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Keeping It Real Estate

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

Posted in Real Estate News

The Sun Also Rises on Pre-pack Administration Reform

In 2015, responding to mounting concerns about pre-pack administration sales, a set of voluntary industry measures were introduced to address the perceived lack of transparency and trust in the process – especially when the sale was to a connected party, like a director or shareholder of the company in administration.

To encourage compliance, the government inserted a “sunset clause” into the Insolvency Act 1986 giving it the power to ban or regulate pre-pack sales to connected parties within the next five years. When that power expired in May 2020 many thought it was the end for pre-pack reform.

However, it was revived by this year’s Corporate Insolvency and Governance Act and extended to June 2021. In a report published today, the Insolvency Service has announced that the power should be exercised to require an independent opinion to be provided on any pre-pack sale in administration to a connected person.

Why has the government now decided to regulate pre-packs?

Following a review, the government has concluded that connected party pre-packs remain a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors. There is, in the government’s words, “still room for further transparency”.

It was also recognised that more companies may become insolvent as a result of the COVID-19 pandemic. Indeed, since the start of the pandemic, we have seen pre-pack sales by several major brands in both the retail and leisure sectors. This gives rise to concerns about the need to protect the interests of creditors as well as promote company rescue, and the Insolvency Service has concluded that further regulation is justified to ensure that pre-pack sales are subject to a measure of independent scrutiny.

What is a pre-pack sale?

A pre-pack sale takes place when the sale of all or a substantial part of a company’s business is arranged prior to the company entering administration, and then completed by the administrator after they are appointed, usually on day one of the administration.

An independent review led by the now Dame Teresa Graham CBE in 2014 highlighted the lack of transparency around pre-pack sales for unsecured creditors, leaving them feeling aggrieved. One of its key recommendations was the establishment of a group of experienced business people which could be approached, on a voluntary basis, to offer an opinion on any pre-pack sale to a connected party. The Pre-Pack Pool (the Pool) was formed to provide such an opinion.

What were the government’s findings?

Despite the number of connected party pre-packs increasing since 2016, there has not been a corresponding rise in the number of referrals to the Pool. The number of pre-pack sales to connected parties increased year on year from 163 in 2016 to 260 in 2019. Remarkably, however, the number of referrals fell in the same period from 36 (22%) in 2016 to just 23 (9%) in 2019.

The reason given for this poor take up rate was that the purchaser saw no benefit in making a referral. Administrators have no ability to request an independent opinion from the Pool, so referrals are entirely dependent on the willingness of potential purchasers to make one. Further, administrators are only required to make connected party purchasers aware of their ability to approach the Pool; they are not required to recommend that the Pool be approached.

In light of this, stakeholders including insolvency industry trade body R3 and the British Property Federation supported the establishment of a statutory mechanism for making referral to the Pool mandatory.

What has the government decided?

The government does not propose banning connected party pre-pack sales altogether. In many circumstances it was felt that a pre-pack sale provides the best outcome for creditors.

Instead, the government will bring regulations into force before June 2021 preventing an administrator from disposing of company property to a connected party within the first eight weeks of the administration without either the approval of the creditors or an independent written opinion. The opinion provider, who must meet certain eligibility requirements, will provide a written report to state that either the case is made for the disposal or not made. Whilst the administrator can proceed with the disposal if the case is not made, the administrator will be required to provide a statement setting out the reasons for doing so. The administrator must in all cases provide a copy of the opinion to the creditors and Companies House.

Today’s announcement on pre-packs will be no doubt be welcome news for landlords, who may feel that the government’s response so far to COVID-19 has been decidedly debtor friendly and undermined their interests as creditors. Whilst the Insolvency Service does not mandate that written opinions must be sought from the Pool, as the established operator in the market it does appear likely that referrals to the Pool will increase dramatically from their current low levels.

A copy of the report can be found here

Posted in Real Estate News

Higher MEES for residential properties? Have your say

On 30 September 2020 the government published its consultation on amending the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “Regulations”), raising minimum energy efficiency standards for the domestic private rented sector in England and Wales.

What is behind this consultation? The government’s aim is to have as many private rented sector homes as possible achieve an EPC band C by 2030. As a reminder, since 1 April 2020 there is a minimum EPC band of E for domestic private rented property (subject to a limited number of exemptions).

The consultation outlines four key proposals to achieve this goal:

  • Raising the minimum energy performance standard…

The government’s preferred policy is for all domestic private rented property to meet the single target of an EPC band C. To be clear, this is the “energy efficiency rating” (“EER“) rather than the “environmental impact rating” (“EIR“). The EER measures a building’s performance based on the total energy costs to heat and light the building, whilst the EIR measures carbon emissions from a building.

  • …via a phased introduction

The requirement to meet the minimum EPC band C would be introduced in phases. Under the proposals, the new minimum standard would apply from:

    • 1 April 2025 for new tenancies of domestic private rented property (including renewals); and
    • 1 April 2028 for all domestic private rented property tenancies.

Alternative approaches include: a single compliance date (i.e. all properties must achieve the EPC band C rating by 1 April 2028); earlier compliance dates in a phased approach; or more interim targets in a phased approach.

  • Changes to the costs cap

At present, where a landlord has substandard domestic private rented property its spending requirements in improving energy performance are capped at £3,500 (VAT inclusive).

Achieving a higher minimum EPC band will require more investment, and the government wants to increase the cap to £10,000 (VAT inclusive).

The government sees the increased cap as the best way to ensure the majority of properties are improved whilst limiting landlords’ costs. Its modelling indicates that landlords would spend £4,700 per property to reach EPC band C if the £10,000 cap was set.

  • A “fabric first” approach

This broadly means improving the energy efficiency of the fabric of a building as a priority, ahead of other improvements. EPC recommendation reports currently adopt the fabric first approach, but landlords are free to implement recommendations in any order they wish.

The government is open to views on how to incentivise fabric first measures – making it mandatory via legislation is up for consideration.

Whilst the above is the government’s preferred policy, it is not the only option on the table. The grading of substandard EPCs is currently done on the EER rather than the EIR. Confusingly, the EIR is also on an A to G scale but is included in EPCs for information purposes only. The government is considering an alternative “dual metric” approach whereby landlords would need to ensure their properties achieved an EER band C and an EIR band C. The cost cap would also be increased to £15,000, rather than £10,000. Whilst this is more ambitious and would lead to more significant emissions savings, the cost to landlords is potentially higher. The government has welcomed views on this alternative.

Finally, the government wants responses on how to encourage compliance. This could include the creation of a new property compliance and exemptions database, operated by a third party provider with a registration fee of £30 per property. The government accepts that there may need to be a maximum registration fee for landlords with significant domestic private rented property portfolios.

The government is also considering changes to enforcement powers, mainly for local authorities. Local authorities have some powers to enter domestic private rented property under the Housing Act 2004 (for health and safety purposes), but the government’s view is that using these powers for enforcing the Regulations is disproportionate to their intended purpose. Instead, local authorities may be given alternative powers to serve notices on landlords and any tenants to carry out inspections at agreed times. In the future, the Housing Health and Safety Rating System that local authorities use may be amended to align with the Regulations. Fines for breaching the Regulations could also be increased to £30,000 per property and per breach to act as a greater deterrent.

You can find a copy of the consultation here. Responses must be submitted by 30 December 2020, and we strongly encourage all interested parties to respond.

Posted in Real Estate News

Prejudice to landowner is too high to impose Code rights on its land

The Electronic Communications Code gives powers to telecoms operators to acquire rights over private land to install their apparatus for the purpose of providing their network. In order to impose rights against a reluctant landowner, the operator must establish that the prejudice caused to the landowner by the imposition of those rights can be adequately compensated in money and that the public benefit of imposing the rights outweighs that prejudice.

In a recent decision, Cornerstone asked the Tribunal to impose an agreement conferring permanent Code rights to install and operate their apparatus on the roof of a building in Elephant and Castle, which was owned and occupied by the University of Arts London. Cornerstone needed a new site in the area having recently been ordered by the Tribunal to leave two other roof-top sites nearby for redevelopment.

The University had already entered into an agreement with a developer to construct a new building for them. Once the new building was completed, the University would sell its existing building to the developer but would remain in occupation under a three-year leaseback to give it time to fit out the new building before moving in. The first 18 months of this leaseback were rent-free, but then the annual rent would increase to £3,000,000. The University had the benefit of a break clause in the leaseback which enabled them to terminate it at any time. However, the break was conditional on the University delivering vacant possession of the existing building to the developer, specifically, free of telecoms apparatus. The significant hike in rent after 18 months created a strong incentive for the University to complete its fitting out works of the new building and exercise the break clause in the leaseback within that first 18 months.

The price of prejudice

It was accepted by both parties that if Code rights were imposed, the University would need to terminate those rights and successfully remove Cornerstone’s apparatus before it could deliver vacant possession. Since Cornerstone would have security of tenure under the Code, and hadn’t left its previous buildings voluntarily without a court order, the University argued it would probably have to litigate to obtain possession. It argued that it would have to follow the 18 month notice procedure in the Code and obtain an order from the Tribunal to terminate the Code rights on one of the statutory grounds and then separately secure an order for removal. There was no guarantee how long that would take and it was likely that the University would be unable to exercise the break in the leaseback at 18 months, which would have significant financial repercussions.

The University also argued that the consequences of litigation would be unpredictable and damaging to their reputation. In the worst case scenario, if the University was not able to deliver vacant possession at the end of the three year term of the leaseback, it argued that the developer could seek an injunction against them. The University’s position was that their prejudice was unquantifiable and could not be compensated by money. Further, the public benefit of imposing the Code rights did not outweigh that prejudice.

Cornerstone argued that that there was a chance the development of the new building would be delayed and in any event, the University would be able to obtain the various orders under the Code to require them to remove their apparatus. Any prejudice suffered could be compensated and would not outweigh the public benefit.

The Tribunal found in favour of the University: there was a real risk of litigation (both under the Code to remove Cornerstone and from injunctive proceedings by the developer), which would create stress, uncertainty, reputational damage and could harm the University’s relationship with the developer and its students. The Tribunal acknowledged that the prejudice must be “very high indeed” to outweigh the competing public benefit, “but there comes a point when it is too much to ask”. In this case, impeding the University’s ability to perform its pre-existing contractual obligations would reach that threshold. As such, the Code rights were not imposed.

Cornerstone Telecommunications Infrastructure Ltd v University of The Arts London [2020] UKUT 248 (LC), The Upper Tribunal (Lands Chamber)

Posted in Real Estate News

UK COVID-19 – The FCA Business Interruption Test Case ruling – the end of the ‘Covid clause’ in leases?

This week the High Court has delivered its eagerly anticipated ruling in the FCA Business Interruption Test Case. The case was brought by the Financial Conduct Authority on behalf of business interruption policyholders, with the aim of determining issues of principle on coverage and causation under a series of sample policy wordings.

Whilst of broad significance for all those whose businesses have been affected or interrupted by COVID-19, the judgment does not specifically address the question which many owners of real estate have been asking in the context of their leases:

  • Can landlords make any recovery under ‘loss of rent’ insurance policies, where tenants have failed to pay rent but this is not linked to physical damage/destruction of their premises?

The judgment does, however, have the potential to influence some of the negotiations which have been occurring between landlords and tenants in recent months, particularly around requests for so-called ‘Covid clauses’. With the spectre of further lockdowns (whether local or national) continuing to loom, such clauses are still being sought by tenants keen to secure either suspensions or reductions in rent in the event of an inability to trade or work from their premises. The negotiation of these clauses is fraught with difficulty: Should they cover only COVID-19 or also any future pandemic? Should they be triggered by government-issued guidance or only by legislation? The test case ruling doesn’t help to answer those questions directly, but in providing more certainty around the scope for successful insurance claims – and therefore the risk profile for each party – it does potentially alter the landscape going forward.

For occupiers of real estate, the key question has been:

  • Can tenants make any recovery under business interruption policies, to cover rent which they have had to keep paying even while they have been unable to occupy or trade from their premises due to lockdown restrictions?

In this regard, the judgement is complex, addressing cover for COVID-19 related claims under 21 different sample policy wordings, and does not lend itself to easy conclusions. Our insurance team have reviewed the judgment in detail and their headline analysis can be read here.  Although there were ‘wins’ for each side on the case, it is clear that at least some business interruption policies -depending on the specific wording – would be construed widely enough:

  • To cover not only the effects of local occurrences of notifiable diseases but also a wider ‘national’ peril
  • To be triggered not only where government action has the force of law but also, in some cases, by government ‘advice’
  • To pay out in respect of ‘hindrance of use’ even where complete prevention of access does not occur.

The critical upshot is that the outcome in each case turns on the effect of specific words and phrases within the various clauses considered by the court. Also (for certain clauses) it turns on the nature of the business conducted by the policyholder and how it was affected by COVID-19 and the various government measures. But in summary, it is fair to say that there is at least a gateway to insurance cover under a broad range of wordings. Whether landlords and tenants will have the capacity and inclination to investigate their particular policies in detail when negotiating Covid clauses, and whether the balance of negotiating strength will tilt in favour of landlords as a result of this ruling, are matters which remain to be seen.

 

 

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

UK COVID-19: Government extends protections for commercial tenants

After much speculation the government announced on 16 September that it will be extending protections that have been afforded to commercial tenants as a result of the COVID-19 pandemic.

What are the current protections?

Commercial tenants currently benefit from a number of COVID-19 related protections including:

  • a temporary prohibition on landlords forfeiting commercial leases as a result of a tenant’s failure to pay rent, which was due to come to an end on 30 September 2020; and
  • a requirement for 189 days’ worth of rent to be outstanding before a landlord can enforce Commercial Rent Arrears Recovery (CRAR), also due to come to an end on 30 September. Normally only seven days’ rent needs to be outstanding in order for a landlord to exercise CRAR.

What has been announced?

The Government has now announced that the forfeiture and CRAR protections will be extended until 31 December 2020 in order to “stop businesses going under and protect jobs over the coming months”.

This means that a landlord will not be able to forfeit a commercial lease for non-payment of rent until 2021 at the earliest, subject to any further extensions to this protection.

In relation to CRAR, this will mean a tenant needs to be in arrears of at least 276 days’ or 366 days’ rent, dependent upon whether CRAR is exercised before or after the December 2020 quarter’s rent falls due, before a landlord can exercise CRAR.

What does this mean for landlords?

The stated purpose of these extensions is to give businesses “some much-needed breathing space at a critical moment in the UK’s economic recovery”. However, at the same time the Government has made clear that where businesses can pay their rent, they should do so.

This will be of little comfort to commercial landlords who have seen tenants refusing to pay rent, despite the Government’s previously announced Code of Practice for commercial property relationships during the COVID-19 pandemic. The Code makes clear that both landlords and tenants “should act in good faith” and that “tenants who are able to pay their rent in full should continue to do so” – read more about this here.

The Government also makes clear that “it is crucial that both landlords and tenants have the clarity and reassurance they need to build back better from the pandemic”. Many landlords will be querying how this further blanket extension provides reassurance that they will receive rents from those tenants who can and should be paying.

What is not clear at the moment is whether the Government is also intending to extend the restrictions on winding up companies, a measure introduced (in part) to prevent landlords enforcing arrears by serving statutory demands on tenants – for more information see our previous blog. These restrictions are currently due to end on 30 September and we will have to wait to see whether there will be a similar extension.

What can landlords do?

This announcement leaves landlords in the difficult position of suspecting that many tenants will see this latest development as an invitation to not pay rent for the remainder of 2020, regardless of whether they have resumed trade and the extent to which their business has recovered. For tenants, deferring rent payments yet further may just be delaying the inevitable and leave them with an even bigger financial hangover to deal with in 2021 when restrictions are finally lifted.

With most other remedies unavailable, landlords may be left with the only option of issuing court proceedings against tenants for non-payment of rent, if they are unable or unwilling to defer payments until next year.

 

 

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

Challenging times – the Use Classes Order and Permitted Development Rights

Aside from the long-awaited “Planning for the Future” White Paper, the big planning and development talking points of the summer have been the radical reforms to the Use Classes Order and the Permitted Development Rights (“PDR”) regime.

We’ve covered the detail of the reforms in our bulletins on the Use Classes Order here and on PDR here. In brief:

  • The changes to the Use Classes Order represent a complete overhaul of the system and, importantly, introduce a broad new commercial, business and service use class (Class E). This new use class incorporates and consolidates the previous shops (A1), financial and professional services (A2), restaurants and cafes (A3) and offices (B1) classes, as well as bringing within it gyms, nurseries and health centres. In the absence of conditions or obligations to the contrary, it’s now possible to change use within Class E without the need for planning permission.
  • The reforms to PDR introduce (in certain circumstances) the ability to extend buildings upwards and to demolish and rebuild vacant buildings for new homes. It’s not open season, though, as both new PDRs are subject to an extensive list of exclusions and limitations.

The changes came into force at the start of this week – and already they’re the subject of a legal challenge brought by a non-governmental campaign organisation concerned with tackling the climate emergency.

The action group seeks to challenge on three grounds the lawfulness of the statutory instruments which bring about the changes to the Use Classes Order and PDR:

  • First, that the Secretary of State unlawfully failed to carry out an environmental assessment of the statutory instruments in accordance with his obligations;
  • Second, that the Secretary of State failed to have due regard to the Public Sector Equality Duty; and
  • Third, that the Secretary of State failed to consider the weight of evidence against these “radical” reforms, including consultation responses and the advice of his own experts.

The challenge seeks to quash the statutory instruments.

An urgent application to suspend the operation of the statutory instruments until the claim is settled was withdrawn on 2 September – so the changes remain in force for the time being – but the government’s relief will be short lived.

The Planning Liaison Judge, Sir David Holgate, has ordered that the matter be heard by the High Court at a rolled-up hearing listed for one and a half days between 8 October and 15 October. If permission to apply for judicial review is granted at that hearing, the Court will proceed immediately to determine the substantive claim. The industry must attentively await the outcome.

Those already in the process of updating their approach to use clauses in leases may want to hang fire until the claim is settled before they commit to referencing the new use classes. More nuanced ways of describing permitted use may be more appropriate or anchoring the permitted use to the Order as it existed prior to 1 September.

Will the much-vaunted Class E live to see the autumn? Or will it disappear almost as quickly as it arrived? Watch this space…

Posted in Real Estate News

UK COVID-19 – Further protection from eviction for residential tenants

Following emergency legislation in March 2020, intended to protect residential tenants from eviction during the COVID-19 lockdown (see our blog here) the government has announced further measures to ease the pressure on tenants who continue to feel the social and economic impact of the pandemic.

Six month notice period

From 29 August 2020, landlords must provide at least six months’ notice to tenants in order to seek possession through the courts (with some exceptions, as to which see below). This applies to both the private and social rented sectors in England and will last until March 2021.

Landlords can serve a section 21 notice to terminate a tenancy following the initial fixed term without an underlying reason. These are used for assured shorthold tenancies. Prior to the pandemic, the section 21 notice gave tenants two months’ notice to leave a property before the landlord could seek possession. The notice period was extended in March of this year to three months. Now, where section 21 notices are served, landlords must provide at least six months’ notice to seek possession, until 31 March next year. Any such notices that were served prior to 28 August 2020 are not affected by these changes and must have given at least three months’ notice.

There are some exceptions to the  new six month rule. For anti-social behaviour, landlords can give four weeks’ notice to seek possession. For domestic abuse and false statement cases, two to four weeks’ notice. For over six months’ accumulated rent arrears, four weeks’ notice is required, and where there has been a breach of the “Right to Rent” immigration and right-to-remain rules, the period is three months’ notice.

Further stay on possession proceedings

The stay on possession proceedings has been extended until 20 September 2020, bringing the total period of protection to six months. Once this stay is lifted, more detailed guidance will be made available.

It is important to note that for possession claims made prior to 3 August 2020, the claim can only proceed if the landlord notifies the court and the tenant that the landlord still intends to seek possession based on the original claim. This includes section 21 cases.

Conclusion

Tenants are still expected to pay the rent where they are able to do so, and they should not rely on this amended legislation to avoid paying their rent, especially given the time-limited nature of these changes.

The amended legislation further protects tenants due to the COVID-19 pandemic. The corollary is that landlords will be able to recover possession of their properties more quickly where the tenant is in serious breach of the tenancy agreement. This balancing of interests will again be under scrutiny when the government brings forward its proposed Renters Reform Bill which is set to abolish section 21 altogether. Whether the Bill will achieve the aim of balancing greater security of tenure for tenants against the ability of landlords to recover their properties remains to be seen.

Section 21 of the Housing Act 1988.

Legislation: The Coronavirus Act 2020 (Residential Tenancies: Protection from Eviction)(Amendment)(England) Regulations 2020 (SI 2020/914)

 

 

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 Real Estate News

Restrictive covenants – more likely to be enforceable, but don’t forget competition law

A recent Supreme Court judgment has clarified one of the routes to challenging covenants limiting land use. It has adopted a new approach to assessing the old question of what is a “restraint of trade”? The judgment did not however address possible challenges to restrictive covenants under competition law, which remain a real possibility.

The Supreme Court considered an agreement by a landlord with one of its retail tenants, which sold food and textiles. The landlord had agreed to prevent construction of a competing shop elsewhere on the same development. Subsequently, as the success of the shopping centre declined, the landlord wanted to have the restriction declared illegal, arguing that it was a “restraint of trade”.

The Supreme Court found for the tenant. It ruled that a restriction will not be a restraint of trade if that type of restriction has “passed into the accepted and normal currency of commercial or contractual or conveyancing relations”. It found that a restrictive covenant of the sort the landlord had agreed to, met this test.

On its face, this is encouraging for parties to real estate transactions seeking certainty. We do not think that the judgment would allow a party to impose more restrictions than is customary today, but all parties should be more confident that those customary restrictions are enforceable.

The big exception to this is competition law, which does not seem to have been argued in this case. Statutory competition law prohibits agreements with an anti-competitive effect or object. In most areas of commercial disputes this law has, to a large degree, taken the place of restraint of trade. Although competition cases can be complex, competition law can in fact be argued in any UK court. It has been applied to UK real estate since 2011.

Any restriction in a lease or other contract will breach the law if it has an appreciable negative effect on competition and countervailing efficiency criteria are not met. Such a restriction is illegal and void. In extreme cases the parties to such a restriction can also be subject to fines – even if this is unlikely in a normal real estate context.

In the real world a competition law analysis can be complex. The regulator’s guidance suggests that restrictions on landlords letting to businesses which compete with their existing tenants may in certain circumstances be illegal.

Also not impacted by this case is a special set of competition rules aimed at the largest supermarkets. Put into place by the competition regulator in 2010, these rules prohibit some restrictive covenants and exclusivity clauses benefitting the supermarkets. Earlier this year the regulator (the CMA) sent a shot across the bows of a major supermarket chain, in an open letter identifying 23 breaches.

So, some takeaways for practitioners:

  • not a green light for novel restrictions in real estate transactions;
  • some greater comfort on the enforceability of customary restrictions;
  • but still a need to consider in all cases whether competition law may overrule the terms of a contract.
Posted in Real Estate News

HMRC change their practice on VAT treatment of lease variations

HMRC has today published Revenue & Customs Brief 11 of 2020 (RCB), concerning the VAT treatment of lease variations.  The RCB represents a change in the way HMRC have treated lease variations for VAT purposes where the landlord reduces the rent and the tenant agrees to give up or vary their break right.  Although HMRC assert that there has been no change in policy, many landlords will be pleased to see that the RCB heralds a more sensible approach.  The RCB is being issued in response to the frequency of lease variations as result of the impact of COVID-19 on the commercial property sector, particularly for retail tenants.

The issue

COVID-19 has resulted in a large number of lease variations where landlords seek to secure the on-going letting of their property investments.  Tenants will often insist on a reduction in rent or rent-free period, in return for agreeing to continue renting the property.  These deals commonly take the form of a variation to the existing lease, reducing or suspending the rent, and removing an upcoming tenant break right (which would otherwise have allowed the tenant to terminate the lease).

HMRC has on previous occasions taken the approach that anything done in return for a reduction in rent or a rent-free period can count as consideration for VAT purposes, including a tenant’s agreement not to exercise a break right.  The landlord was seen by HMRC as making a supply to the tenant in consideration for the tenant removing its break option, and the tenant was likewise seen as making a supply to the landlord in consideration for the reduction in the rent.  The value of both supplies would usually be equal to the rent reduction. The result in practice was that a landlord who had opted to tax a property was required to charge VAT to the tenant.  The tenant would likewise be required to charge VAT if it had opted to tax, though in practice this is less common.  HMRC expected VAT to be charged by reference to the amount of rent given-up by the landlord, based on an assumption that the landlord and tenant were providing something of equal value to each other (and indeed this approach is still reflected in VAT Notice 742, paragraph 10.2).

This often created problems in practice, especially among tenants unable to recover the VAT charged by the landlord.    Additional confusion arose from other VAT guidance on lease variations: apparently intended to clarify the treatment where a variation triggers a deemed surrender and re-grant, it ostensibly suggests that a lease variation which extends the term of the lease can never give rise to VAT unless monetary consideration was involved.

Valuation issues have also complicated the position.  VAT law requires the landlord to charge VAT based on the subjective value that the parties can be regarded as having treated as the consideration for the supply.  It is not always the case that the value will be the same as the value of rent given up by the landlord. Take the example of a landlord forced to reduce the rent to keep afloat a tenant in financial difficulties, where the tenant’s break right is removed as little more than a gesture, in the hope that it survives.  In that situation the landlord is unlikely to consider that removal of the break right was worth the same as the amount of rent given up on paper.

The change in HMRC practice

The RCB contains an example which demonstrates that HMRC will be following the approach that merely giving up a break right (or agreeing to extend the term of the lease) will not be seen as consideration for VAT purposes.  No VAT would be chargeable by the tenant or the landlord (other than in respect of the rent), absent anything additional being given or done on the tenant’s part.

There are good legal grounds for that position.  Broadly speaking, promising to be a tenant and to pay rent is not treated as consideration when a new lease is granted, and the same reasoning (set out in the Mirror Group case (C-409/98) appears equally applicable where those promises are made during the course of an existing lease.  In both situations the landlord is giving a rental reduction or rent-free in order to secure the on-going letting of the property, regardless of whether that takes the form of the tenant accepting a new lease or removing a break right from an existing lease.

Conclusions

Lease variations are notorious for the VAT issues they create, and are best considered on a case-by-case basis.  However, the RCB signals that HMRC do not expect landlords or tenants to be charging VAT where the tenant does no more than giving up a break right, in return for a rent reduction or rent-free period.

Posted in Real Estate News

A sign of the times – Land Registry start accepting electronic signatures

The Land Registry has announced this morning that, with immediate effect and until further notice, they will accept for registration transfers, leases and certain other deeds which have been electronically signed.

Twelve weeks ago, when the Land Registry announced that they would register deeds which had been signed ‘virtually’ using the “Mercury” protocol, practitioners across the industry breathed a sigh of relief that a method of signing which had been in use for more than a decade was finally being recognised by the Land Registry. Now, with speed that would have been hard to imagine prior to the COVID-19 crisis, the way has been opened for e-signed deeds to be used for registrable transactions as well.

The Land Registry’s move will be widely welcomed in the real estate market – and is one which will have long term effects even when the current difficulties arranging hard copy signings have eased. The use of electronic signing platforms has already gained significant traction over the months of lockdown, but the inability to use them for transactions involving Land Registry registration meant they could only ever be a ‘bonus method’ available for certain types of document. Now we expect many of our clients to adopt electronic signing as their default method of execution.

Needless to say, there are important caveats which must be borne in mind. No particular signing platforms are endorsed or preferred by the Land Registry, but their updated practice guide stipulates a number of requirements which must be met. These include:

  • All parties must agree to the use of electronic signatures and the platform being used. (Note this does not mean that every party has to use the same platform or indeed sign electronically; it is still open for different parties to sign counterparts using different methods.)
  • All parties must have conveyancers acting for them.
  • A conveyancer must be responsible for setting up and controlling the signing process.
  • A number of prescribed steps for the signing and dating process need to be followed. In particular signatories and witnesses will be required to enter a ‘one-time password’ (two factor authentication) sent to them by text message in order to access the platform.

Whilst the Land Registry has addressed a number of the immediate issues, there remain some difficulties arising from a mismatch between some electronic platforms’ two factor authentication processes and the prescribed steps which the Land Registry require to be followed. The concerns, which relate to confidentiality of the final signed document, may mean that for the time being, where a party’s execution method requires the use of witnesses, parties may not be comfortable adopting e-signing for those transactions.

Nevertheless, today will be looked back on as a somewhat momentous day in the history of conveyancing. Electronic signing looks set to become part of the ‘new normal’ in the real estate world.