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Keeping It Real Estate

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

Posted in Real Estate News

Rateable value: The Supreme Court departs from reality

The Supreme Court has decided that a rateable value of £370,000 should be entered into the ratings list for an office block in Blackpool despite there being “no actual tenant willing to pay a positive price for the building itself“.

Ascertaining rateable value

In order to work out what the rateable value of a property is, a valuation officer will need to work out what the open market rent would be for the property, by applying what is known as the rating hypothesis. The purpose of the rating hypothesis is to ascertain “the rent at which it is estimated the hereditament might reasonably be expected to let from year to year“.

For the purposes of the 2010 non-domestic ratings list, effective from 1 April 2010, the relevant valuation date at which to apply the rating hypothesis is 1 April 2008, known as the ‘antecedent valuation date’ (AVD).

Background

The property in question is known as Mexford House, an office block in Blackpool and was occupied for a number of decades by various Government departments. As of 1 April 2008, Mexford House was still occupied by two of these departments, but they had given notice to vacate, and subsequently vacated on 31 March 2009.

When the 2010 ratings list came into force, the valuation officer (Hewitt) entered a rateable value of £490,000 into the list for Mexford House, on the basis that there were similar office buildings in the local area that were occupied at similar rents. The landlord, Telereal, appealed to the Valuation Tribunal and the rateable value was reduced to £1, on the basis that there was no market for the property.

By the time that the case reached the Supreme Court, the parties were in agreement that:

  • nobody in the real world would have been prepared to occupy the property” as at 1 April 2008, because the market was “saturated“;
  • there were similar properties in the area that were let for significant rents; and
  • if the valuation exercise required to be undertaken to ascertain rateable value was allowed to take into account the general demand in the area for comparable office buildings, although there was no actual demand for Mexford House as at the AVD, the rateable value of the property should be £370,000.

The decision

The issue for the Supreme Court was whether, when ascertaining the rateable value of a property, the general demand for property in the area should be taken into account, notwithstanding there being no actual tenant willing to pay more than a nominal rent for the property in question.

The Supreme Court concluded that whether the property is occupied or unoccupied, or an actual tenant has been identified, as at the AVD, is “not critical“. The valuation hypothesis assumes a willing tenant, even in a “saturated” market.

In relation to the level of rent that a tenant is willing to pay, the Supreme Court considered that “there is no reason why…it should not be assessed by reference to ‘general demand’ derived from ‘occupation of other office properties with similar characteristics’ “.

Therefore, the Supreme Court directed that Mexford House should be entered into the ratings list with a rateable value of £370,000.

Comment

It is, of course, unusual for there to be general market demand for a type of property, but no actual demand for the property in question, so in practice the departure from reality seen in this case will not occur that often.

However, the decision itself does seem counter-intuitive. The predominant purpose of the rating hypothesis is to ascertain the market rent for a property at a specific point in time. Notwithstanding that predominant purpose, in this case the result is a significant departure from reality and seems all the more unsatisfactory given that both parties were agreed that there was no “real world” demand for Mexford House.

Telereal Trillium (respondent) v Hewitt (Valuation Officer) (appellant) [2019] UKSC 23

 

Posted in Real Estate News

Open for Business – ESOS Phase 2

Regular readers may recall that we have previously blogged a fair bit on the Energy Savings Opportunity Scheme (“ESOS”).  Phase 1 finished at the end of 2015 and we are now getting close to the end of Phase 2, as the final date for compliance is 5 December this year. See links to previous blogs for more on what ESOS is and what participants have to do.

We fully anticipate a last minute rush in Q4 of this year, just as we saw in Q4 2015, but participants that can get ahead of the curve should get better quality audits and will have plenty of time to ensure that they have complied in full, especially where careful analysis of complex corporate group and/or property ownership structures is required. Better also to implement sooner something that may actually save energy and money.

The good news for those wanting to get on with their compliance is that the Environment Agency has announced details of the new notification system for Phase 2 of ESOS and it is available for participants to use.  It replaces the existing Phase 1 notification system, which is now closed.

To make a Phase 2 notification you can now do so at https://www.gov.uk/guidance/energy-savings-opportunity-scheme-esos – and if you need to make a Phase 1 notification then you should contact the ESOS helpdesk at ESOS@environment-agency.gov.uk, who will be able to explain the process to you.

The Phase 2 notification process is, apparently, similar to the Phase 1 system, but there are two significant changes.

First, it is now possible to tell the Environment Agency that you do not qualify for ESOS using the new built-in option for this (previously you were directed to a separate system).  The visuals below summarise the qualification criteria.

And secondly, you can now upload a list of all the organisations in your participant group, either as a standard template (which is downloadable from the notification system) or in any other format you like, such as a group structure chart.

Remember, if you are a participant, the final date for compliance with ESOS Phase 2 and making your notification is 5 December 2019.  Phase 2 audits must have been carried out and compliance reports submitted by then.

A major problem in the run up to the original Phase 1 deadline (5 December 2015) was the difficulty that participants had in finding lead assessors and auditors to carry out their audits.  We therefore suggest that participants should get ahead of the crowd and start work on their audits as soon as possible.  In particular, it would be sensible to engage now with preferred auditors and lead assessors while they still have capacity to undertake the necessary work.

Qualification Criteria for ESOS

Note that:

  • a corporate group must participate as a whole if one or more of the companies in it is large enough to fall within ESOS; and
  • ESOS does not distinguish between property investors, developers, occupiers or funders, so any business that is large enough to meet the qualification criteria must participate in it.

Simon Keen
Counsel, London
E: Simon.keen@hoganlovells.com
T: +44(0)207 296 5697

 

 

Posted in Real Estate News

Three Words that mean so much

What is the easiest way to locate a specific point on a map? It’s a question that is increasingly vital to many sectors of the economy, from your Amazon delivery driver (or drone operator) to the tourism industry. At its most extreme, the speed and ease of finding a location can be the difference between life and death for emergency services or aid agencies operating in densely-populated or remote regions.

In developed countries such as the UK, using addresses with specific postcodes simplifies such navigation. However in other parts of the world, it is not such an easy exercise – try finding your way to a specific address in Venice or to a remote part of Antarctica without resorting to map co-ordinates.

But a UK technology company, What3Words, now offers a simpler solution: a universal method for describing a location in any part of the world.

How does it work? What3Words has divided the globe into notional squares, each measuring 3 x 3 metres. There are 57 trillion squares in total, covering the whole of the surface of the earth, including all oceans, the Arctic and the Antarctic. Each square has been assigned a unique and fixed three word address. The three-word address will never change and you can’t request or purchase specific words. By using the What3Words app, you can use this three word address to identify a specific point on a map.

It takes around 38,500 words to generate unique three-word addresses for all 57 trillion squares. There are over 100,000 English words so the system cuts out offensive and complex words and homophones (eg see and sea). Addresses are intentionally randomised and unrelated to the squares around them, with similar addresses as far apart from each other as possible to avoid possible confusion (for example, the three-word address birds.dogs.pigs is in Minnesota, USA whereas grid.logs.twig is off the coast of Auckland, New Zealand). The system is currently available in 26 languages and the company is working on extending it to more.

Who uses it? According to the company, What3Words is now being used in over 170 countries by individuals, business and NGOs across a variety of industries. Current users include:

  • The United Nations and Red Cross for disaster reporting and humanitarian aid projects.
  • Emergency services and postal systems around the world.
  • Drone operators to set destinations accurately, making drone deliveries and inspections more achievable.
  • The tourism and hospitality industry to help customers navigate to specific locations.
  • Asset managers to identify accurately items (such as lighting) or parts of buildings which require attention.

By a happy twist of fate one of the What3Words addresses for our London office is Truly.Offers.Answer. What is yours?

Posted in Real Estate News

What is Net Zero Carbon?

The issue of climate change couldn’t be more topical. But what is “net zero carbon”? Is it just another buzzword and what does it really mean? The UK Green Building Council has this week published its Framework Definition on Net Zero Carbon Buildings. To see a copy of the new Framework Definition click here and to understand how it will work in practice read on. This document is a critical first step in the UK property and construction industry’s aim to make new and existing buildings net zero carbon by 2050.   Political, investor and popular pressure is driving the real estate industry in this direction, and the transition to net zero carbon buildings is seen as a key part of ensuring that investments are “future-proofed”. Whether you are a developer, an investor, an occupier or a funder of real estate, the UKGBC’s framework is well worth a read, and is an important contribution to this vital ongoing conversation within our industry.

In her introduction, UKGBC Chief Executive Julie Hirigoyen describes climate change as “undoubtedly the greatest challenge of our times” and explains that “we need to take urgent action to almost halve global emissions by 2030 and eliminate them completely by the middle of the century“. That is a commendable aim, but the industry lacks consensus on how it should be achieved. The UKGBC’s framework tries to address this in a practical way: by providing an overarching framework of consistent principles and metrics that can be integrated into tools, policies and practices. This should enable the industry to build the consensus that is needed.

It does this by setting out two definitions of “net zero carbon”, one that applies to construction and the other that applies to operational energy. A building is net zero carbon in construction “when the amount of carbon emissions associated with [its] product and construction stages up to practical completion is zero or negative, through the use of offsets or the net export of on-site renewable energy.” It is net zero carbon in its operation “when the amount of carbon emissions associated with [its] operational energy on an annual basis is zero or negative” and if it “is highly energy efficient and powered from on-site and/or off-site renewable energy sources, with any remaining carbon balance offset.

The framework also describes three overarching principles, which are:

  1. “the polluter pays”, i.e. whoever is responsible for creating emissions should also be responsible for the costs of addressing them;
  2. measurement and transparency should be improved, so that as far as possible building emissions should be based on measured rather than estimated data, using the most accurate data available; and
  3. action should be encouraged today, with the requirements tightening over time, in order to ensure that a “whole life carbon approach” is taken.

These two definitions and the three overarching principles are then applied in five steps to achieving a net carbon building. These steps represent the “whole life carbon approach” and so not all of them will be relevant to every building all of the time.

The first step is to establish the net zero carbon scope. This is not just a question of deciding which definition to use, but also to identify the boundaries of what is being measured, depending on how much operational control the building owner has in practice.

The second step is to reduce construction impacts (which can only apply where the first definition is being used and the building is being newly constructed or undergoing a major refurbishment).

The third and fourth steps are to reduce operational energy use and to increase renewable energy supply. Whilst these are mainly operational matters, they are still relevant to construction because the framework requires that new buildings and major refurbishments are designed to achieve operational net zero carbon by considering them. The fifth step is to offset any remaining carbon. These three steps have been deliberately ordered so that the priority is to reduce energy demand and use, to supply any remaining demand from renewable sources as far as possible and only then to offset carbon.

The framework also contains a number of areas for “future development”, where standards can be raised and additional processes developed to assist and measure performance. The framework cannot be static, and there is a clear intention to update and improve it regularly over the next decade, “in order to increase robustness and provide sufficient stretch for industry to lead the transition to net zero whole life carbon buildings“.

 

Posted in Real Estate News

Raising living standards in rented homes

Did you know that prior to 20 March 2019 there wasn’t an automatic legal right for tenants to live in a home fit for human habitation? That is no longer the case following the advent of the Homes (Fitness for Human Habitation) Act 2018.

Now, residential rented accommodation must be provided and maintained in a state of fitness for human habitation.  Until the new Act came into force an anomaly existed:  a landlord was obliged to repair a property but not obliged to bring a property up to a standard fit for habitation unless it was let on a very low rent or the property was in disrepair.  Disrepair was measured according to the standard of a property at the start of a tenancy. So, if a property was damp at the time of the letting, a landlord did not need to improve it even if it was so defective that it wasn’t fit to live in.

What is unfit for habitation? 

Accommodation will be considered unfit for human habitation if it is so far defective in one or more of the following categories that it is not reasonably suitable for occupation:

  • repair;
  • stability;
  • free from damp;
  • internal arrangement;
  • natural lighting;
  • ventilation;
  • water supply;
  • drainage and sanitary conveniences;
  • facilities for preparation and cooking of food and for the disposal of waste water;
  • any prescribed hazard (meaning a hazard posing risk of harm to the health or safety of an occupier which arises from a deficiency in the property or prescribed in regulations).

Where the accommodation is in a building with common parts, the fit for habitation obligation will also apply to the common parts. This means that a landlord will have to remedy, for example, damp in a common hallway and not just in the living accommodation.

Which leases are caught?

The Act applies to the following leases of residential accommodation in England:

  • leases granted after 20 March 2019 for a term of less than seven years.
  • leases granted after 20 March 2019 for a term of more than seven years if it is a secure tenancy, an assured or an introductory tenancy (these are types of tenancies mostly adopted by councils and housing associations and are granted on a periodic basis with no fixed term).
  • leases granted before 20 March 2019 which will fall into either of the above categories after the end of 12 months (for example, statutory periodic tenancies arising after the end of a fixed term assured shorthold tenancy). This is to allow a 12 month grace period for pre-existing leases.

Why now?

The fit for habitation standards originally enshrined in the Landlord and Tenant Act 1985 only applied if the annual rent was less than £80 in London or less than £52 outside London. These figures have not been changed since 1957.

Whilst the Housing Act 2004 introduced the Housing, Health and Safety Rating System (HHSRS), it is widely viewed as too complex and is applied inconsistently by local authorities.  A tenant would have to rely on the local authority inspecting the property, identifying a risk of harm from a potential hazard and then taking enforcement action against the landlord.  Furthermore, the operating guidance has not been updated since 2006. The government has confirmed that the HHSRS will be reviewed in 2019.

By comparison, the Homes (Fitness for Human Habitation) Act 2018 provides a real and achievable direct route of redress for tenants living in substandard conditions. A tenant will be able to seek specific performance or damages through a civil process if their living accommodation or the common parts are not fit for human habitation.

Comment

It remains to be seen how the new  standard is tested through the courts and whether tenants issue proceedings against landlords to improve their accommodation in practice.  For the time being though, this marks a step forward in increasing the rights and powers of tenants in the private rented and social housing sectors to require a decent standard of living accommodation.

Posted in Real Estate News

Non-UK resident SDLT surcharge: adding 1% and more complexity: Part II

In February we discussed the government’s intention to increase stamp duty land tax for non-UK residents (that post can be accessed here). The proposal is to add 1% to the SDLT charge for non-UK resident buyers of UK residential property. The policy is to ease pressure on UK residents seeking home ownership. HMRC’s public consultation on the new rules remains open until 6 May.

As discussion of the proposed increase has developed in the real estate sector, and with government, it’s apparent that a few key aspects of the regime require particular attention.

Who is caught?

The consultation proposes that the additional charge will fall on purchasers of residential property which are non-UK resident individuals, non-UK companies, and closely-held UK companies if they are controlled by non-UK residents. Partnerships and trusts can also be caught depending on their participants.

It’s difficult to see why as a matter of policy all corporate buyers have been treated in this way, and in particular why a widely-held non-UK company is assumed to be ‘bad’ for the purposes of the rules.

Clearly no one except a natural person uses a home as such. So the residence status of a corporate buyer, of itself, doesn’t reveal whether the home is for the use of a UK resident individual. Moreover, as the CGT treatment for a non-UK resident company investing in UK property is, since 6 April 2019, similar to that for a UK resident company, it would be odd for SDLT policy to be apparently discriminating against the non-UK corporate investor.

Build to rent

One consequence of the proposal is that it will naturally catch many non-UK resident collective investment vehicles acquiring finished or partly-constructed build-to-rent residential units. Some such buyers will not be paying residential rates of SDLT because they will instead be treating the purchase of 6 or more residential units in a single transaction as an acquisition of ‘commercial’ property for SDLT purposes. But for those buyers who claim the residential rate benefit of ‘multiple dwellings relief’ (MDR), their acquisition cost will go up by 1% under the current proposals. No reliefs for non-UK funds from the additional 1% charge have been suggested in the consultation, although the government has apparently been surprised by how many such purchasers do claim MDR (and so would therefore be affected by the additional charge).

A new residence test

Motivated by a desire for simplicity, the consultation envisages that an individual will be ‘non-UK resident’ if not present in the UK for 183 days during the 12 months ending with the purchase, albeit with the ability to reclaim the 1% if they are present here for 183 days during the 12 months after the purchase. This is odd, given one would assume that the policy is to charge those who don’t pay UK direct taxes, and so are not “contributors” to the UK exchequer.

With that in mind, the obvious approach would be to align the concept of residence with the existing statutory test for income tax purposes. Otherwise situations could arise in which a buyer is a UK tax payer, but nonetheless happens to be ‘non-resident’ for the 1% charge, at the time of purchase. Moreover, the consultation does contemplate a relief for military personnel and other Crown servants abroad, precisely because it would be unfair to charge them if they are still paying UK tax.

A particularly harsh feature of the proposed regime is that, in the case of joint purchasers, the charge will apply if any of them is non-resident. So spouses will be disadvantaged by their choice of a non-UK resident partner. A more sensible approach would seem to be to reverse this rule, for those joint purchasers with ‘ties of affection’. For others, such as business partnerships, why not allow the charge to apply, or not, according to the circumstances of each joint owner/partner?

What next?

The government has not committed to when it intends to introduce the new charge, other than to say it will be in a future Finance Bill. Hopefully this open-ended approach presages a will to consider carefully the results of the consultation and whether, as currently proposed, the regime will truly (and fairly) further its policy ambitions.

Posted in Real Estate News

Health and safety in buildings: the health and safety file

With health and safety in buildings under increasing scrutiny, we look at the legal requirements for health and safety files and provide some top tips for commercial property transactions.  Introduced in 1994 and retained under current regulations, the health and safety file is a key document in providing owners and occupiers with information about past construction projects in a building.

What is a health and safety file?

The Construction (Design and Management) Regulations 2015 (“Regulations”) require the principal designer in a construction project to prepare a health and safety file during the pre-construction phase which is appropriate to the characteristics of the project and which contains information relating to the project which is likely to be needed during any subsequent project to ensure the health and safety of any person.

Afterwards, the file must be appropriately reviewed, updated and revised to take account of the building work and any changes that have occurred.

At the end of the project, the principal designer or principal contractor must give the health and safety file to the client. The client is anyone for whom a construction project is carried out (note that there are some differences between commercial and domestic clients).

The health and safety file does not need to be on paper necessarily, it could also be produced electronically, for example.

Who prepares the health and safety file?

The Regulations require the principal designer to prepare and maintain the health and safety file but it is the client’s responsibility to ensure that the file is prepared by the principal designer and dealt with in accordance with the Regulations.

The principal contractor will also need to provide the principal designer with any information in its possession that is relevant to the health and safety file during the project and takes on responsibility for the health and safety file if the principal designer’s appointment concludes before the end of the project.

When do I need to prepare one?

The Regulations require an up to date health and safety file for the duration of the project.
A project does not just include the initial construction of a building but also building works involved in repair, maintenance (including some cleaning activities), demolition, site clearance and installation of certain equipment.

A health and safety file will also be required for any further works to an existing project.  In a subsequent project, the health and safety file will need to be updated or a new one prepared for any subsequent works (note that the Regulations are not clear as to whether a new file is needed or the existing one should be updated).

What should I expect to see in the health and safety file?

The Regulations state that the file should be appropriate to the characteristics of the project and so the contents will vary for each project. Typically, you might expect to see items such as as-built drawings, instructions for how to safely carry out maintenance and cleaning and any hazards at the property (eg asbestos or contaminated land).

Who should receive the health and safety file at the end of a project?

The Regulations require the principal designer or (if their role has ended) the principal contractor to hand the file over to the client.

On any disposition of the client’s interest in the project, the client must provide the health and safety file to the person acquiring the client’s interest and must ensure that that person understands the nature and purpose of the file.

The health and safety file should also be kept available for inspection by any person who may need it to comply with any relevant legal requirements. Details of the file and where it can be inspected should therefore be provided by a landlord to any tenant.

Practical tips for commercial property transactions

  1. On the sale of a property, the seller must hand the health and safety file over to the individual or organisation who will take on the client duties and ensure that the new client is aware of the nature and purpose of the file.
  2. On the sale of part of the property, the seller should ensure that any relevant information in the file is passed on or copied to the new owner.
  3. When granting a lease of the property, the landlord must make the file available to any tenant of the property. The responsibility for keeping and maintaining it would need to be considered on a case by case basis, for example (a) if the property is let to one tenant on an FRI lease, it may be appropriate for the tenant to keep and maintain the health and safety file until its lease ends or (b) if the property is located within a building with other tenants, the landlord would typically be responsible for the health and safety file, but it must be made available to the tenants for inspection.
  4. If the tenant of the property carries out construction works at the property where it is the client for the purpose of the Regulations (ie the project is being carried out for the tenant) then the landlord (as original client) should arrange for the existing file to be made available to the tenant so it can pass it to its principal designer.  The tenant should also be required to provide information relating to its work so that the health and safety file for the property can be updated.
  5. The CPSE replies that are provided for any transaction should contain details of the health and safety file and how this will be dealt with.
Posted in Real Estate News

Second time around for RICS consultation on Lease Code

In our blog on 4 April 2018, we encouraged interested parties to input into the RICS consultation on its professional statement, Code for leasing business premises, 1st edition.  With the status of a professional statement, the new Code has sufficient weight to deliver a professional punch whereas the current regime is voluntary.

Following last year’s consultation and discussions between landlords, tenants and other trade bodies, a number of changes have been made to the Code and the RICS has launched a further consultation.  The consultation can be found here and closes at midnight on 5 May.

In a welcome change, the current draft contains fewer mandatory requirements for RICS regulated surveyors or firms, although the requirement for written heads of terms before issuing a draft lease is still mandatory.

The key mandatory points of the revised Code are as follows:-

  • Lease negotiations must be approached in a constructive and collaborative manner.
  • A party that is not represented by an RICS member or other property professional (surveyors and property lawyers) must be informed of the existence of the Code and the supplemental guidance and must be advised to obtain professional advice.
  • On a letting with vacant possession the agreed terms for the proposed lease must be recorded in written heads of terms which state that it is “subject to contract” and must summarise as a minimum the agreed position on each of the aspects listed in the Code. These aspects are also listed in a checklist which follows the heads of terms.
  • The heads of terms on a lease renewal or extension must also include the aspects listed in the Code, but may state that certain terms will follow the existing lease, subject to reasonable modernisation.
  • Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.

The landlord or its agent will be responsible for ensuring that Code compliant heads of terms are in place before the first draft lease is circulated. In cases where a landlord or agent wishes to use bespoke heads of terms, the RICS template can be used as a checklist.

The remainder of the recommendations of the Code are broadly similar to the 2007 Code and set out areas of good practice.

The RICS are encouraging parties to comment on whether the concerns raised in last year’s consultation have been addressed. Further input into the consultation, particularly by RICS members who are impacted by the regulatory requirements, is welcomed.

We have been asked how the new Lease Code fits with the Model Commercial Lease (MCL) (https://modelcommerciallease.co.uk/).  The Lease Code is designed to drive the market and the MCL is designed to reflect it (as far as possible).  The MCL committee believe the MCL should reflect a fair starting point for an investor when letting premises and should therefore be consistent with the Lease Code where possible.  Various consultant members of the MCL committee have therefore responded accordingly to the consultation.

Posted in Real Estate News

RIP the fixed term residential tenancy?

Landlords will have to provide a good reason to evict residential tenants from now on, the government announced on 15 April, in a proposed major reform of the private rental market.

It says it will abolish so called “section 21 evictions”, which currently allow landlords to bring to an end residential tenancies without an underlying reason on 2 months’ notice once their contractual term has ended. Instead, landlords will have to rely on a specific reason, such as the tenant’s failure to pay the rent or the landlord wishing to occupy the property itself.

The effect of this will be to change what are currently fixed term tenancies into open ended, rolling tenancies.

The intention is to protect vulnerable tenants from being evicted from their homes at short notice. According to the government, this is one of the major causes of family homelessness.

Theresa May said: “this important step will not only protect tenants from unethical behaviour, but also give them the long-term certainty and the peace of mind they deserve”.

Communities Secretary, James Brokenshire MP called it “the biggest change to the private rental sector in a generation”.

The government’s plans to abolish section 21 of the Housing Act 1988, leaving landlords to rely on the grounds set out in section 8 and a court order to take back possession of a property, will have far reaching consequences, even taking into account the additional grounds for possession under section 8 (where the landlord wishes to sell or occupy the property themselves), which the government plans to introduce as part of its reforms along with an expedited procedure.

Housing charities, such as Shelter, have applauded the change. Polly Neate, Shelter’s CEO said:

“One in four families now privately rent their home, as do hundreds of thousands of older people. And yet, we frequently hear from people with contracts shorter than your average gym membership, who live in constant fear of being thrown out at the drop of a hat. Ending Section 21 evictions will transform these renters’ lives – giving them room to breathe and put down roots in a place they can finally call home.”

On the other hand, some landlords are more sceptical. The National Landlords Association says that section 8 is an ineffective and expensive means of terminating a tenancy. It says the change has created “a new system of indefinite tenancies by the back door” and predicted chaos in the courts amid a rush of section 8 applications.

Any changes to the law which are implemented should balance the need to address this issue against the government’s stated need to increase the number of available rental homes (which in turn means not putting off investors from investing in new housing stock).

There is also the much wider question: is this just the first step in the changes for fixed term assured shorthold tenancies? Facing tenants with an open ended tenancy, landlords may well look to grant longer leases with rent review provisions where they have previously offered short, fixed rent leases.  What would the government make of a significant change in market practice?  Can we expect to see further rent controls during the term of the lease?  This looks to be only the first chapter in a new story for assured shorthold tenancies and the government’s proposed consultation on its package of reforms will be an important second paragraph.

Posted in Real Estate News

Can a landlord forfeit a long lease?

Hogan Lovells recently represented the landlords in SHB Realisations Limited and GB Europe Management Services Limited v Cribbs Mall Nominee (1) Limited and Cribbs Mall Nominee (2) Limited, a case confirming that it is possible in certain circumstances to forfeit a long lease granted for a substantial premium.

Forfeiture

Leases invariably include a right for landlords to bring a lease to an end before lease expiry if a tenant is in breach (known as a right to forfeit or right of re-entry).

A tenant can apply for relief from forfeiture and, when exercising its discretion as to whether to grant relief, one of the central factors a court will consider is the value of the tenant’s lease.

As a result, there is a widely held belief that a tenant will invariably get relief against forfeiture of a long lease because the courts do not like to see tenants losing a valuable asset and, by corollary, landlords obtaining a windfall.

Background to the case

Shop premises previously occupied by BHS (now in liquidation) were let in 1998 for a 125 year term at a premium of £7 million and a peppercorn rent.

The landlords had a right to forfeit the lease for any breach by BHS of its covenants, including a “keep open” covenant to maintain trade at the store.

BHS ceased to trade from the premises in 2016.  As a result, the landlords took steps to forfeit the lease for BHS’s breach of the keep open covenant.  BHS issued proceedings for relief from forfeiture.  In response, the landlords counterclaimed for possession which had the effect of forfeiting the lease.

According to BHS, the lease was valuable because they could sell it to another retailer for a significant premium, and thereby remedy the breach.  However, by the date of trial in early 2019, BHS had failed for over two years to find a buyer.  The landlords argued that there was, therefore, no market for the lease and so no value that BHS would lose if relief was refused.

The court’s decision

The judge at trial considered that if the lease had had no value then any windfall to the landlords was irrelevant when considering whether to grant relief.

However, whilst “there can be no doubt that the value of the lease has depreciated considerably given the new retail world and its terms“, the judge concluded that there was some interest from a third party in taking an assignment of the lease. He said that there was “an extremely weak market and there is no evidence… to suggest that the market is likely to get any stronger“.

Having decided that the lease had some value, the judge acknowledged that the windfall to the landlords was relevant but did not give it great weight.  In reaching this conclusion, he took into account the conduct of the parties and the fact that the appreciation in value for the landlords was nothing like the amounts suggested by BHS.

The judge concluded that relief should be granted, but on condition that BHS completed an assignment of the lease within three months, thereby remedying the breach.  If it failed to do so then the lease would remain forfeit for all purposes.

This case shows that landlords should not dismiss forfeiture as an option simply because the tenant has a long lease granted for a significant premium.