. They had only decided to sell the property after it had been built. For the claimants to have had a valid claim under the Act they would have had to show that the couple intended to sell the house as soon as they reasonably could after completion and had no intention of occupying it as their home for more than a minimum period. That was not the case here.
Recovery of service charges from tenants
The Landlord & Tenant Act 1985 contains requirements for landlords to consult with residential long leaseholders before carrying out works above a certain value or entering into any long-term agreement for the provision of services. The provisions are designed to protect residential tenants from excessive service charges.
The requirements in the Act are fairly detailed but include the following:-
- The landlord must give notice of its intention both to individual leaseholders and to any recognised tenants association explaining why the works are necessary and inviting written observations.
- The landlord must have regard to any written observations received from a leaseholder or the tenants association.
- The landlord must seek estimates and both the leaseholders and the tenants association have a right to nominate alternative contractors from whom the landlord must obtain estimates. The landlord must issue a statement setting out the estimated costs from at least 2 of the contractors together with a summary of the observations received from the leaseholders and the tenants association and the landlord’s responses to them.
- The landlord must then go through a second stage consultation period following which the landlord must give reasons for selecting the successful contractor.
If the statutory requirements are not complied with, the tenant’s contributions are limited to £200 each, although the Leasehold Valuation Tribunal has power to dispense with the requirements in a particular case if it is satisfied that it is reasonable to dispense with the requirements.
In a recent case the landlord gave notice to the tenants of a block of flats and the tenants association of its intention to carry out major works costing just under £280,000. When the tenants and the association applied to the Leasehold Valuation Tribunal, it ruled that the landlord had failed to comply with certain aspects of the statutory requirements and limited the contribution of the tenants to £250 each.
However, the landlord’s appeal against this ruling has been upheld by the Supreme Court which decided to grant a dispensation from the requirements to the landlord. However, this was on condition that the tenants’ aggregate liability to pay for the works was reduced by £50,000 – a £50,000 discount had been offered by the landlord – and also that the landlord should pay the tenants’ reasonable costs in relation to the proceedings before the Leasehold Valuation Tribunal.
The reason for the Supreme Court’s decision was that it considered that the tenants had not suffered any substantial prejudice as a result of the landlord’s failures and the £50,000 discount offered exceeded any possible prejudice. The Supreme Court pointed out that the statutory requirements are for the purposes of ensuring that tenants are not required to pay for unnecessary services or for defective services and that they should not be required to pay more than they should for services which are necessary and provided to an acceptable standard.
In this case the Supreme Court wanted to achieve a fair balance between landlords and tenants by ensuring that the tenants did not receive a windfall on fairly technical grounds and ensuring that landlords are not cavalier about adhering to the statutory requirements.
Although the case provides some reassurance for landlords that each and every breach of the statutory requirements will not automatically prevent the grant of a dispensation, care should still be taken to comply with the substance of the statutory requirements and their overall purpose.
The comments in this note are of a general nature only. Full advice should be sought on any specific problems.