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Keeping It Real Estate

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

Posted in Real Estate News

A black hole in the telecoms code: operators occupying under old agreements left without any protection

The Upper Tribunal has, reluctantly it is fair to say, found that telecoms operators in situ under agreements granted under the old Code but which expired before the new Code came into force have no Code protection and are unable to apply for fresh Code rights. This leaves a landowner free to serve a removal notice on the operator and gives the operator no option other than to leave. There is no requirement on the landowner to prove redevelopment; no lengthy notice periods; and in this case, no 1954 Act rights for the operator either.

The “new” Electronic Communications Code came into force on 28 December 2017. Part 4 of the Code gives approved operators rights to install and maintain their apparatus on private land and the new Code is particularly favourable to operators in terms of the rents they pay for such rights. The new Code was not retrospective and repealed the “old” Code, whilst containing transitional provisions for subsisting agreements. A subsisting agreement is one which was granted under the old Code and was “in force” between the operator and the relevant person when the new Code came into force in December 2017. The termination and removal provisions under the new Code provide protection for these subsisting agreements, so that a landowner can only terminate on one of four statutory grounds, including redevelopment. Once the agreement has been terminated, removal of the apparatus is the second stage in the process, meaning it can be lengthy to obtain possession from an operator.

In this case, Arqiva occupied the site under a lease which had been contracted out of the 1954 Act and which had expired in October 2016. It remained in occupation of the site post expiry and was, at that time, protected from the landowner seeking removal of the apparatus. Whilst the old Code did not have the effect of continuing Code rights granted under the lease, the landowner essentially needed the permission of the court to require removal of the apparatus and the operator remained entitled to request fresh Code rights through the courts.

The Tribunal found that Arqiva was occupying the site under an implied tenancy at will, which falls outside of the protection of the transitional provisions of the Code. Further, it had no protection under the Landlord and Tenant Act 1954, as tenancies at will are expressly excluded.

As it did not have any Code rights, Arqiva sought to obtain fresh rights under Part 4 of the Code, including temporary rights to keep the existing apparatus in situ until the application for permanent rights was determined. The Tribunal was bound by the Court of Appeal’s recent interpretation of the Code in two cases and found that Arqiva was not entitled to do so.

The result is that the operator is effectively shut-out from any protection under the new Code. The Tribunal has indicated it will give permission to appeal, as the ramifications for operators in situ under expired agreements are huge. If the decision stands, it will entitle a landowner in this scenario to by-pass the termination procedures in the Code and serve a removal notice requiring the operator to agree within 28 days a reasonable period in which to vacate the site.

As many telecoms leases granted under the old Code were contracted out of the 1954 Act to avoid duplicate protection for the operator, this will come as quite a blow to operators in this scenario whilst being music to a landowner’s ears. The music has not stopped yet though … stay tuned for an update on the appeal.

Arqiva Services Ltd v AP Wireless II (UK) Ltd [2020] UKUT 195 (LC)

Posted in Real Estate News

UK COVID-19: Should the UK real estate sector still worry about a no-deal Brexit?

At the moment Brexit appears to have been forgotten by many. This is understandable – the impact of COVID-19 is so immediate, vast and deep that the economic impact of Brexit seems distant and trivial by comparison. However, as real estate investors, landlords and tenants adapt and restructure their businesses they need to factor in the risks of Brexit to ensure they have a robust business plan going forward which isn’t undone by a no-deal Brexit.

The UK government’s current position is that the EU transition period will not be extended beyond the end of 2020, no matter what the circumstances. They have therefore asked businesses to plan accordingly. Many are not taking this threat seriously assuming the government will not want to compound the current crisis by having a disorderly no-deal exit from the EU. The market is assuming that a deal will be done or the transition period extended until the end of 2021.

However, there is a real possibility that a pro-Brexit government will make good on its threat, especially as it now has greater political freedom to intervene and support private businesses. The UK government is also keen to get on and conclude independent trade deals with non-EU countries and any extension to the transition period may place such deals at risk. Many in the UK government are keen to use Brexit to fundamentally restructure the UK economy; these plans now include building resilience to pandemics by controlling borders and shoring up key local industries.
Those in the real estate industry should therefore be mindful of the following in the event of a no-deal Brexit:

  1. Rents – Factoring a no-deal Brexit into any current restructuring discussions landlords are having with tenants. Landlords negotiating rent concessions that fall away when a tenant reaches pre-pandemic profitability levels may want to consider if such levels will take longer to achieve because of Brexit. If you are a tenant, are robust rent concessions and grace periods from payment obligations being negotiated?
  2. Liquidity – There could be a tightening of liquidity as financial regulations become disrupted. Companies are expected to emerge from COVID-19 carrying unprecedented levels of debt on their balance sheets and refinancing this may encounter unexpected hurdles.
  3. Construction work – The government is on the lookout for “shovel ready” construction projects that can be delivered in the next 18 months. There may therefore be a spike in demand for construction labour and supplies which may get compounded by shortages of labour and supplies because of Brexit and border controls. It is estimated that 15% of the construction industry’s workforce is made up of foreign employees (who after Brexit may need to fill in a Tier 2 Visa application, which is a costly and lengthy process) and 62% of the UK’s building materials are imported from the EU.
  4. The workforce – Hospitality, leisure and retail sectors also rely heavily on EU migrant labour and it is unclear how these sectors will be impacted. Any labour shortages from Brexit may get offset by such businesses being able to recruit employees who have become unemployed as a result of COVID-19. Much will depend on the pace of recovery in these sectors and if the local workforce will be willing to step in and take on jobs in these sectors. The recent “fantastic response” to the “Pick for Britain” initiative suggests room for cautious optimism.
  5. Demand – In the student accommodation sector, a significant drop in international students because of COVID-19 could be compounded by a no-deal Brexit. Similarly, a no-deal Brexit could accelerate the plans of office tenants to decentralise and move away from high cost offices.
  6. Wary customers – The British economy depends on the consumer and a no-deal Brexit might further dampen consumer confidence. A projected rapid recovery as lockdown eases towards the end of this year and in 2021 may get derailed and turn into a “W” shaped recovery.
  7. Uncertainty in decision making – The time and resources rightly being dedicated to the COVID-19 response have been diverted away from Brexit planning at an institutional and regulatory level.  For the planning and development industry – in addition to the practical implications set out above – this is likely to lead to significant uncertainty in decision making and forward planning at a national and local level.

For example, much of our planning and environmental law framework derives from EU law and is ultimately enforced at a European level.  Although a new Office for Environmental Protection is proposed in the Environment Bill, it’s now unlikely that the watchdog will be ready to step up to the plate until well into 2021.

At a local level, local planning authorities drawing up plans are grappling with the dual uncertainty brought about by COVID-19 and Brexit and how best to predict housing need.  Housing need is a dark art at the best of times let alone in the current context.

In the midst of chaos, however, there is also opportunity, and any decision making uncertainty may well open doors for those in the development industry who are able to take longer term, strategic view.

There is a considerable amount of Brexit fatigue and everyone’s attention and energies quite rightly are focused on COVID-19, but now is the time to start paying Brexit some attention, or even best laid recovery plans could easily become unstuck.

 

Our interactive tracker is a single point of reference for you on COVID-19 real estate specific matters across our global practice. It lets you view relevant guidance and changes to legislation for each country and it also allows you to compare information across different jurisdictions:

COVID-19 Global Real Estate Interactive Map:
Government Response Tracker

https://www.engage.hoganlovells.com/knowledgeservices/covid-19-real-estate-developments

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

Posted in Real Estate News

COVID-19 UK – Additional breathing space…but tenants who can pay should

Last week the government announced that:

  • the forfeiture moratorium is to be extended until 30th September 2020;
  • Commercial Rent Arrears Recovery (CRAR) can only be used where tenants owe at least 189 days of unpaid principal rent;
  • the draft Corporate Insolvency and Governance Bill has been amended, extending the temporary ban on the use of winding-up petitions where the inability to pay debts is caused by COVID-19, until 30 September 2020; and
  • a new voluntary Code of Practice has been introduced for commercial landlords and tenants to follow during the COVID-19 pandemic

Most commercial leases require the tenant to pay its rent quarterly, and invariably include a provision allowing the landlord to forfeit if that rent has been unpaid for a period of time, e.g. 7, 14 or 21 days.  Outside of the lease, a landlord would normally also have other tools at its disposal if a tenant is not paying its rent (such as CRAR or serving a statutory demand threatening winding-up proceedings).

The measures already introduced and proposed by the government, in response to the COVID-19 pandemic (see here for more information), limit landlords’ options when faced with a non-paying tenant. This has already resulted in many facing large arrears positions with reduced options for bringing tenants to the table to agree a sensible payment plan.  Given that the protections have now been extended to 30 September 2020, the squeeze on landlords looks set to continue.

On the same day as the government extended these protections, it also published its Code of Practice for commercial property relationships during the COVID-19 pandemic.  The Code is voluntary and sets out a number of principles which landlords and tenants ought to apply when dealing with each other on rent issues during the pandemic.  Signatories to the Code include the British Property Federation, the British Retail Consortium, REVO and RICS.

It is recognised that “both parties should act in good faith” and the foreword to the Code maintains that the government “has always been clear that tenants who are able to pay their rent in full should continue to do so”.  Therefore, although the Code encourages co-operation, it is clear that landlords are not being asked to agree concessions with businesses that, despite the COVID-19 pandemic, are able to pay their rent.

If a tenant can demonstrate it is experiencing “temporary severe hardship” as a result of the impact of the COVID-19 pandemic, it is suggested that landlords “should provide concessions where they reasonably can” and that new arrangements could be agreed between the parties including a “rent-free period”, a “deferral of the whole or part of the rent” or “rental variations to reduce ongoing payments to a current market rate”.

It will be interesting to see what impact this voluntary Code will actually have.  However, it’s worth noting that even in the absence of the Code, many landlords have already been proactively seeking to engage with tenants’ deferrals and, in certain circumstances, concessions in order to support tenants’ businesses, where possible.

Related blogs:

https://www.ukrealestatelawblog.com/2020/03/24/uk-covid-19-commercial-tenants-to-be-given-three-months-protection-from-forfeiture/

https://www.ukrealestatelawblog.com/2020/05/22/uk-covid-19-the-corporate-insolvency-and-governance-bill-new-tenant-debtor-protections-unveiled/

https://www.ukrealestatelawblog.com/2020/04/24/uk-covid-19-further-commercial-tenant-protections-announced-by-the-government/

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

 

Posted in Real Estate News

UK COVID-19: Landlords take note – this is not a wind up

RE: A COMPANY (INJUNCTION TO RESTRAIN PRESENTATION OF PETITION)

The court considered an application for an injunction in light of the new Corporate Insolvency and Governance Bill 2020 (“CIGB”), which was published on 20 May 2020 and is expected to come into force in late June or early July – click here for more details on the provisions of the CIGB.  Amongst other things, the current draft of the CIGB temporarily prevents creditors presenting winding up proceedings on or after 27 April 2020 on the basis of statutory demands served between 1 March 2020 to 30 June 2020 (or, if later, one month after the CIGB is enacted), unless the creditor can satisfy the court it has reasonable grounds for believing:

(i)  coronavirus has not had a financial effect on the company; or

(ii) the relevant ground (being the company’s inability to pay its debts) would apply even if coronavirus had not had a financial effect on the company.

The case

The tenant, an unnamed high street retailer, failed to pay its rent and service charge pursuant to the lease.  The landlord was, as a result of section 82 of the Coronavirus Act 2020, prevented from exercising a right of forfeiture and instead served a statutory demand on the tenant on the basis that it was unable to pay its debts, as a precursor to presenting a winding-up petition. The landlord was aware that the mere presentation of the petition would be enough to cause problems for the tenant (such that it may force it to pay up).

In the absence of an injunction, the landlord could present the petition at any time after expiry of the statutory demand and as such, the tenant made an urgent application for an injunction.

The tenant initially argued that the petition amounted to an abuse of process: a winding-up order should only be made where that is in the interests of the company’s creditors as a whole and the process should not be used for the sole benefit of a petitioning creditor trying to pressurise the company to pay.

The judge, Mr Justice Morgan, however, invited the tenant to concentrate on the significance of the CIGB and it was primarily on this ground on which the order was made.

The landlord’s position was that in advance of the CIGB being enacted, there was nothing to stop a creditor presenting a winding-up petition.

The court was not convinced and was content it had authority to take into account the likelihood of a change in law that would be relevant to its decision.

The court granted an interim injunction and its reasoning was as follows:

• The policy behind and provisions of the CIGB were obvious and the court was confident that the CIGB would be enacted “more or less” in its current form.

• It was unlikely in any event, that the petition would be heard before the CIGB was brought into force.  As such, the court was able to consider the likelihood of the success of the winding-up petition in light of the CIGB.

• The court was convinced that the petition would be likely to fail (relying a significant amount of financial evidence furnished by the tenant) and that the petition would have a seriously damaging effect on the tenant.

What is the impact?

This case acts as a further deterrent for landlords who are considering the use of statutory demands or winding-up petitions against non-paying tenants in the wake of the pandemic.

The decision is perhaps not too surprising, though, as the courts have previously disapproved of the use of statutory demands as a method of debt recovery.  As landlords will know, the presentation of a petition can put tenants in breach of certain covenants in, for example, loan agreements or other financial arrangements and for that reason they often serve as a useful means of putting pressure on those tenants that can pay.

The CIGB, along with the other measures introduced by the government, leaves landlords with limited options to force the hands of tenants to pay their rent and other sums owing under the lease.  In the absence of statutory demands, winding-up petitions and forfeiture, landlords may have to resort to the more traditional route of commencing debt recovery proceedings at court, seeking an early default judgment against the tenant.

The court in this case also relied on the significant body of financial information furnished by the tenant showing the financial impact of coronavirus on its business.  What we have not seen, is the court considering a situation where the petition is brought against a tenant that is not struggling as a result of coronavirus.  This may be permissible under the CIGB.

What some landlords might find odd is that where a the tenant can prove it is in fact able to pay its debts as they fall due (and is clearly therefore solvent) then they will still be prevented from presenting a winding-up petition under the CIGB, and even before the Bill is enacted the court is likely to grant an injunction against any petition being presented.

 

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

Posted in Real Estate

Life Below Zero

Despite mixed messages over the past few weeks, it sounds as if the Bank of England is considering taking UK base rate interest below 0% in order to give itself and the Chancellor more headroom for measures intended to restart the economy, and then keep it going, as we start slowly to come out of lockdown and other fiscal measures, such as the furloughing scheme and government-backed loans for small businesses, come to an end. The general economic consensus is that for various reasons like Brexit, global recession, semi-permanently low oil prices, the need to over spend to “level–up” inflation will be almost non-existent and although the government will need and is willing to borrow its way through this, bond rates will remain low to zero and below. If we do see UK base rate going below zero then what would that mean for real estate contracts?

Most commercial leases and other real estate contracts will contain provisions referring to base rate interest, and very few of them will anticipate negative interest rates.  For instance, a tenant must usually pay interest at base rate on any “back-rent” after a rent review has been settled.  If the interest rate is negative then might the landlord have to pay the interest to the tenant?  That could be the outcome if the drafting required the back-rent to be paid “together with base rate interest” and if so, then the result would be a reduced back-rent payment to the landlord.

Do provisions that prevent tenants from making deductions or setting off monies from payments help here?  Probably not.  Strictly speaking, this is not the tenant making a deduction or exercising a right of set-off, it is a direct result of the lease drafting, and so the parties are simply doing the maths and making the payment due under the lease.

Unless negative interest rates plummet, penal rates for late completion of a purchase, or a late rent payment, would probably be unaffected as they are usually two, three or four percentage points above base rate.  But if the negative base rate is low enough, it might mean that the landlord has to pay the tenant for late payment of rent, or the seller has to pay the buyer for late completion!  That would be surreal!

What would happen to interest on rent and purchase deposits?  Can a deposit taker comply with an obligation to place it in an interest bearing account if the interest rate is negative?

There is an easy drafting fix for this, and we did see it drafted into some documents around 2016 when we last thought that interest rates might go below zero. If you provide that, where the base rate is negative, a zero rate applies, then the issues described above should vanish.  Another potential solution is to agree a fixed rate, as long as the rate you choose is not out of line with the market and therefore could be seen as a penalty.

But would you actually want a fix at all?  If negative interest rates reflect a topsy turvy economic paradigm where having cash in the bank costs you money, wouldn’t you want to minimise cash receipts (for a while at least) and therefore actually prefer to receive payments late, or lower amounts (as long as your fixed costs are covered)?  Certainly economic theory suggests that if stagflation is a semi-permanent state then you are ok with receiving less than zero – that sounds exactly what bond buyers at negative rates expect/want as they assume other assets will depreciate further so this is a hedge against what might happen if they deploy capital elsewhere – I know, I am not an economist so that seems weird to me too!

Would there be any difference at rent review between a lease containing a provision collaring base rate interest at 0% and another lease without it?  Would a rent review surveyor treat differently a lease that is out of keeping with the rest of the market in this way?  Even since 2016, normal commercial leases have not typically contained this sort of provision; it is not in the Model Commercial Lease, for instance, and why would it be?  Would landlords want a drafting fix if it might unintentionally be seen as having a negative impact on rent review?

A drafting fix won’t help with existing leases anyway, as it isn’t practical to try to vary them all.  They will therefore need to be re-interpreted in the context of negative interest rates.  For that you would need either legislation (which is unlikely), guidance from the courts (which you might, possibly, get in time, especially as the indications currently are that the Bank of England isn’t ready to take base rate interest below zero just yet), or just a commercial approach recognised by the market (which in reality is probably the most likely solution).

If asked to consider a lease in this context, a judge might decide that the draftsman did not have negative interest rates in mind when preparing a lease, and rule that a tenant who pays late should not benefit from his breach by being entitled to deduct (ie apply negative) late payment interest from, and so reduce, his payment to the landlord.  On the other hand, he might decide to uphold the strict wording of the lease!  It wouldn’t be the first time the courts decided that our commercial assumptions were wrong.

Might commercial real estate investors just live with the outcomes?  At first glance they seem unattractive, but businesses would evolve in their approach in an environment with negative interest rates.  If it will cost money to have cash in the bank, because the bank is charging (not paying) interest, businesses will re-assess their cash flow and investment needs and could refocus their investments to capital appreciation and low/no yielding assets. They might decide to pay for things in advance (if they can find someone to accept the early payment).  Conversely, they might want to receive payments as late as possible and be unwilling to accept pre-payments.

There are lots of questions to which, as yet, there are few answers.  But if the Bank of England does take the plunge, and makes a negative UK base rate a reality, we will need (quickly) to ask and answer these questions.

Posted in Real Estate News

UK COVID-19: The Corporate Insolvency and Governance Bill – New tenant/debtor protections unveiled

Long awaited insolvency reforms in the UK, plus the government’s COVID-19 proposals on the use of statutory demands – and much more

What’s the latest?

As we reported on 24 April, the government announced curbs to landlords’ “aggressive” rent collection tactics of serving statutory demands and presenting winding-up petitions during the COVID-19 pandemic.  The details of these curbs have finally been published in the draft Corporate Insolvency and Governance Bill, which had its first reading in the House of Commons on Wednesday 20 May.

Is the Bill just aimed at real estate and COVID-19?

Absolutely not.  Whilst the Bill introduces measures previously announced to combat the economic effects of the COVID-19 pandemic, it also includes measures contained in the government’s “A Review of the Corporate Insolvency Framework” consultation published in 2016.  These include what is essentially a new insolvency process, the company moratorium, aimed at helping struggling businesses restructure and, at the same time, limiting enforcement action that can be taken against them by creditors (including landlords).

It amounts to a substantial updating of UK insolvency law, some of which has specific application to real estate and landlord remedies in the COVID-19 crisis.

A wider review of the insolvency law changes is available here; however, for the purposes of this blog we have focussed on some of the aspects which will be of most interest to landlords dealing with struggling tenants.

Why is the government concerned about landlords’ use of statutory demands?

We’ll look first at the issue landlords and tenants have been most concerned about in the context of rent recovery. Landlords have been looking to use statutory demands as an effective means to encourage payment and engagement from tenants who do not (but perhaps could) pay their rent during the COVID-19 crisis.

The government’s issue is that an unsatisfied statutory demand can be used by a landlord as evidence that a company cannot pay its debts and grounds to present a winding up petition to force a company into liquidation: “Insolvency proceedings of this nature are not intended to be used as a tool for debt collection but are to deal with financial failure and tackle companies that are no longer viable”, the government explains.

In passing it seems this view has been supported by the courts.  Last month an injunction was obtained by a tenant debtor against a threatened petition resulting from a statutory demand served by the landlord for unpaid rent.  The court held that service of a statutory demand was an inappropriate use of the insolvency process (which is in keeping with the government’s approach).  The curious outcome is that this effectively means the tenant has successfully argued that it should be protected from winding-up for non-payment of rent, because it can pay its rent – but hasn’t paid it and doesn’t commit to the court to pay it.

So what is changing? 

The government is legislating to temporarily prevent winding-up proceedings being taken on the basis of statutory demands and to temporarily stop winding-up proceedings where COVID-19 has had a financial effect on the company which has caused the grounds for the proceedings.

The provisions apply to all UK companies, not (as might have been assumed from the original announcement) just landlords and commercial tenants or even the retail and hospitality sectors, and in the main take effect retrospectively from 27 April 2020.

What does that mean in practice?

No petition can be presented on or after 27 April 2020 based on a statutory demand served in the “relevant period” of 1 March to 30 June 2020 (or, if later, one month after the legislation comes into force, which is likely to be relevant here, as this legislation is unlikely to come into force before 30 May 2020).

A petition based on an inability to pay debts cannot be presented by a creditor in the relevant period unless the creditor has reasonable grounds for believing that:

• “coronavirus has not had a financial effect on the company”; or

• the company’s inability to pay was not caused by the COVID-19 pandemic.

Any petition presented after the legislation comes into force, but before the end of the relevant period, must include a statement from the creditor to that effect.

In reality, no creditor will be able to rely on the first ground above, because there will be very few companies who have not been affected, in one way or another, by COVID-19.  Presumably, if the company is able to pay but is simply choosing not to, a creditor cannot issue a winding-up petition at all.

In effect, it is for the landlord creditor to prove to the court that it has reasonable grounds for believing that the tenant’s failure to pay is not caused by COVID-19.  This is clearly going to be extremely difficult for a landlord to do without access to a tenant’s financial data.  Landlords will have hoped that it would have fallen on the tenant to prove that COVID-19 had caused it to be unable to pay its rent, but the government has seen fit to place the burden of proof on the landlords, which seems unfair, as it should be the tenant, who should have to justify not having paid its rent.

Should landlords rush to seek winding-up orders before the legislation comes into force?

In case any landlords wish to rush to present winding-up petitions before the legislation comes into force, retrospective provisions give tenants further protection and make this a fairly futile course of action.

For petitions presented in the period between 27 April 2020 and the legislation coming into force, the court can make appropriate orders to restore the debtor’s position to what it was before the petition was presented if the creditor did not hold the necessary belief about the non-impact of COVID-19.

Furthermore, and quite remarkably, winding-up orders which would not have been made had the legislation already come into force are rendered void (although protection is given to a liquidator in respect of any actions taken based on the order).

What is the new company moratorium?

The Bill introduces a new free-standing moratorium process as Part A1 to the Insolvency Act 1986, and the existing small company CVA moratorium is repealed.

The moratorium provides companies with breathing space from creditor action if they are, or are likely to become, unable to pay their debts and it is considered that the moratorium will allow the company to be rescued as a going concern.

Available to UK registered and unregistered companies liable to be wound up under Part 5 of the Insolvency Act 1986, the moratorium will last for an initial period of 20 business days but can be extended:

• by the directors for another 20 business days;

• with creditor consent for a total period (including the initial 20 business day period) of a year; and

• by the court for an unlimited period.

As this is a debtor-in possession process, the directors will have to be in charge of the day to day running of the company but the process will be overseen by a monitor who has to be a licensed insolvency practitioner.  This is not too dissimilar to the light-touch administrations we have seen recently, although the monitor will have a more limited role.

Consequences of the moratorium for landlords

On the plus side for landlords, the moratorium means that personal and business relationships will remain unchanged as no insolvency practitioner is, for example, appointed to run the company in place of the existing directors.  It also means that valuable resources are not diverted from business operations into meeting more extensive costs, e.g. of an administration.

Pre-moratorium debts (being those falling due before the moratorium and those falling due during the moratorium but arising from an obligation incurred prior to the moratorium) benefit from a payment holiday during the moratorium, aimed at easing the struggling company’s cash flow.  Pre-moratorium debts which are subject to the payment holiday can be paid but only up to a specified cap per creditor, unless the monitor consents.

However, importantly for landlords, certain pre-moratorium debts won’t benefit from that holiday including rent in respect of a period during the moratorium.  Although there is nothing in the Bill requiring the company to pay debts without a holiday, the directors have to confirm that the debts have been paid before they can extend the moratorium, and the monitor has to bring the moratorium to an end if it thinks the company is unable to pay these debts – both of which may provide some comfort to landlords that the company will continue to make rent payments during the moratorium.

Unfortunately for landlords the moratorium does also mean that certain actions are prohibited without the consent of the court including:

• commencing insolvency or legal proceedings;

• action under the Commercial Rent Arrears Recovery Regime (the draft legislation still refers to the old term of “distress”); and

• forfeiture by peaceable re-entry.

This is similar in many ways to the moratorium arising on the appointment of administrators.

Unintended consequences?

The Bill provides, in relation to any contract “for the supply of goods or services”, that where the contract includes a provision allowing the supplier to terminate the contract or “do any other thing” when a company becomes subject to a relevant insolvency procedure (including but not limited to the new company moratorium, administration or liquidation), such provision will “cease to have effect” when the company becomes subject to the relevant insolvency procedure.

It is not inconceivable that you could construe a lease as a contract for the supply of “goods or services”, and the result of the draft legislation may be that some tenants will try to argue, for example, that a landlord is unable to rely on a right to forfeit relating to a relevant insolvency procedure.  Hopefully, government will take the opportunity to clarify that this is not the case.

The Bill is before Parliament.  Will it change much and when will it become law?

We have no reason to think that the Bill will change particularly before it becomes law, and we assume that the government is keen for it to receive Royal Assent as soon as possible.  Expect to see it on the statute books shortly.

 

Government Response Tracker

https://www.engage.hoganlovells.com/knowledgeservices/covid-19-real-estate-developments

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

 

 

 

Posted in Real Estate News

UK COVID-19: Back to the workplace – stay alert

Boris Johnson has now changed the focus from staying at home to staying alert.  What does this mean for landlords who need to create a COVID-safe environment? How does this look in practice?  And who pays?

It will be a long time before the lockdown is fully lifted, but the government’s ambition is for some shops to open in June and parts of the hospitality industry to open from July, at the earliest. Landlords will need to be prepared to deal with a variety of issues; not only continuing demands for rent deferrals and concessions, but also alterations to the premises and health and safety obligations.

What about rent?

Landlords can expect tenants to continue seeking rent deferrals and concessions throughout 2020.  Even when commercial premises are allowed to open, physical distancing measures will mean that they won’t be able to operate at full capacity.  And then there are the restrictions on pursuing tenants for outstanding arrears – see our recent blog for more information.

Keeping healthy and safe – who foots the bill?

Health and Safety legislation means a landlord has to “take such measures as it is reasonable for a person in his position to take to ensure, so far as is reasonably practicable, that the premises… are safe“.  Breach of these duties is a criminal offence but what is reasonable is fact specific, looking at the situation on the ground.   To assist, the government has published detailed guidance on how to work safely.   As always, the exact meaning of these guidelines will no doubt attract considerable debate.

Landlords of shopping centres, for example, will have an important role to play in considering how physical distancing, visitor circulation, hygiene and other necessary measures are implemented.  The government guidance provides, in relation to shopping centres, that landlords should “take responsibility for regulating the number of customers in the centre and the queuing process in communal areas on behalf of their retail tenants“.  This may require additional staff to limit the number of people entering the centre at any one time and to make sure shoppers respect physical distancing rules, and even one-way flows through pinch points in malls.

For landlords of multi-let offices, the government guidance recommends “more one-way flow through buildings” and “reducing maximum occupancy for lifts, providing hand sanitiser for the operation of lifts and encouraging use of stairs“. These changes might require alterations to common parts.

Who will be responsible for paying for these changes? 

If landlords are looking to recover costs incurred in complying with the government’s guidance through the service charge they will need to review the service charge provisions to check whether this is feasible.  There could be other additional service charge costs such as increased cleaning, especially of high contact points, and possibly the provision of additional cycling and showering facilities for those who no longer wish to travel on public transport.

It’s not just landlords who will be grappling with this. Many tenants will want to install plastic screens in retail premises, additional partitions in office spaces and reconfigured kitchen and seating layouts in restaurants and cafes.  Whether tenants require their landlord’s consent to these alterations will depend on the terms of their lease: is it an alteration required by legislation? Is it an alteration contemplated by the lease or does it go further and make a structural alteration?

For more practical pointers on planning a safe return to the workplace, read our recent blog by Richard Welfare, Kevin O’Connor and Josefine Crona.

What’s at the end of the rainbow?

COVID-19 has shown that some industries, particularly the services and tech industries, are able to operate seamlessly whilst most of their employees work from home.  One well known employer has even announced that some staff will be able to work from home permanently.

Does this mean the demise of the large open-plan office space? No doubt, some office occupiers will look to downsize, use their space more cleverly and re-imagine the way they work.

As our employment partner Ed Bowyer emphasized in a CBI daily coronavirus webinar, flexibility and creativity will be the new mantra for occupiers and their space if they want to find gold at the end of the rainbow.

 

Our new interactive tracker is a single point of reference for you on COVID-19 real estate specific matters across our global practice. It lets you view relevant guidance and changes to legislation for each country and it also allows you to compare information across different jurisdictions:

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

 

Posted in Case Updates

UK COVID-19: Can the temporary stay on possession proceedings be lifted?

The Court of Appeal says (almost definitely) no

We have previously blogged about the 90-day stay of all possession proceedings until the end of June, which was brought into force by the courts on 27 March 2020 by the new practice direction PD 51Z.

Earlier this week, in the case of Arkin v Marshall, the Court of Appeal decided a number of issues concerning PD 51Z, including whether the practice direction was itself ultra vires and whether the 90-day stay can ever be lifted.

Background to the case

Arkin v Marshall is a rather unremarkable possession claim.  However, the timing of the proceedings brought PD 51Z to the fore.

On the day that PD 51Z came into force certain procedural steps were ordered by a judge in the County Court at Central London.  These included the usual directions for disclosure of documents and exchange of witness statements.

Paragraph 2 of PD 51Z provides that:

All proceedings for possession brought under CPR Part 55 and all proceedings seeking to enforce an order for possession by a warrant or writ of possession are stayed for a period of 90 days from the date this Direction comes into force.”

PD 51Z was amended on 20 April 2020 by the introduction of a new paragraph 2A, to make clear that the stay in paragraph 2 does not apply to:

  • possession proceedings brought against “persons unknown”; and
  • an application for case management directions which are agreed by all parties“.

The Marshalls, who were defendants to the claim, took the view that the effect of paragraph 2 was to discharge the parties from any obligation to take steps in accordance with the court’s directions for the 90-day period.  The claimant, Arkin, disagreed, arguing that the stay did not apply to the proceedings and, even if it did, the stay should be lifted.

The County Court judge found for the Marshalls and held that the proceedings were stayed, and that the court had no power to lift the stay.  Given the importance of the case, permission was given for Arkin’s appeal to “leapfrog” the High Court, and proceed directly to the Court of Appeal.

Is PD 51Z ultra vires?

In order for PD 51Z to be enforceable, it was agreed that it must constitute a “pilot scheme” the aim of which was for “assessing the use of new practices and procedures in connection with proceedings“.  Arkin argued that PD 51Z was not a genuine pilot scheme.

The Court of Appeal concluded that PD 51Z clearly was a pilot scheme.  PD 51Z itself provides that it “is intended to assess modifications to the rules and Practice Directions that may be necessary during the Coronavirus pandemic and the need to ensure that the administration of justice, including the enforcement of orders, is carried out so as not to endanger public health”.

Arkin’s argument that PD 51Z was inconsistent with the Coronavirus Act 2020 was said by the Court of Appeal to be “not tenable”.  Arkin further argued that PD 51Z was contrary to Article 6 of the European Convention on Human Rights and Fundamental Freedoms and the principle of access to justice. The Court of Appeal disagreed, considering that “the short delay to possession litigation enshrined in PD 51Z is amply justified by the exceptional circumstances of the coronavirus pandemic.”

Does the Court have jurisdiction to lift the stay?

Arkin argued that the effect of paragraph 2A is that if the parties agree case management directions, then these should be complied with, notwithstanding the 90-day stay.

The Court of Appeal disagreed, finding that paragraph 2A allows the making of an “application” for agreed case management directions.  If any of those directions include an obligation to do something before the 90-day stay expires, then such directions cannot be enforced.

However, the Court of Appeal did make the following clear:

If either party fails to do what it agreed to do during the period of the stay, the other party will, no doubt, be able to rely on that circumstance once the stay is lifted.  It will be able to ask the court, at that stage, to take the conduct of the other party into account in making revised directions.”

Arkin also argued that the court must retain a general discretion to lift the 90-day stay.  The Court of Appeal acknowledged that “a judge retains the power to lift the stay which [PD 51Z] imposes” although, in relation to PD 51Z, “it would almost always be wrong in principle to use it”. There was also nothing about these possession proceedings which would warrant the lifting of the stay.

What does this mean?

The effect of this decision is that, unless you are dealing with possession claims against persons unknown, there is very little prospect of getting the 90-day stay of proceedings imposed by PD 51Z lifted.

However, if a property owner has agreed directions with a defendant requiring action before the end of the 90-day stay, they should still seek to comply with them, notwithstanding the stay, as any failure to comply without good reason may be taken into account by the court at a future date.

Arkin v Marshall [2020] EWCA Civ 620

Our new interactive tracker is a single point of reference for you on COVID-19 real estate specific matters across our global practice. It lets you view relevant guidance and changes to legislation for each country and it also allows you to compare information across different jurisdictions:

COVID-19 Global Real Estate Interactive Map:
Government Response Tracker

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

Posted in Case Updates

What is Duvalue of an absolute covenant in a lease?

On 6 May 2020, the Supreme Court handed down its judgment in the case of Duval v 11-13 Randolph Crescent Limited [2020] UKSC 18.  The question considered by the court was whether a landlord of a block of flats could consent to a tenant carrying out works which would amount to a breach of covenant under the lease, in circumstances where the remaining leases in the block required the landlord to enforce the covenants of all tenants.

The facts

Julia Duval held a long lease (125 years) of two of the nine flats in 11-13 Randolph Crescent.

Under the terms of all nine leases, the tenants were prohibited from carrying out certain alterations and improvements without the landlord’s consent, not to be unreasonably withheld.  There was a further, absolute prohibition on works that involved the cutting into any roofs, walls, ceilings or service media.

The landlord had covenanted with each of the tenants that it would, at the request and cost of the tenant, enforce certain covenants contained in the other tenants’ leases.

One tenant wished to remove a load-bearing wall at basement level and approached the landlord for consent.  The landlord was minded to consent to the works.  Duval issued proceedings arguing that the landlord had no power to give its consent as this would allow the tenant to breach its covenant under its lease.

The landlord argued that it was and should be able to deal with its own building as it saw fit and that, once it had granted consent, the works could no longer be considered a breach.

The Supreme Court’s decision

The Court found in favour of Duval, deciding that there was an implied covenant by the landlord in Duval’s lease not to do anything that would prevent the landlord from enforcing the tenants’ covenants in the other leases, including by consenting to something that would otherwise be a breach.  The Court felt the covenant would otherwise be useless if the landlord could essentially modify, vary or permit breaches of covenant as it pleased.

The Supreme Court drew a distinction between, on the one hand, routine works which the parties will have contemplated would be needed over the lifetime of the lease (such as repair and replacement of plumbing, drainage and heating systems and even modernisations and technological developments) and, on the other, those which went above and beyond routine alterations and which may be damaging or destructive to the building.  The fact that the leases were long-term and were acquired for a substantial premium assisted the Court in reaching this view.

What are the implications?

This case is likely to have far-ranging consequences particularly on blocks of residential flats where landlord covenants to enforce breaches of tenants’ covenants are common.  Although less common in the commercial context, the case may impact on commercial landlords of multi-let office buildings and shopping centres, for example.

Landlords should also ensure that they have an active role in managing their building to avoid any argument that they have, even by implication, consented to something that would otherwise be a breach of the tenant’s covenants. It would be prudent to review existing procedures for consenting to tenants’ works, as against the terms of the leases.

If appropriate, landlords should consider whether they have any discretion whether to enforce tenant covenants, for example only to enforce breaches which have a direct impact on the other tenants’ units or the common parts, or enforce “as the landlord deems fit” or “where the landlord considers it reasonable to do so“.  Landlords should also seek to negotiate these qualifications into future leases wherever relevant to maintain greater flexibility when managing their property. It is likely, though, that we will see landlords taking a much tougher stance when granting consent.

For tenants, a potential workaround could be to seek the agreement of all other tenants in the relevant building, though achieving this is, of course, often easier said than done!

COVID-19 Global Real Estate Interactive Map:
Government Response Tracker

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

Posted in Real Estate News

UK COVID-19: Residential possession proceedings during lockdown- is the new practice direction too wide to work?

The UK government’s response to the COVID-19 outbreak has included various steps intended to relieve pressure on residential property tenants, whose livelihoods and income might have been seriously impacted by the current lockdown.  Those steps have included the extension of statutory notice periods for landlords who want to terminate residential tenancies, and extra time being given to tenants who find themselves in breach of their tenancy agreements (for example, because they are unable to pay their rent).

Those measures were set out in the Coronavirus Act 2020.  At the same time, a new practice direction “51Z” was added to the Civil Procedure Rules (the set of procedural rules that governs the processes for civil proceedings through the court system) staying for 90 days all existing court proceedings for possession orders and warrants of possession.  Because an owner cannot generally recover possession of residential property without a possession order, this means that any attempt by an owner to recover possession of property from an occupier who is unwilling to leave has been put on ice for 90 days (or more if, as expected, the 90 day period is extended).  The effect of the new practice direction is wide-ranging, and it does not appear to distinguish between (for example) tenants who have simply outstayed their welcome, and squatters who have entered property unlawfully.

Within a month of the new practice direction coming into effect, it has already been challenged in court.  The case of Arkin v Marshall is a claim brought before the current lockdown, by a lender seeking to enforce its rights as a mortgagee of property.  The proceedings are possession proceedings caught by the new practice direction 51Z . The applicant, apparently eager to press on without being delayed, asked the court to determine whether the practice direction has to be complied with (so staying the proceedings for 90 days) or whether the court can disregard the practice direction and require the parties to comply with upcoming directions for exchange of witness statements and expert reports, pushing the case towards trial.  The judge decided in the first instance hearing that the 90 day stay had to be complied with, without exception.

Given the purpose of this particular practice direction, as part of a suite of measures intended to slow down or halt the residential possession process during the COVID-19 lockdown, one might expect compliance to be strictly enforced, but with consent having been given for a leap-frog appeal straight to the Court of Appeal, we might soon see a Court of Appeal decision about whether judges have a discretion to ignore this and other Civil Procedure practice directions.

COVID-19 Global Real Estate Interactive Map:
Government Response Tracker

 

https://www.engage.hoganlovells.com/knowledgeservices/covid-19-real-estate-developments

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning