Statutory Instruments
Enabling power: Housing Grants, Construction and Regeneration Act 1996
Commencement: 22 May 2008
Summary: Further amend the Housing Renewal Grants Regulations 1996, which set out the means test for determining the amount of grant which may be paid by local housing authorities under Chapter 1 of Part 1 of the Housing Grants, Construction and Regeneration Act 1996.
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Enabling power: Housing Act 2004
Commencement: 1 June 2008
Summary: Amend the Home Information Pack (No 2) Regulations 2007. Regulation 2 amends regulation 10A(1) (leasehold information included during a temporary period), regulation 16(1)(a) (energy information unobtainable before or at the first point of marketing) and regulation 34(2)(a) (first day marketing during a temporary period) to extend until 1st January 2009 the exemptions set out in those regulations.
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A recent refusal of planning permission for a two-storey extension posted on the Charnwood Borough Council website encapsulates the problem and the solution being used by the council:
“The local planning authority is of the opinion that, given the location of the proposed development very close to the university and halls of residence, the accommodation would prove especially attractive for occupation by students […]
“The development would […] offer an opportunity for the uncontrolled expansion of the student population in a part of the town which already experiences a detrimental impact on community balance and of conflicting lifestyles arising from a high proportion of households in that area being student households."
Ian Trehearne, joint head of planning and environment at Berwin Leighton Paisner LLP explains the council has stipulated that it will not allow planning permission for certain types of dwelling, as defined in its Supplementary Planning Document (SPD). But these provisions only apply to new properties or developments because "it would be extremely difficult to roll back to lets which predate the legislative changes, except through enforcement".
Trehearne does not believe that other councils will follow Charnwood’s lead because these changes to the planning laws are the result of local circumstances. "Loughborough is a small place, which has grown a lot and residents are not used to it. These local concerns have been driven electorally."
He highlights that a number of threshold categories have been set up by Charnwood Borough Council including, denying planning permission for purpose-built student housing, and denying planning permission for certain types of building where the intention is to provide housing for more than six people living together.
He explains that "the planning system will be supportive of landlords, but will be less radical than, for example, the affordable housing laws first appeared when they were brought in a few years ago. They are not against second homes."
Trehearne comments that while the detection of new student homes is easy, the detection of older student residence would be more difficult, but despite this, he adds that "there will be something of an attempt to sweep up retrospectively". He believes there is likely to be "a certain amount of denunciation by neighbours", but it will be down to enforcement teams to act on the information they receive.
(23/5/08)
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The Leasehold Reform Act 1967 gives long leasehold tenants the right to buy the freehold of their properties, but this right exists only if the premises can be described as a “house”.
Jacqui Joyce, partner at Thomas Eggar LLP, says: "The issue was whether the property was a ‘house’ within section 2(1) of the 1967 Act. This turned on whether it could be said to be ‘designed or adapted for living in’. As a matter of fact the property was at the time unfit for residential use. The landlord argued that it could not, therefore, be regarded as designed or adapted for residential use."
The trial judge and the Court of Appeal agreed, but the House of Lords overturned the decision.
Joyce explains that the premises had been built in the 1730s as a single private residence and were continually used as such for over 200 years. After the Second World War the three lower floors were used by a dressmaking business and the upper floors were used as residential flats. The commercial part was empty since 1990 and the residential part was empty well before service of the notice in October 2003.
At the date the notice was served by the tenant, the property was vacant and the three upper floors were stripped back to the basic structure by the removal of plaster, ceilings and floorboards and were not capable of being lived in without works being done.
Joyce says: "The House of Lords held (Lord Neuberger) that the fact that the premises were not fit for immediate habitation did not detract from the fact that it had, when first built, been ‘designed’ for living in and nothing had changed that."
"The uppers floors at least ‘were and remain designed to be lived in’ and the lower floors were ‘structurally laid out substantially as they were when the property was in single residential occupancy’. Also the fact that it was adapted for mixed business and residential use did not prevent it being a ‘house’ as the statute imposes no requirement that a house must be solely adapted for living in. Therefore the tenant could enfranchise."
When leasehold enfranchisement was first introduced, says Joyce, there was a “residence” test to ensure that the right was confined to the homes of individual tenants. This residence requirement was abolished by the Commonhold and Leasehold Reform Act 2002.
She says: "This case could be seen as widening the scope of the Act even further. Not only do tenants no longer have to reside in the property, but it has now been held that the premises do not even have to fit for residential purposes to enable enfranchisement."
"While not deciding the point on the facts of this case, Lord Neuberger also went on to state that he thought the definition in the section would include a property which had originally been designed for living in, but had subsequently been adapted for another use (even if totally not partially). He thought that this would qualify because ‘designed’ and ‘adapted’ ‘appeared to be alternative qualifying requirements’." If this were followed, Joyce adds, this could again widen the scope of properties caught by the Act.
Relevant legislation: Leasehold Reform Act 1967; Commonhold and Leasehold Reform Act 2002
Case annotations in other services: Boss Holdings Ltd v Grosvenor West End Properties and others [2008] All ER (D) 244 (Jan)
(16/5/08)
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Home-sellers have been able to market a property without a HIP, as long as the required documents have been commissioned and paid for, or arrangement for payment has been made, and they are expected to arrive within 28 days. The rules were due to change at the end of May, which would have required sellers to complete the HIP, providing details such as title deeds, local searches and an energy performance certificate, before they marketed.
Housing Minister Caroline Flint has now announced that the "temporary first day marketing provisions" are being extended to December 31. The inclusion of leasehold documents will also remain optional until the end of the year. She says the measures were intended to "smooth" the introduction of the packs and a further period of flexibility is "prudent".
The delay comes as figures show that the number of buy-to-let mortgages on the market has fallen by 40 per cent in a month. Only 674 loans are available, compared with 4,025 a year ago, according to the price comparison website MoneySupermarket.com.
The announcement has been met with a mixed reaction from those on both sides of the HIP debate, says Peter Ambrose, director of The Partnership, which produces HIPs for solicitors and estate agents. "HIP providers have been pushing for the scrapping of the ‘first-day-marketing’ exemption, which many saw as a route to secure much needed revenue more quickly. In particular those companies with financial ties to energy performance certificate (EPC) provision recognised that the increased demand for fast delivery of EPCs would provide them with a way to increase prices for their services."
However, he says for those companies wanting to use authorised searches and complete title documentation, the extension of the provisional measures gives them time to build on their services.
Ambrose says they are able to deliver accurate EPCs within two days. "While we would have benefited from the scrapping of ‘first day marketing’ we recognise that in the current climate, anything that may slow down the instruction process must be avoided. The change would have created retraining issues and yet more confusion, during a time when stability and predictability are in short supply."
Critics continue to warn that HIPs are likely to "strangle" the housing market rather than give it stability.
However, Flint says that more than 640,000 HIPs have been produced, the majority within seven to 14 days, while more than 700,000 homes now have EPCs. But she admits: "We recognise that many agents are not showing prospective buyers the HIP and that consumers are not requesting to see it. We have asked the industry to respond to this consumer need by working with us to promote higher and consistent standards of practice that delivers better services to consumers, and to raise consumer awareness of the service standards they should expect and what they can do if things go wrong."
When it comes to leasehold documentation, Ambrose says it is disappointing that its inclusion is to remain optional, arguing it should be a vital part of a HIP.
Ted Beardsall, Deputy Chief Executive of the Land Registry, has been carrying out a short assessment of the scale and nature of the problems with leasehold information. He found longstanding issues in the provision and cost of leasehold information which he said would cause serious difficulties in including all leasehold information before marketing. He is now heading a working group of industry representatives looking at the type of leasehold information that should be required within a HIP so final measures can be introduced from January 2009.
(9/5/08)
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Barrister Patrick Cannon says: "The Land Registry has issued official guidance confirming that no ‘SDLT evidence’ (I take this as meaning the SDLT 5 certificate issued by HMRC following the submission to HMRC of an SDLT return) is now required for the following: an acquisition (other than the grant, assignment or surrender of a lease) where the chargeable consideration for that acquisition (including that for linked transactions) is less than £40,000 – this includes, for example, freehold transfers and easements; grant of a lease for seven years or more where the premium is less than £40,000 and the annual rent is less than £1,000; assignment or surrender of a lease where the lease was granted for seven years or more and the consideration other than rent is less than £40,000 and the rent is less than £1,000; grant, assignment or surrender of a lease of less than seven years where the premium does not exceed £125,000 for residential property and £150,000 for commercial property; and transactions exempt under FA 2003, Schedule 3 — for example, gifts, divorce, etc."
He adds: "The above categories reflect a new section 77A, which contains exceptions from the normal requirement to obtain an SDLT 5 for the acquisition of a major interest in land as a condition of obtaining registration of that interest at the Land Registry."
An SDLT 5 certificate is required for other transactions where registration is applied for, except for non-major interests (these are chargeable interests other than freeholds or leaseholds). Non-major interests require an SDLT 1 return and an SDLT 5 certificate only when they are “notifiable”. A new section 77(1)(b) provides that non-major interests are “notifiable” only if there is chargeable consideration on which SDLT is chargeable at the rate of 1 per cent or higher — that is, over £125,000 for residential and £150,000 for commercial transactions — or would be so chargeable but for a relief. In addition a notional land transaction arising under the general statutory anti-avoidance rule in the Finance Act 2003, section 75A is also now made “notifiable”.
Cannon says: "Where a land transaction that would previously have been registered using an SDLT 60, such as a gift of land, is presented for registration, the Land Registry should accept the application without raising a requisition about why no SDLT 5 accompanies the application if either it is obvious from the application that one of the exceptions in the new section 77A applies — for example, chargeable consideration is less than £40,000, or there is a covering letter confirming that the application relates to a ‘non-notifiable’ land transaction. Otherwise it is likely that a requisition will be raised and the applicant asked to explain why no SDLT 5 is required."
He adds: "It is understood that there are no current plans to alter the Land Registry forms to enable an indication of why no SDLT 5 is required to be given by the applicant. Hence in practice, in some cases at least, the SDLT 60 has simply been replaced by the need for a covering letter fulfilling the same function — so much for deregulation."
Relevant legislation: Finance Act 2003, section 75A
(7/5/08)
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Alan Davis, Competition Partner at Pinsent Masons, says: "The SO is only an intermediary stage in the investigation and represents the provisional findings of the OFT. It sets out the OFT's case against the companies involved and will be the first time that many of the companies will have seen the evidence against them. The SO is made available only to the companies that are caught up in the investigation and its purpose is to enable each company to exercise its rights of defence."
He adds: "Cover pricing must be seen in its proper historic and industry context. It is an outdated industry-wide practice that went on for many years and wasn't generally understood to be illegal by the participants at the time. For the most part, cover pricing did not have an effect on competition in the sense of increasing prices to customers. The purpose of taking a cover price was to enable the company in question to provide a bid that appeared plausible but would not win the work. Yet it would still be close enough to the winning bid so that the firm could stay on the tender list. Crucially, during the tender process there would almost always still be a number of competing tender bids so the winning price would be a competitive price."
Cover pricing arrangements have previously been found by the OFT and the Competition Appeal Tribunal to be illegal and in breach of the Competition Act 1998 due to the restrictions on competition that arise. Under the Competition Act 1998 and article 81 EC, cartels are prohibited. Any business found to be a member of a cartel could be fined up to ten per cent of its worldwide turnover.
Davis says: "The OFT has not at this stage imposed fines on any company but the SO does provide some guidance on how fines will be calculated. It is only when the final decision is published — probably in early 2009 — that the actual fines will be announced. In the meantime, each firm will have more than two months to prepare written representations in response to the SO and, if it wishes, an oral hearing with the OFT case team."
He adds: "The industry has called on the OFT to take into account the minimal effect, if any, on competition arising from the practice of cover pricing and to take a proportionate response when calculating the level of penalties. If penalties are set at a disproportionately high level, it would arguably have a negative effect on competition if contractors were to be put out of business."
The SO also alleges that a minority of the construction companies have variously entered into one or more arrangements whereby it was agreed that the successful tenderer would pay an agreed sum of money to the unsuccessful tenderer (known as a “compensation payment”). These more serious forms of bid rigging are usually facilitated by false invoices.
John Fingleton, OFT Chief Executive, said: "Cartel activity of the type alleged harms the economy by distorting competition and keeping prices artificially high. This investigation, together with the OFT's previous decisions in the roofing sector, will hopefully send out a strong message to the construction industry about the seriousness with which we view suspected anti-competitive behaviour. Businesses have no excuses for not knowing and abiding by the law."
The construction companies under investigation carry out general building work including construction of housing, as well as commercial and industrial construction both in the public and private sector. The SO allegations cover a diverse range of projects, including tenders for schools, universities and hospitals. Davis says: "It would be inappropriate and may breach EC public procurement rules to penalise companies identified by OFT by removing them from tender lists at this stage. Given that this was an endemic practice across the whole industry, it would be disproportionate to penalise only those companies that have been named in this investigation."
Relevant legislation: Competition Act 1998
(1/5/08)
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Articles
1. Housing Renewal Grants (Amendment) (England) Regulations 2008
Number: 2008/1190Enabling power: Housing Grants, Construction and Regeneration Act 1996
Commencement: 22 May 2008
Summary: Further amend the Housing Renewal Grants Regulations 1996, which set out the means test for determining the amount of grant which may be paid by local housing authorities under Chapter 1 of Part 1 of the Housing Grants, Construction and Regeneration Act 1996.
Back to top2. Home Information Pack (Amendment) (No 2) Regulations 2008
Number: 2008/1266Enabling power: Housing Act 2004
Commencement: 1 June 2008
Summary: Amend the Home Information Pack (No 2) Regulations 2007. Regulation 2 amends regulation 10A(1) (leasehold information included during a temporary period), regulation 16(1)(a) (energy information unobtainable before or at the first point of marketing) and regulation 34(2)(a) (first day marketing during a temporary period) to extend until 1st January 2009 the exemptions set out in those regulations.
Back to topPlease note subscribers can go to LexisNexis Butterworths for further details about all the above SIs. Non-subscribers can sign up for a free trial of the online service.
Features
1. Planning laws to curb student lets
After years of consultations, Charnwood Borough Council has brought in local planning laws to help redress the population imbalance in Loughborough by applying a Threshold Approach to specific areas in the town centre and adjoining areas, with a 20 per cent cap on the number of student lets permitted. This threshold is being applied to new properties and/or plans designed to provide accommodation for students. Over the years, residents in Loughborough have registered their unhappiness with the high number of student lets (which in some streets is as high as 92 per cent) and the impact of this on their local community.A recent refusal of planning permission for a two-storey extension posted on the Charnwood Borough Council website encapsulates the problem and the solution being used by the council:
“The local planning authority is of the opinion that, given the location of the proposed development very close to the university and halls of residence, the accommodation would prove especially attractive for occupation by students […]
“The development would […] offer an opportunity for the uncontrolled expansion of the student population in a part of the town which already experiences a detrimental impact on community balance and of conflicting lifestyles arising from a high proportion of households in that area being student households."
Ian Trehearne, joint head of planning and environment at Berwin Leighton Paisner LLP explains the council has stipulated that it will not allow planning permission for certain types of dwelling, as defined in its Supplementary Planning Document (SPD). But these provisions only apply to new properties or developments because "it would be extremely difficult to roll back to lets which predate the legislative changes, except through enforcement".
Trehearne does not believe that other councils will follow Charnwood’s lead because these changes to the planning laws are the result of local circumstances. "Loughborough is a small place, which has grown a lot and residents are not used to it. These local concerns have been driven electorally."
He highlights that a number of threshold categories have been set up by Charnwood Borough Council including, denying planning permission for purpose-built student housing, and denying planning permission for certain types of building where the intention is to provide housing for more than six people living together.
He explains that "the planning system will be supportive of landlords, but will be less radical than, for example, the affordable housing laws first appeared when they were brought in a few years ago. They are not against second homes."
Trehearne comments that while the detection of new student homes is easy, the detection of older student residence would be more difficult, but despite this, he adds that "there will be something of an attempt to sweep up retrospectively". He believes there is likely to be "a certain amount of denunciation by neighbours", but it will be down to enforcement teams to act on the information they receive.
(23/5/08)
Back to top 2. Leasehold enfranchisement
Enfranchisement of long leasehold buildings in commercial use may now be possible following a recent decision by the House of Lords in Boss Holdings Ltd v Grosvenor West End Properties and others.The Leasehold Reform Act 1967 gives long leasehold tenants the right to buy the freehold of their properties, but this right exists only if the premises can be described as a “house”.
Jacqui Joyce, partner at Thomas Eggar LLP, says: "The issue was whether the property was a ‘house’ within section 2(1) of the 1967 Act. This turned on whether it could be said to be ‘designed or adapted for living in’. As a matter of fact the property was at the time unfit for residential use. The landlord argued that it could not, therefore, be regarded as designed or adapted for residential use."
The trial judge and the Court of Appeal agreed, but the House of Lords overturned the decision.
Joyce explains that the premises had been built in the 1730s as a single private residence and were continually used as such for over 200 years. After the Second World War the three lower floors were used by a dressmaking business and the upper floors were used as residential flats. The commercial part was empty since 1990 and the residential part was empty well before service of the notice in October 2003.
At the date the notice was served by the tenant, the property was vacant and the three upper floors were stripped back to the basic structure by the removal of plaster, ceilings and floorboards and were not capable of being lived in without works being done.
Joyce says: "The House of Lords held (Lord Neuberger) that the fact that the premises were not fit for immediate habitation did not detract from the fact that it had, when first built, been ‘designed’ for living in and nothing had changed that."
"The uppers floors at least ‘were and remain designed to be lived in’ and the lower floors were ‘structurally laid out substantially as they were when the property was in single residential occupancy’. Also the fact that it was adapted for mixed business and residential use did not prevent it being a ‘house’ as the statute imposes no requirement that a house must be solely adapted for living in. Therefore the tenant could enfranchise."
When leasehold enfranchisement was first introduced, says Joyce, there was a “residence” test to ensure that the right was confined to the homes of individual tenants. This residence requirement was abolished by the Commonhold and Leasehold Reform Act 2002.
She says: "This case could be seen as widening the scope of the Act even further. Not only do tenants no longer have to reside in the property, but it has now been held that the premises do not even have to fit for residential purposes to enable enfranchisement."
"While not deciding the point on the facts of this case, Lord Neuberger also went on to state that he thought the definition in the section would include a property which had originally been designed for living in, but had subsequently been adapted for another use (even if totally not partially). He thought that this would qualify because ‘designed’ and ‘adapted’ ‘appeared to be alternative qualifying requirements’." If this were followed, Joyce adds, this could again widen the scope of properties caught by the Act.
Relevant legislation: Leasehold Reform Act 1967; Commonhold and Leasehold Reform Act 2002
Case annotations in other services: Boss Holdings Ltd v Grosvenor West End Properties and others [2008] All ER (D) 244 (Jan)
(16/5/08)
Back to top3. HIPs delays
The final roll out of the home information packs (HIPs) has been delayed until the end of the year after the government got cold feet in the face of the fragile property market.Home-sellers have been able to market a property without a HIP, as long as the required documents have been commissioned and paid for, or arrangement for payment has been made, and they are expected to arrive within 28 days. The rules were due to change at the end of May, which would have required sellers to complete the HIP, providing details such as title deeds, local searches and an energy performance certificate, before they marketed.
Housing Minister Caroline Flint has now announced that the "temporary first day marketing provisions" are being extended to December 31. The inclusion of leasehold documents will also remain optional until the end of the year. She says the measures were intended to "smooth" the introduction of the packs and a further period of flexibility is "prudent".
The delay comes as figures show that the number of buy-to-let mortgages on the market has fallen by 40 per cent in a month. Only 674 loans are available, compared with 4,025 a year ago, according to the price comparison website MoneySupermarket.com.
The announcement has been met with a mixed reaction from those on both sides of the HIP debate, says Peter Ambrose, director of The Partnership, which produces HIPs for solicitors and estate agents. "HIP providers have been pushing for the scrapping of the ‘first-day-marketing’ exemption, which many saw as a route to secure much needed revenue more quickly. In particular those companies with financial ties to energy performance certificate (EPC) provision recognised that the increased demand for fast delivery of EPCs would provide them with a way to increase prices for their services."
However, he says for those companies wanting to use authorised searches and complete title documentation, the extension of the provisional measures gives them time to build on their services.
Ambrose says they are able to deliver accurate EPCs within two days. "While we would have benefited from the scrapping of ‘first day marketing’ we recognise that in the current climate, anything that may slow down the instruction process must be avoided. The change would have created retraining issues and yet more confusion, during a time when stability and predictability are in short supply."
Critics continue to warn that HIPs are likely to "strangle" the housing market rather than give it stability.
However, Flint says that more than 640,000 HIPs have been produced, the majority within seven to 14 days, while more than 700,000 homes now have EPCs. But she admits: "We recognise that many agents are not showing prospective buyers the HIP and that consumers are not requesting to see it. We have asked the industry to respond to this consumer need by working with us to promote higher and consistent standards of practice that delivers better services to consumers, and to raise consumer awareness of the service standards they should expect and what they can do if things go wrong."
When it comes to leasehold documentation, Ambrose says it is disappointing that its inclusion is to remain optional, arguing it should be a vital part of a HIP.
Ted Beardsall, Deputy Chief Executive of the Land Registry, has been carrying out a short assessment of the scale and nature of the problems with leasehold information. He found longstanding issues in the provision and cost of leasehold information which he said would cause serious difficulties in including all leasehold information before marketing. He is now heading a working group of industry representatives looking at the type of leasehold information that should be required within a HIP so final measures can be introduced from January 2009.
(9/5/08)
Back to top4. Changes to notification of land transactions
The Budget 2008 announced changes in the Stamp Duty Land Tax (SDLT) requirements for notification of land transactions to HM Revenue and Customs (HMRC). One of these changes was the abolishment of the SDLT 60 self-certificate for all land transactions effective from 12 March this year.Barrister Patrick Cannon says: "The Land Registry has issued official guidance confirming that no ‘SDLT evidence’ (I take this as meaning the SDLT 5 certificate issued by HMRC following the submission to HMRC of an SDLT return) is now required for the following: an acquisition (other than the grant, assignment or surrender of a lease) where the chargeable consideration for that acquisition (including that for linked transactions) is less than £40,000 – this includes, for example, freehold transfers and easements; grant of a lease for seven years or more where the premium is less than £40,000 and the annual rent is less than £1,000; assignment or surrender of a lease where the lease was granted for seven years or more and the consideration other than rent is less than £40,000 and the rent is less than £1,000; grant, assignment or surrender of a lease of less than seven years where the premium does not exceed £125,000 for residential property and £150,000 for commercial property; and transactions exempt under FA 2003, Schedule 3 — for example, gifts, divorce, etc."
He adds: "The above categories reflect a new section 77A, which contains exceptions from the normal requirement to obtain an SDLT 5 for the acquisition of a major interest in land as a condition of obtaining registration of that interest at the Land Registry."
An SDLT 5 certificate is required for other transactions where registration is applied for, except for non-major interests (these are chargeable interests other than freeholds or leaseholds). Non-major interests require an SDLT 1 return and an SDLT 5 certificate only when they are “notifiable”. A new section 77(1)(b) provides that non-major interests are “notifiable” only if there is chargeable consideration on which SDLT is chargeable at the rate of 1 per cent or higher — that is, over £125,000 for residential and £150,000 for commercial transactions — or would be so chargeable but for a relief. In addition a notional land transaction arising under the general statutory anti-avoidance rule in the Finance Act 2003, section 75A is also now made “notifiable”.
Cannon says: "Where a land transaction that would previously have been registered using an SDLT 60, such as a gift of land, is presented for registration, the Land Registry should accept the application without raising a requisition about why no SDLT 5 accompanies the application if either it is obvious from the application that one of the exceptions in the new section 77A applies — for example, chargeable consideration is less than £40,000, or there is a covering letter confirming that the application relates to a ‘non-notifiable’ land transaction. Otherwise it is likely that a requisition will be raised and the applicant asked to explain why no SDLT 5 is required."
He adds: "It is understood that there are no current plans to alter the Land Registry forms to enable an indication of why no SDLT 5 is required to be given by the applicant. Hence in practice, in some cases at least, the SDLT 60 has simply been replaced by the need for a covering letter fulfilling the same function — so much for deregulation."
Relevant legislation: Finance Act 2003, section 75A
(7/5/08)
Back to top5. Alleged bid rigging in the construction industry
As part of its investigation into anti-competitive behaviour in the construction industry, the Office of Fair Trading (OFT) has issued a Statement of Objections (SO) against 112 companies which it alleged have been engaged in bid rigging activities and in particular cover pricing.Alan Davis, Competition Partner at Pinsent Masons, says: "The SO is only an intermediary stage in the investigation and represents the provisional findings of the OFT. It sets out the OFT's case against the companies involved and will be the first time that many of the companies will have seen the evidence against them. The SO is made available only to the companies that are caught up in the investigation and its purpose is to enable each company to exercise its rights of defence."
He adds: "Cover pricing must be seen in its proper historic and industry context. It is an outdated industry-wide practice that went on for many years and wasn't generally understood to be illegal by the participants at the time. For the most part, cover pricing did not have an effect on competition in the sense of increasing prices to customers. The purpose of taking a cover price was to enable the company in question to provide a bid that appeared plausible but would not win the work. Yet it would still be close enough to the winning bid so that the firm could stay on the tender list. Crucially, during the tender process there would almost always still be a number of competing tender bids so the winning price would be a competitive price."
Cover pricing arrangements have previously been found by the OFT and the Competition Appeal Tribunal to be illegal and in breach of the Competition Act 1998 due to the restrictions on competition that arise. Under the Competition Act 1998 and article 81 EC, cartels are prohibited. Any business found to be a member of a cartel could be fined up to ten per cent of its worldwide turnover.
Davis says: "The OFT has not at this stage imposed fines on any company but the SO does provide some guidance on how fines will be calculated. It is only when the final decision is published — probably in early 2009 — that the actual fines will be announced. In the meantime, each firm will have more than two months to prepare written representations in response to the SO and, if it wishes, an oral hearing with the OFT case team."
He adds: "The industry has called on the OFT to take into account the minimal effect, if any, on competition arising from the practice of cover pricing and to take a proportionate response when calculating the level of penalties. If penalties are set at a disproportionately high level, it would arguably have a negative effect on competition if contractors were to be put out of business."
The SO also alleges that a minority of the construction companies have variously entered into one or more arrangements whereby it was agreed that the successful tenderer would pay an agreed sum of money to the unsuccessful tenderer (known as a “compensation payment”). These more serious forms of bid rigging are usually facilitated by false invoices.
John Fingleton, OFT Chief Executive, said: "Cartel activity of the type alleged harms the economy by distorting competition and keeping prices artificially high. This investigation, together with the OFT's previous decisions in the roofing sector, will hopefully send out a strong message to the construction industry about the seriousness with which we view suspected anti-competitive behaviour. Businesses have no excuses for not knowing and abiding by the law."
The construction companies under investigation carry out general building work including construction of housing, as well as commercial and industrial construction both in the public and private sector. The SO allegations cover a diverse range of projects, including tenders for schools, universities and hospitals. Davis says: "It would be inappropriate and may breach EC public procurement rules to penalise companies identified by OFT by removing them from tender lists at this stage. Given that this was an endemic practice across the whole industry, it would be disproportionate to penalise only those companies that have been named in this investigation."
Relevant legislation: Competition Act 1998
(1/5/08)
Back to topArticles
4. Be reasonable
Journal: New Law Journal
Citation: 158 NLJ 729
Issue date: 23 May 2008
Authors: Adam Colenso and Desmond Kilcoyne
Summary: Examines why practitioners should prepare carefully before making Leasehold Valuation Tribunal 1985 dispensation applications
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5. The PAIF: The open-ended sister to the REIT
Journal: Tax Journal
Citation: Issue 934, 15
Issue date: 19 May 2008
Authors: Kevin Ashman and Suzanne Price
Summary: Looks at the conditions of the new property authorised investment funds regime introduced on 6 April allowing investors to combine tax-efficient property investment with the flexibility of investment through an open-ended vehicle
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6. REITs: Practical issues arising on a joint venture
Journal: Tax Journal
Citation: Issue 933, 19
Issue date: 12 May 2008
Author: Bernadette Pope
Summary: Looks at REITs and the practical issues that can arise on a joint venture
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7. Righting a housing wrong
Journal: New Law Journal
Citation: 158 NLJ 656
Issue date: 9 May 2008
Author: Francis Davey
Summary: Examines the issue of tolerated trespassers and how they could be affected by tabled amendments to the Housing and Regeneration Bill
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Please note subscribers can go to LexisNexis Butterworths for further details about all the above SI. Non-subscribers can sign up for a free trial of the online service.
Discount offers
1. How to book and claim discounts
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Law Society Publishing: quote “Property Section” to receive a 20 per cent discount off related titles (excluding directories) via Prolog at The Law Society, PO Box 99, Sudbury Suffolk CO10 2SN, telephone 0870 850 1422, fax 01787 313 995 or email lawsociety@prolog.uk.com.
- LexisNexis Butterworths: quote “Law Society Section discount offer” when ordering via www.lexisnexis.co.uk, customer.services@lexisnexis.co.uk or 020 8662 2000.
This e-alert is not intended to provide comprehensive records of information concerning the property sector. If you have any feedback or suggestions, please email propertysection@lawsociety.org.uk. This e-alert was created in conjunction with LexisNexis UK Legal Updater Service. For further information about any of the articles, please contact claire.melvin@lexisnexis.co.uk. The views expressed by the Legal Analysis interviewees are not necessarily those of the proprietor.
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