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Keeping It Real Estate

News and Trends in UK Real Estate, Disputes and Planning Law

Posted in Real Estate News


The Government has published its long-awaited guidance on the minimum energy efficiency standards regulations that will start to apply to non-domestic properties in April 2018.  We previously blogged on the topic of MEES here back in 2015; a copy of the guidance can be downloaded from here.

The guidance is intended for use by both landlords and enforcement agencies alike, and contains a useful explanation of the way in which the Government intends the regulations to be applied.  It provides a number of helpful, practical examples of the process for deciding whether or not a landlord is required to comply with the regulations for a particular property and what might be covered by exemptions.

It also sheds some light on some of the points that were not clear from reading the regulations on their own.  For instance, it is clear from the guidance that the Government does not intend a landlord to have to comply with the regulations where an EPC has been obtained voluntarily and has not been used for a sale or letting (a scenario that was previously unclear under the regulations).  This means that landlords who have obtained EPCs for their own purposes and have not let the property since doing so will not have to comply with the regulations for that property until they come to grant a new lease, which from 2023 onwards (when the prohibition on “continuing to let” substandard premises comes into force) will be a significant relief to asset managers who were worried that obtaining a voluntary EPC might bring them within the scope of the regulations.

The guidance doesn’t help to clarify the scope of the “consent exemption”, though.  We were hoping for examples scoping out the sorts of unreasonable conditions third parties could impose that would qualify for an exemption, but instead the guidance simply repeats what the regulations say: the condition must be one with which the landlord cannot reasonably comply.  We therefore still don’t know how reasonableness is to be measured in this context.

The guidance also attempts to elaborate upon the confusing position of listed buildings and buildings in conservation areas.  Under the regulations relating to EPCs, an EPC is not needed for a building that is “officially protected as part of a designated environment or because of [its] special architectural or historical merit, in so far as compliance with certain minimum energy performance requirements would unacceptably alter [its] character or appearance”.  The Government has explained that this means that you do not need an EPC for listed buildings or buildings in a conservation area if compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance.  But if compliance would not unacceptably alter their character or appearance, you do.  The Government seems to think that this clarifies matters, but as it still leaves open the question of what an “unacceptable” alteration might be we are in practice really no wiser!

Finally, it is important to note that the guidance on MEES is clearly stated not to be legally binding or a definitive interpretation of the law; instead, the guidance states throughout that appropriate legal advice should be taken by anyone seeking to apply or to comply with the regulations.  As the regulations are complex and the penalties for non-compliance can be severe (up to £150,000 per breach, plus a “publication penalty” intended to deter through the risk of reputational harm – and there’s a section in the guidance on this, too!), we would definitely echo that recommendation.

Posted in Real Estate News

Quit (Illicit) Smoking – new proposals will affect landlords

Landlords could potentially find themselves hit with new lease requirements, periodic checking obligations and even financial penalties following the publication of the ‘Sanctions to tackle tobacco duty evasion and other excise duty evasion’ consultation document by HM Revenue & Customs.

The context

The government is committed to tackle evasion of tobacco duty and the illicit tobacco trade. In 2015-16, the UK consumed around 5 billion illicit cigarettes and 3,200 tonnes of illicit hand-rolling tobacco. Evasion of tobacco duty robs public finances of revenue and undermines the government’s wider public health objective of reducing smoking, which contributes to over 100,000 deaths each year.

What does this have to do with landlords?

Whilst the underground world of illicit tobacco trading may seem remote to landlords, they need to be aware of some key – and potentially onerous – proposals of the consultation.  These proposals  reflects a perception that some landlords are turning a blind eye to their tenant’s behaviour to protect their rental income.

Whilst many leases prohibit a tenant from using the property for any illegal, immoral or improper purpose, HMRC are proposing to write to landlord associations to request that they voluntarily add a clause to their standard lease agreements prohibiting illicit tobacco or excise trading.

More serious is a potential sanction proposed in the consultation which would impose a statutory duty of care on the landlords of properties or land which are used in tobacco (or other excise duty) fraud. The proposals are:

1. The duty of care would only arise once the landlord has been notified that the tenant has evaded an excise duty

2. Landlords who have taken reasonable steps to prevent future wrongdoings on their property would have a defence available (in an effort to minimise the burden on them). Such reasonable steps could include:

  • Including provisions in all new leases making it clear that any illicit tobacco trading or any other illicit excise activity will terminate an existing lease and providing HMRC with copies of tenancy agreements.  It is not clear whether the usual forfeiture clause for breach of covenant would suffice.
  • Requiring the landlord to undertake periodic checks of the premises and request relevant information from tenants.
  • Contacting HMRC or Trading Standards immediately should landlords have any concerns.

3. If the tenant continues to deal in illicit excise trading and the landlord cannot demonstrate that they have taken steps to address the issue, HMRC will consider action against the landlord. A new civil penalty would be introduced for non-compliance.

HMRC hopes this will raise landlords’ awareness of the issue and root out illicit sales of tobacco in their properties.

What happens next?

The consultation document seeks views on whether the proposed steps landlords could take to prevent illicit activity on their properties are reasonable and proportionate. HMRC is also querying what sanctions they should apply to landlords who fall short of their obligations, including whether they should suffer a financial penalty.

Responses to the consultation are due by 12 May 2017.

A copy of the consultation document published by HMRC can be found here to:https://www.gov.uk/government/consultations/sanctions-to-tackle-tobacco-duty-evasion-and-other-excise-duty-evasion

Posted in Real Estate News

Supreme Court decision slashes empty rates bills for developers

The rateable value of commercial premises is generally equal to the rent payable under a hypothetical letting on the relevant assessment date. There are some express statutory assumptions for this – it is to be an annual periodic tenancy and the premises are assumed to be in a reasonable state of repair unless the works required would be uneconomical for the landlord to carry out.  Paradoxically, there is a separate, long standing principle of reality which requires the premises to be valued as they actually exist on the assessment date. How do these two opposing principles fit together?

In early 2010, the owner of a vacant office block embarked on an extensive renovation project, stripping it back to shell and taking out all existing services and systems. The building was listed in the 2010 list as “offices and premises” with a rateable value of £102,000. When this fell to be re-assessed in 2012, it was still vacant. Works were underway, but the re-installation of services was incomplete.

The Court of Appeal found in favour of the valuation officer and held that the statutory assumptions took precedence.

That decision has been overturned this week by the Supreme Court, which decided that the reality principle was overarching. The valuation officer, they said, should have taken a three step approach.  First, he should consider whether the premises were actually capable of occupation in the state they existed on the assessment date. This is an objective test. If they were, the second step is to ascertain the mode or category of occupation. These two steps are based on the reality principle. The third step is to apply the statutory assumptions. If any part of a building undergoing redevelopment is capable of occupation on the assessment day, it can be separately assessed for rates and the statutory assumption of repair would apply to that part. In this case, the works had rendered the whole premises incapable of occupation so the statutory assumptions were not engaged. The building should have been rated as a “building undergoing reconstruction” with a nominal rateable value of £1.

The court dismissed concerns of deliberate avoidance tactics by owners of empty buildings as the Secretary of State has the power to enact regulations to prevent owners benefiting from the removal of services before a rating assessment.

There may now be a rise in factual disputes over the extent of redevelopment works and whether all or part of the premises is capable of occupation, but the decision will be welcomed by developers and property owners alike.

Newbigin (Valuation Officer) v S J & J Monk [2017] UKSC 14

Posted in Real Estate News

Revolution or Evolution – Protect & Survive

The annual Hogan Lovells CBRE Hotel Conference 2017

The threat from terrorism will continue well into the next decade and every country and major organisation needs a counter-terrorism plan. This was the message from Richard Walton our key note speaker and former commander at New Scotland Yard and Head of the Counter Terrorism Command.  The hotel industry needs to be vigilant and ensure in addition to physical security measures such as CCTV and protective bollards, time and money is invested in carrying out detailed risk assessments and, importantly, penetrative assessments (drills to work out how far into a hotel a terrorist attacker could venture before being stopped).

Our next speaker Professor Richard Barkham from CBRE moved the conversation on to the economic threats facing the industry. Despite the seismic geopolitical events of 2016 and more of the same to possibly follow in 2017 with the rise of non-centrist parties in Europe, Richard’s comforting view was that it was the more predictable business cycle rather than world events that determines hotel trade. Looking at past data there was a “very clear” inverse trend between RevPar and unemployment. We are currently approaching full employment and RevPar – trade is likely to continue to improve, but we may reach the peak of the cycle in late 2018. The advice to hoteliers is not to shut up shop but get your balance sheet in order.

There has been occupancy and RevPar growth in 2017 in both the London and regional UK markets, according to data from David Bailey, Senior Director of CBRE Hotels. In 2017 more than 12,000 new rooms are going to come on stream and this will be one of the biggest supply jumps for a long time. New supply appears to be concentrated in regions such as Manchester and Edinburgh and also focused on the budget hotel and serviced apartments sector.

Katie Dunn of Hogan Lovells provided an outline of issues and recent regulations on cyber security – more information can be found at our dedicated cyber security website http://www.hoganlovells.com/en/knowledge/topic-centers/cybersecurity-solutions. Angus Coulter, head of our Antitrust Competition Practice also gave an update on the latest thinking on competition and rate parity issues relevant to the industry. Jane Lees, head of EMEA Valuations at CBRE looked at the net initial yields achieved on major hotel deals in 2016.

Andrew Sangster, editor of Hotel Analyst, moderated a panel with Terri Scriven (Head of Hospitality Google), Thomas Dubaere (MD of AccorHotels), John Brennan (CEO of Amaris Hospitality which is owned by Lone Star)) and Ufi Ibrahim (CEO of British Hospitality Association). The panel looked at how threats create opportunities.

• Thomas – following Brexit the UK hotel market has continued to do well but the industry needs to be passionate and customer-guest centric. It also needs to invest in its people and cannot rely on the government – Accor has its own academy for training staff. Accor is also diversifying and investing in technology platforms in the private rented sector. Further, it is creating communities in previously idle hotel space – an example is a coffee shop entrance instead of a lobby at its recent Cambridge hotel and encouraging customers who are not guests to come into hotel and use lobby space for meetings and social gatherings.

• John – there has been so much chatter on Brexit and businesses are coming to the conclusion they need to stop talking and get on with developing and managing their business. The hotel sector also needs to actively engage with the government on the way ahead.

• Ufi – continued the idea of engagement with the government by saying immigration policy post Brexit is the single biggest threat to the industry –  15% of the industry or approximately 700,000 workers are EU nationals who would not be entitled to remain in the UK under the current work permit system. The hotel industry needs a minimum of 50,000 new workers a year for growth and to cope with churn. The government understands this and has suggested it will try and obtain a 10 year transition period following Brexit, but this is likely to come at a cost with the government demanding that the industry invests in training and hiring UK staff and contributing towards border protection.

• Terri – highlighted that the hotel sector has not made full use of technology and using this to optimise the customer experience and efficiency in the same way as other sectors. Google searches for Airbnb and holiday rentals are growing at 12-13% per year while google searches for traditional hotels are only increasing around 8-9% a year.

Jackie Newstead, our Global Head of Real Estate and partner in the hotels practice, surveyed the delegates’ views and found them optimistic about the prospects of the operating and investment market in the coming year.

Posted in Real Estate News

The Construction Industry Scheme: Change in the air?

What does real estate investment have to do with the problem of tax evasion made possible by cash-in-hand payments in the building industry?  Very little, one might suspect, but that has not prevented real estate investors becoming the unintended casualty of a withholding tax introduced in the 1970s to target tax fraud among builders.  A concerted effort has now been made to lobby for sensible improvements, spearheaded by the Chartered Institute of Taxation.

The Construction Industry Scheme (CIS) requires deductions to be paid to HMRC when payments are made under certain construction contracts, similar to the way that employers are required to make deductions when operating payroll in respect of employment contracts.  By securing tax revenue at the source of payment, the risk of tax loss on undeclared income is reduced.

Two factors have resulted in the CIS becoming a misplaced administrative burden for real estate investment.

First, the law as written could apply very broadly, including (at least potentially) to situations where a landlord and tenant agree as part of lease negotiations that the tenant will undertake works going beyond ordinary fit-out works and which therefore benefit the landlord.  Any landlord’s contribution to those works may fall within the scope of the CIS.  The result has been large, institutional investors devoting material amounts of time and effort to comply with a counter-evasion regime at odds with the context in which they operate.

Second, HMRC’s commendable work engaging with taxpayers and providing bespoke rulings to make up for the deficiencies caused by that drafting has allowed the situation to remain just about tolerable for many years.  Nonetheless a great many landlord and tenant transactions have been subjected to disproportionate delays and additional costs as parties grapple with the CIS.

The Chartered Institute of Taxation has recently made a public submission to HMRC urging a change in the law that would make the CIS more targeted, removing ordinary landlord and tenant activity from its scope.  The submission is, in our view, an excellent piece of work and Hogan Lovells’ tax team has provided evidential support for it to HMRC.

The real estate sector will remain hopeful that HMRC applies the same energy to tackling this issue at its legal source as it has done in coping with its day-to-day fall-out.

A copy of the submission can be found here.

Posted in Real Estate News

IPF Launches Template Non-Disclosure Agreement and Exclusivity Agreement

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is typically entered into between parties who need to share confidential information with each other in order to evaluate it, typically as a prelude to an acquisition or a merger.  An NDA sets out the terms on which the information is being disclosed and imposes obligations on the receiving party to keep the information confidential.  NDAs can be unilateral (where one party is receiving the information from another, but not disclosing any confidential information itself) or bilateral (where both parties are disclosing confidential information to each other).

An exclusivity agreement (EA) prevents the parties to it from negotiating in respect of a proposed transaction with other parties for an agreed period of time – typically to enable them to agree specific terms or carry out due diligence.  An EA does not legally bind either party to conclude a deal with the other, but it does provide breathing space to do so.  Where one party is committing to significant professional costs, an EA may be a shrewd move.

The problem is that both NDAs and EAs can be heavily negotiated in their own right and can distract the parties from the deal itself.  There are common terms which parties will seek to include and compromise positions which are often agreed.

In an effort to streamline the process, the Investment Property Forum formed a working group to produce a template NDA and a template EA which they hope will be acceptable to both sides of the agreements with minimal amendment.  The NDA and the EA (and the accompanying guidance notes) can be downloaded from the IPF website here. In particular the IPF seems to have its eye on overseas investors who they hope will take comfort from knowing that the agreements are acceptable in the UK market.  The IPF states that the templates have been:

“created to represent what the IPF believes is a fair and reasonable position for both parties and reflecting general market standards at the current time.”

Historically, the real estate industry has not been quick to adopt standard form documents as evidenced by successive attempts to standardise commercial leases.  However, NDAs and EAs do not create long term relationships between parties so in theory, at least, they should be less controversial.  The acid test is likely to be what happens where one or both parties have their own standard documents, which may not have been created specifically with real estate in mind.  This scenario is recognised by the IPF, but their hope is that use of the templates will become standard across the industry in keeping with their mission:

“to enhance the efficiency and liquidity of real estate as an investment asset class.”

No one in the industry would argue with the merits of that mission.

Posted in Real Estate News

New Law on Revenge Evictions Goes Cold

The BBC reported this week that fewer than half of the local authorities in England have been called upon to prevent so-called “revenge evictions” since new laws came into force on 1 October 2015.

The headline implies that councils might be failing to exercise new statutory powers intended to protect assured shorthold tenants from unscrupulous landlords, but the reality is more likely to be that tenants just aren’t aware of the new law, or about the steps that they themselves need to take in order to take advantage of the new statutory protection.

The new law is set out in section 33 of the Deregulation Act 2015.  Its purpose is to prevent landlords from using section 21 notices to evict their assured shorthold tenant, in apparent retaliation for the tenant having complained about the condition of their property.

Landlords are required to use section 21 notices (under the Housing Act 1988) to recover possession of property let on an AST following its expiry or on an earlier break date.  In much the same way as a landlord is prevented from recovering possession if it has failed to comply with the tenancy deposit scheme , the “retaliation eviction” rules prevent the landlord from recovering possession from a tenant who has raised a legitimate complaint, notwithstanding that the contractual term of their tenancy might have expired.

However, under section 33 the tenant will only obtain protection from eviction if they have gone through specific steps before the landlord’s section 21 notice was served, as follows:

1. First, making a complaint in writing to the landlord about the condition of the property, which the landlord fails satisfactorily to deal with within 14 days;

2. After those 14 days, making a fresh complaint to their local housing authority about the same problem;

3. Obtaining from the local housing authority in response to that complaint an Improvement Notice or a Notice Requiring Emergency Remedial Action (both under the Housing Act 2004), served on the landlord.

Only once the landlord has received an Improvement Notice or Notice Requiring Emergency Remedial Action, will the landlord’s right to serve a section 21 notice be suspended, for a period of 6 months.  As a section 21 notice must give at least 2 months’ notice to the tenant, this regime should afford the tenant at least 8 months’ further enjoyment of their property from the date on which the local authority’s notice was served on the landlord.

In order for these new protections to operate successfully, assured shorthold tenants should ensure that they are aware of their rights, and of the need to make formal complaints to both their landlord and the local housing authority.

There are also clear lessons for landlords, here, too.  Not only should landlords ensure that their let properties are habitable and in repair, but they should also ensure that if they receive a complaint from their tenant, they provide an “adequate response” within the meaning of section 33, in good time. That is: they should provide within 14 days a written description of the remedial action they intend to take, and they should set out a reasonable timescale in which to carry it out.

Posted in Planning

Draft Airports NPS takes off…

On 2 February 2017 the Government published its highly anticipated draft Airports National Policy Statement (“NPS”) alongside a consultation on the contents of the draft NPS.

The draft NPS

The draft NPS will, if adopted, provide the primary basis for decision making on applications for development consent for a Northwest Runway at Heathrow Airport.

Although its name suggests that the NPS will apply broadly to airports, the document’s main concern is with development at Heathrow.  For applications for new runway capacity and airport infrastructure elsewhere in London and the South East it is an “important and relevant consideration” akin to a material consideration when determining applications under the 1990 Act.  So although it doesn’t carry quite the same weight for development away from Heathrow as it does for the Northwest Runway, it remains significant nonetheless.

The draft NPS sets out:

– why the Government sees a strong need case for new airport capacity in the South East in order to secure the UK’s status as a global aviation hub;

– the case for the Heathrow Northwest Runway as the Government’s preferred scheme, building on the long-awaited “preferred option” announcement in October 2016;

– the various principles against which applications for development consent relating to a Northwest Runway at Heathrow will be decided; and

– in relation to the potential impacts of the development of a Northwest Runway, the assessments that the applicant will need to carry out, and the specific planning requirements that the applicant will need to meet, in order to attain development consent.  As one would expect in relation to development of this nature, air quality, carbon emissions and noise issues feature strongly, and the draft NPS devotes much time to mitigation measures, community engagement and compensation.

Interestingly, the draft NPS was published shortly after the High Court struck out a claim for the judicial review of a decision by the Government to select for inclusion in a draft NPS a proposal for a third runway at Heathrow.  Cranston J. held that proceedings can only be brought in the six week period after designation of the NPS, so in this case the High Court had no jurisdiction to hear the claim.  As the NPS isn’t expected to be designated until late 2017 at the very earliest, any potential claimants will have to sit tight for now.


Together with the draft NPS the Government has published a consultation document which contains nine open questions seeking views on the key issues dealt with in the draft NPS.  In addition to the written consultation, the Government will hold a series of 20 local and 13 nationwide consultation events.  The local events are open to all whilst the nationwide events will be open to invited stakeholders.

The Government clearly has an eye on the importance of the consultation and its potential to be contentious and has appointed Sir Jeremy Sullivan, the former Lord Justice of Appeal, as an independent consultation adviser.  Sir Jeremy’s role will be to provide oversight of the process, ensure that best practice is upheld and to raise any concerns about procedure with the Secretary of State.

The consultation period closes on 25 May 2017.  The draft Airports NPS is available here and the consultation document is available here.

Posted in Real Estate News

Falling Foul of Flying Freeholds

A mental image of a building sprouting wings and taking to the sky is one way to picture a flying freehold, but mention the phrase to most property lawyers and their hearts will sink. Discovering a flying freehold raises alarm bells because, without appropriate reciprocal rights between adjoining owners, they can leave both owners exposed.

What are flying freeholds and do they really need to cause such fear?

Put simply, a flying freehold is part of a freehold property that either reaches into or is built over a neighbouring property. The flying freehold owner owns the “flying” part, but not the land or buildings beneath it.

The difficulties stem from the fact that, without express agreement, each land owner has very limited rights in relation to the other’s land.  In particular they cannot force the other owner to maintain or repair their property, even if the flying element is structurally dependent on the other land, or where a flying element in disrepair risks damaging the adjoining property. In these circumstances, financing either property may be difficult as lenders will want a clean title certificate. Problems can also arise where one owner wants to redevelop or carry out works because rights of access can be limited. These problems apply equally to the owner of the flying element and the owner of the adjoining land.

In the absence of express rights and obligations, there are a number of options:

1. Title indemnity insurance

Typically insurance would cover loss of value following damage due to lack of repair of the adjoining property and costs incurred in prosecuting the adjoining owner. However, it does not resolve the fact that there are no access rights and insurance may be invalidated by any redevelopment or structural alterations

2. A new mutual agreement

A mutual agreement can be put in place between the two owners, documenting the reciprocal rights and obligations. As with any positive covenant, the agreement would only bind future owners if they agree to be bound by it when they acquire the property. This can be built into the agreement and backed up by a restriction on the title register.  However, the process of putting an agreement in place may be time consuming and costly, particularly where there is little or no incentive for the non-selling owner to co-operate quickly

3. Alternative structure

It may be possible to convert the flying freehold to a leasehold structure so there is only one freehold out of which a long (999 years) lease is granted to the adjoining owner. The advantage of this is that the appropriate rights and positive covenants can be included in the lease and will not be affected by a transfer of the freehold or leasehold interests.  However a lease may also be time consuming and costly to negotiate and tax structuring advice should be sought at an early stage.

In June 2011, the Law Commission recommended revising the law of easements and introducing the concept of a “legal obligation”. This would make it possible for the benefit and burden of positive obligations to be enforced by and against subsequent owners. So far as flying freeholds are concerned, this would simplify and make more attractive a mutual agreement as it would avoid any concern that those obligations could be lost over time. It was announced in the Queen’s Speech in May 2016 that the Government will bring forward proposals to respond to the report; however, any progress appears painfully slow and no change is on the immediate horizon.

In the meantime, identifying flying freeholds early on in a transaction is key. This is not always easy or obvious and careful analysis of the plans of the building may be required. After that, there are various options to address the risks but they may take time to implement and a wary lender’s views should be considered early.  With careful thought a flying freehold need not result in the death of the deal.

Posted in Planning

HS2: chugging towards its final destination

The government has now issued its formal response to the House of Lords’ special report on the hybrid bill for HS2, issued in December.  Whilst much of this relates to specific petitioners it also includes some important changes to the bill relating to the government’s powers of compulsory purchase, compensation and engagement with landowners.

From the first publication of the draft bill there has been concern about the breadth of the government’s proposed powers of compulsory purchase.  In particular, where the central government considered that the construction or operation of HS2 had given rise to “the opportunity for regeneration or development” of land, the bill gave it powers to compulsorily acquire that land.  These unprecedented powers were not subject to any spatial or time limits, and were also seen by many as the government trying to ensure that it had “first dibs” on any uplift in land value created by HS2.  If the government could demonstrate that HS2 had unlocked the development potential for the land, it would be entitled to compulsorily acquire it and the landowner would only be entitled to the pre-HS2 value of the land.

Some commentators accused the government of trying to make a profit from the HS2 regeneration opportunities at the expense of local authorities and land owners, although the government said the powers would not be used in this way.

In their report, the Lords concluded that it was “not sound law-making” to grant such wide ranging powers based only on ministerial statements that they would only be used as a measure of last resort, without a statutory guarantee.  As a result the provisions were struck out.

The government has confirmed that these provisions will not be reinstated and instead they will rely on local authorities to ensure that all regeneration opportunities unlocked by HS2 are delivered.

Other points of note are:

  • The compensation package will be improved for those living in certain urban areas and affected by severe and prolonged noise and other disturbances during construction. The government has said that this will “provide a fair and proportionate remedy” for the HS2 construction effects on these owners.  This is a positive move to redress the balance between urban and rural property owners, as previously rural owners were in a better position when seeking compensation for disturbance during construction; and
  • Many petitioners complained that government engagement with land owners on HS2 was often “sporadic and frustrating”.  In response the government has established a new Community Engagement Directorate which will be tasked with dealing with public responses, including looking at ways to develop “genuine and timely two-way engagement.”