Solicitors stifle an inner groan when they learn that the rural cottage or estate they are instructed to sell is fed by a private pipe from the mains (a private distribution network (PDN)) or a private water supply (PWS). Either are likely to make problems in a sale, unless the difficulties can be addressed early.
A landowner, Mr Crocus, wishes to sell Snowdrop Cottage which is served by an old private waterpipe. From the mains supply on Thorn Road the water pipe crosses an arable field (once owned by Mr Crocus), connects to Snowdrop Cottage and goes on to serve three other nearby cottages previously owned by him. Mr Crocus’ long-suffering land agent reads the water meter at the mains, is invoiced by the utility company for the water consumed and claims reimbursement from the cottages. It all takes forever and everyone grumbles that the water “tastes funny”.
Snowdrop Cottage is the last property owned by Mr Crocus in the area and he wishes to be rid of the responsibility of invoicing the cottages. Unfortunately, his solicitors seem to have ignored the private pipe in all previous sales so there are likely to be difficulties with the sale. A potential buyer will be concerned about the lack of express legal easement for the pipe over the field between the cottage and the road. If the pipe leaks, who is responsible for repair? Does Snowdrop Cottage even have a right of entry to repair? Who is responsible for any damage to the farmer’s crops? A buyer may be reluctant to take on the task of the management of the PDN, including the burden of billing the other cottages. A buyer may also worry that the PDN constitutes a ‘Regulation 8 Supply’ (under the Private Water Supplies Regulations 2016) such that the local authority will be concerned to include it within its risk assessment and monitoring programme.
What to do? First, establish the facts. This may mean a review of the title, an inspection of the property and a basic services plan to show the PDN route. These will inform the drafting of cross rights in the transfer (if required). Defective title indemnity insurance may be an option in relation to the lack of legal easement, but it is not a solution to all the questions above. It may be worth approaching the farmer to see if he will grant a new easement for the pipe across the field. Another option to explore might be to require the buyer to disconnect and find an alternative water source, perhaps by connecting directly to the mains with a new pipe or even by installing a borehole. These obligations can be supported in the sale contract. If these are not possible, can the utility company be persuaded to adopt the PDN? An alternative would be to sell Snowdrop Cottage with the problem unresolved and an obligation on the buyer to administer the water supply in the sale contract. This approach might make the sale suitable for an auction (where buyer due diligence is often limited).
The Bluebell Estate
The Bluebell Estate has three large farms and ten cottages. The farms and cottages all obtain their water supply from the PWS which rises from a source on Primrose Farm in the heart of the estate, is pumped to a reservoir and then distributed by gravity along a network of pipes. The estate is owned by Lady Daffodil and let out to tenants. Lady Daffodil bills her tenants directly for their water consumption and her estate manager arranges all repairs and maintenance. That said, the PWS is beset by the usual problems: the running costs and capital expenditure to comply with PWS regulations increases every year, the tenants are late in paying licence fees, which always fall far short of the running costs, a dead sheep was found in the pump room last summer – it all keeps Lady Daffodil awake at night.
Then Lady Daffodil dies, her executors are forced to sell the estate and the PWS presents a problem. If, as seems likely, the estate is sold in three main lots corresponding to the three farms, the PWS infrastructure would be split between the separate farms, complicating ownership and management of the PWS in the eyes of potential buyers and driving down the purchase price. The other two farms would be entirely dependent on Primrose Farm for their water supply. It would be legally and practically extremely difficult to place a buyer of Primrose Farm under a positive obligation to continue to provide a supply of water to the other farms in a manner satisfactory to all parties. A purchaser of Primrose Farm would not be attracted by the obvious potential liabilities that come with managing the PWS for the benefit of other users.
One solution is to set up a special purpose vehicle (SPV) to take a transfer of all the parcels of land on which the PWS infrastructure sits (the water source, reservoir and pump room). This can be done by a long lease of rights (say, 125 years at a peppercorn rent) which also grants the right to use all the pipes and other PWS apparatus. When the ownership of the estate is split up by a lotted sale the transfers will be subject to the PWS long lease.
The SPV (incorporated as a limited company with bespoke articles appropriate to its function) will be owned jointly by the new owners of the separate parts of the estate. Buyers become shareholders and each will have the right to appoint a director to the board. Day to day running of the SPV (and therefore the PWS) can be delegated to one director or a third party manager. Users of the PWS will enter into licence agreements with the SPV, under which they make their annual contributions to meet running costs in the same way as happened with Lady Daffodil.
This approach solves a number of problems. It is both simpler and quicker to sell the estate in lots because the PWS is owned by one body. Each sale is subject to the existing rights of the SPV and there is nothing to negotiate in the sale documents. This structure also affords limited liability to the buyers of the estate which is attractive for obvious reasons. Ownership of the PWS by a limited company provides a single administrative unit and cost centre for the running of the PWS. The users pay their licence fees to the company, but they also manage the company as directors and the company is accountable to them as shareholders.
If you require further information about anything covered in this briefing, please contact Katy Grylls or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2021