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Keeping It Real Estate

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

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

 

 

Posted in Real Estate News

UK COVID-19: Further commercial tenant protections announced by the government

Yesterday, the government announced further protection for the “UK high street from aggressive rent collection”.  This protection takes the form of further restrictions on a landlord’s ability to pursue certain enforcement action against a tenant: in particular, serving statutory demands and presenting winding up petitions for non-payment of rent.

These protections build upon the temporary suspension of a landlord’s right to forfeit for non-payment of rent, which you can read more about here.

As we saw when the government initially announced the suspension of a landlord’s right to forfeit for non-payment of rent, the government’s new proposals on statutory demands and winding up petitions are vague and unclear.  This blog highlights some of the gaps, which we look forward to seeing fleshed out in the proposed legislation.

What is the purpose of the measures?

The government wants to protect the “UK high street” against aggressive debt recovery actions.  It perceives that the majority of landlords and tenants are working collaboratively to reach agreements on debt obligations, but that some landlords have been putting tenants under “undue pressure”.

The government goes on to say that aggressive debt recovery tactics are “unfair”; and that the temporary emergency measures are designed to acknowledge the pressures landlords are facing while encouraging cooperation in the spirit of fair commercial practice.

Who will be protected?

The announcement refers to “high street shops and other companies under strain”, and the commentary in the announcement makes it clear that it extends to both retail and hospitality businesses.   It does also refer to “commercial tenants” without reference to the high street at all; however we infer that whereas the suspension of a landlord’s right to forfeit applies to all commercial tenants, the specific references to the high street suggests that the government’s latest proposals may not apply so widely.

Will the proposals apply if the tenant is still able to pay the rent?

The government is clearly trying to draw a distinction between tenants that can pay their rent but are choosing not to; and those that cannot pay their rent due to COVID-19.  As the proposals are high level it is not clear how this will work, but this distinction is going to be crucial for landlords.

The intended legislation will introduce a temporary ban on the use of statutory demands and winding up orders where “a company cannot pay their [sic] bills due to coronavirus, to ensure they do not fall into deeper financial strain”.

What does not appear to be intended to make its way to the statute books, though, is the requirement for those tenants that can pay to do so.  Instead, the government “calls on tenants to pay rent where they can afford it or what they can in recognition of the strains felt by commercial landlords too” which will fall some way short of many landlords’ hopes in this regard, particularly given the number of retailers who are withholding rent while still trading and appearing to be under no financial strain.

However this hopefully indicates that, unlike the suspension of a landlord’s right to forfeit, the government’s approach on ‘banning’ statutory demands and winding up petitions will be more carefully targeted.

So what protection is being introduced?

As mentioned above, a temporary ban on the use of statutory demands and winding up orders.

To implement this, the government has stated that “any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why.  The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.”

This indicates that the government may be proposing an additional ‘check’ on landlords taking steps to wind up a company, rather than an outright ban.  It may also suggest that the burden of proving coronavirus hardship will fall on the tenant, although perhaps we infer too much.

Do the proposals remove the statutory demand and winding-up from a landlord’s armoury?

At present a landlord is still entitled to serve a statutory demand, and doing so may result in a tenant paying its rent, especially in a case where the tenant can pay its rent and is simply trying to take advantage of the COVID-19 situation.
Depending on what the draft legislation says, it may still be possible to serve a statutory demand and issue a winding up petition in certain circumstances, but everyone acknowledges that this is a serious step to take and landlords will need to consider carefully if they have the confidence, and resources, to meet the new additional hurdle.

The extra limitations will make the process less attractive, meaning that landlords are more likely to exercise other enforcement action, such as CRAR or issuing debt proceedings.

Is there any change to CRAR?

No, but the government has announced that it is in the process of preparing further legislation to provide tenants with more protection from the Commercial Rent Arrears Recovery regime (CRAR).

The government has said that this will “prevent landlords using commercial rent arrears recovery (CRAR) unless 90 days or more of unpaid rent is owed.”  The good news for landlords is that if a tenant pays rent quarterly in advance, this should not affect a landlord’s ability to take action under CRAR except perhaps in September, when the quarter has only 87 days .

Can the landlord still sue the tenant for the arrears?

Yes.  The government’s most recent proposals do not appear to prevent landlords issuing Court proceedings for a tenant’s failure to pay rent.  We anticipate that landlords may well become more prepared to issue proceedings as other remedies become harder to invoke.

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

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:

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

Posted in Real Estate News

Right to rent checks – here to stay

The Court of Appeal has held that right to rent checks are not unlawful under the Human Rights Act, reversing a decision of the High Court. The Court held that the scheme was a “proportionate means of achieving its legitimate objective”, and was therefore justified. However its finding that the scheme has caused some discrimination is likely to have significant political ramifications and will lead some to call for its abolition.

The right to rent requirements were brought into force in England in February 2016 under the 2014 Immigration Act, but have not yet been implemented in Scotland, Wales or Northern Ireland.

In March last year, the High Court found that right to rent checks cause discrimination on grounds of race and nationality and breach the Human Rights Act. The High Court felt that the scheme could not be justified as “the measures have a disproportionately discriminatory effect” and, on the evidence, “the scheme has had little or no effect” in tackling illegal residence.

In considering this issue, the Court of Appeal expressed difficulty with the assessment of whether or not there was discrimination. Ultimately the Court concluded that those who do have a right to rent, but not a British passport, were subject to some discrimination on the basis of their nationality and this was caused by the scheme.

However the Court stressed that this discrimination is not a rational or logical outcome of the scheme, and noted the evidence which indicates that over half of all landlords do not discriminate in this way. Discrimination was not a logical or inevitable result of the scheme.

This played a role in the judges’ determination of whether the scheme could be justified. Ultimately, the Court held that the scheme was a “proportionate means of achieving its legitimate objective”, and was therefore justified.

The right to rent scheme requires all private landlords to check the immigration status of a tenant or lodger, to ensure they can legally rent a residential property in England. The policy also affects commercial landlords if, for example, they let residential flats over retail units. In practice, landlords generally pass on responsibility for rent checks to letting agents, but this needs to be clearly agreed as part of the landlord’s contract with the agent.

The checks must be carried out before the start of a tenancy, on all people aged 18 or over who will live at the property as their main home, whether they are named in the tenancy agreement or not. Certain types of property, such as social housing, some student accommodation, and leases of seven years or more of any residential property, are exempt. Landlords can be fined up to £3,000 or face criminal charges for acting in contravention of the scheme.

While the challenge cast some doubt over the scheme’s legality, it is now clear that right to rent checks are here to stay, unless the government bows to mounting political pressure. In a statement made following the judgment, the Home Secretary Priti Patel stated the government was, “carefully reviewing and reflecting on the recommendations in the Lessons Learned Review report, including those relating to the compliant environment”. This is bound to gather traction given the Court found the scheme had caused some discrimination. Indeed, the government has promised to “continue to work with landlords and lettings agents to ensure that the scheme is operated in a lawful way”.  We now wait to see whether a final appeal will be made to the Supreme Court.

 

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

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

COVID-19 UK – Emergency permitted development right switched on

As converted conference centres and arenas open their doors as temporary NHS Nightingale Hospitals, the latest tranche of urgent planning measures designed to respond to the spread of COVID—19 came into force at 10.00 this morning (Thursday 9 April 2020).  The measures provide planning clarity for those wishing to make available to the NHS and public sector facilities such as empty car parks, unoccupied hotel rooms or vacant conferencing facilities, and set out the basis on which they can do so.

The Town and Country Planning (General Permitted Development) (Coronavirus) (England) (Amendment) Order 2020 (the “Order”) introduces a new permitted development right to allow the emergency development by local authorities and health service bodies of facilities required in responding to the spread of COVID-19 without having to submit a planning application.

What does the right allow?

The right permits development (including physical works and changes of use) by or on behalf of a local authority or health service body on land owned, leased, occupied or maintained by it for the purposes of:

– preventing an emergency;

– reducing, controlling or mitigating the effects of an emergency; or

– taking other action in connection with an emergency.

For the purposes of the Order, an emergency means an event or situation – such as the current COVID-19 pandemic – which threatens serious damage to human welfare in a place in the United Kingdom.

The permitted development right is broad, recognising the unprecedented circumstances, the need for flexibility and sensibly acknowledging that the detail of any development required won’t necessarily be known in advance.  The right facilitates development including the change of use of existing premises, the erection of temporary buildings, structures, plant and machinery, vehicle parking and storage space.

The Explanatory Memorandum to the Order envisages the right enabling “surge sites” to be brought forward for use as temporary hospitals, health facilities, testing centres, coroner facilities, mortuaries, accommodation and storage and distribution uses including for community food hubs.

What isn’t allowed?

The right does not allow unfettered development, and the Order sets out the parameters within which any permitted development must be carried out – this includes excluding the right in respect of certain types of land, imposing some limits on the nature of physical works permitted, and protecting buffer zones between development and adjoining land (in particular, dwelling houses).

It is important to note that the right only deals with planning consent and does not grant any other consents or permits – such as listed building consent, advertisement consent or environmental permits – which might be required to bring the development into use.

Is the right subject to any conditions?

Development under the right is subject to the following three conditions:

– where the developer is not the local planning authority it must, as soon as practicable after commencing development, notify the planning authority of the development

– the right is temporary – any use of land pursuant to the right must cease on or before 31 December 2020 (meaning that planning permission will be required for the use to continue beyond that date); and

– any building, structures and plant must be removed from the land and the land restored to its former condition within 12 months of the use ceasing.

Who can benefit from the right, and is there scope for private sector involvement?

The permitted development right is conferred on local authorities and health service bodies.  Any development must take place on land owned, leased, occupied or maintained by the authority or body.

Although the Order envisages the local authority or health service body taking control of the development itself, the authority or body doesn’t have to own the land on which the development is to take place.

This creates an opportunity for the private sector.  Land under private sector ownership – such as empty retail park car parks, unoccupied hotel rooms or vacant conferencing facilities – could (subject to any third party consents required) be released to local authorities or health service bodies under short-term leases or licences to occupy.  The Order sets the stage for more vital public-private collaboration to build on the impressive NHS Nightingale Hospital efforts to date.

It is important to ensure that all the requirements of the Order are complied with, otherwise any development purportedly carried out pursuant to the right could be in breach of planning control.  Whilst enforcement action is unlikely in the present circumstances, any breach could result in problems when normality resumes.  To safeguard value and the on-going operation of assets, therefore, it is critical to ensure compliance.

Equally, the procurement by the local authority or health service body of works, services or supplies in relation to any development remains subject to the public procurement rules and the Cabinet Office has published an Information Note (PPN 01/20, March 2020) with specific guidance in response to COVID-19.  Our procurement team can advise you on these issues if you need further information.

At a time of national emergency, it is positive to see the planning system – so often criticised as a foot firmly on the brake of development – responding quickly, flexibly and pragmatically to the urgent need to ramp up surge sites and temporary facilities to deal with the COVID-19 pandemic.

Please get in touch with your Hogan Lovells real estate contact to discuss this further.  Please contact Ciara Kennedy-Loest and Kate Rees in relation to procurement issues.

 

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
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 Planning

COVID-19 UK: Virtual planning committee meetings are no longer a remote possibility

The government has finally taken the steps needed to start bringing the planning system into the 21st Century, enabling “remote committee meetings” for the first time, in response to the coronavirus outbreak.

Certain types of planning applications must be determined by a local planning authority’s planning committee, but to date the meetings of these committees have been required to take place in person. Members of the public are entitled to attend (again in person), and documents associated with such committees (e.g. the agenda, committee reports etc.) were to be made available at the authority’s offices. As you can imagine, this has been causing some headaches with the government’s recent lockdown measures.

However, to deal with this, the recently enacted Coronavirus Act 2020 enabled the Secretary of State to make regulations to make provisions about the way in which people could attend and participate in meetings, and the availability of documents to members of the public. After some disquiet that the government had only done half the job in the Act, these regulations have finally been made; they come into effect on 4 April 2020 and apply to local authority meetings that are required to be held, or are held, before 7 May 2021.

Accordingly, local authority meetings (including planning committees) can now be attended by members remotely and, where such meetings are to be open to the public, the public can do the same. Relevant documents can also be published on the authority’s website, and the requirements for local authorities and the GLA to hold annual meetings are disapplied with greater flexibility given to the GLA in respect of certain other meetings. There are still some practical concerns about how these meetings will be hosted, and in particular the manner in which members of the public will be able to participate – although the industry is keen for determinations to continue this must not be at the expense of certainty and a greater risk of legal challenge – but it is clearly a positive step towards keeping the planning system moving.

And whilst these measures are only temporary, if they are successful, there is now hope that the government will look to make them permanent in a bid to speed up the planning process going forward.

 

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