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

Posted in Real Estate News

UK COVID-19: Update on protection from forfeiture for commercial tenants

Avid readers will have seen our previous blog on the government’s proposals to protect commercial tenants from the risk of forfeiture for non-payment of rent, as a result of COVID-19.

The proposals were incorporated into section 82 of the Coronavirus Act 2020 (the Act), which came into force on 25 March 2020.  In particular, section 82(1) of the Act provides that:

“A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.”

Unfortunately the Act left a number of questions unanswered.

In response to requests for clarification from the Property Litigation Association, the Ministry of Housing, Communities and Local Government (MHCLG) has provided some guidance on the aims and objectives of section 82 of the Act.  These include:

• What is meant by “rent”? 

MHCLG has made clear that for the purposes of the forfeiture moratorium “rent” is meant to include “any sum” a tenant is liable to pay under a business tenancy, including, it seems, service charge, insurance and other sums as well as principal rent.

• What is meant by “business tenancy”?

MHCLG has confirmed that the objective of the legislation is for the moratorium to cover “all commercial leases with someone in occupation of the premises for the purposes of their business”.

This is meant to include leases where the tenant in question has sublet the premises, and so is no longer in occupation, but a subtenant is in occupation of at least part of the premises for the purposes of their business.  In such circumstances, the sublease and the superior lease will both benefit from the forfeiture moratorium.

Following the same logic, the forfeiture moratorium would not, however, appear to extend to the head leaseholder of a build-to-rent residential building.  That is because such premises would be occupied by sub-tenants for residential purposes, rather than for the purposes of their business.  It’s worth bearing in mind that there are additional hurdles and complications to consider when forfeiting a lease with residential parts.

• What about consensual forfeitures? 

Unfortunately MHCLG has not given a clear indication that consensual forfeitures are excluded from the ambit of the Act.  MHCLG stated:

“Whether express agreement to forfeit the lease for non-payment of rent amounts to enforcement by action or otherwise of a right of re-entry or forfeiture will depend on the facts of a given case”.

The result of this is that the legislation appears to prohibit consensual forfeitures.  This suggests that landlords would have to agree surrenders with administrators of insolvent tenants or to rely on alternative grounds for forfeiture.

MHCLG’s responses, although not legally binding, have provided some helpful guidance for landlords and tenants of commercial premises; however, it is clear that the Act has some unsatisfactory consequences which for the present time landlords and tenants will need to adapt to. These include the apparent prohibition on consensual forfeitures, and the fact that landlords are not only prevented from enforcing payment of their rental income from property by forfeiture, but also recovery of their actual expenditure to keep the building safe, secure, well maintained and insured.

As set out in our previous blog, landlords remain free to enforce non-payment by other means, including (in the case of rent) by way of the Commercial Rent Arrears Recovery regime, or by winding up proceedings.  However, MHCLG has made clear that it is “monitoring the enforcement of non-payment closely and is keeping this issue under review”.  Therefore, if landlords do attempt to enforce non-payment of rent by other means, it may be the case that further action is taken by the government to protect commercial tenants.

The PLA’s questions and MHCLG’s responses can be read in full here.


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

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning



Posted in Real Estate News

COVID-19 UK – Flexibility in insurance policies for property managers

COVID-19 UK: Many insurance policies require annual lift servicing and water management system servicing. Is there any flexibility in policies for this sort of thing in exceptional circumstances?

Our understanding is that insurers should be flexible around these sorts of requirements (e.g. annual lift servicing or water management system servicing) in property insurance policies given the current COVID-19 crisis which has closed many buildings or restricted access.

This is in line with the Association of British Insurers (ABI) Guidance on property vacancy i.e. that if a business has to temporarily close because of COVID-19, where policyholders are taking the appropriate steps to mitigate the risk of damage to the property whilst unoccupied, insurers will be flexible around the period of un-occupancy specified on the policy document.

The bottom line is that if there are any specific requirements under an insurance policy that a business is unable or unlikely to be able to comply with, such as on-site security or maintenance, the advice is to speak with the insurer or insurance advisor/broker. The expectation being that insurers will be flexible and waive the requirement for a certain time period or find an alternative solution. Having said this, for lift servicing (for example) there may well be a legal requirement to carry out an annual check where the lift is still in (albeit limited) service for health and safety reasons, which may need to be considered over and above the insurance perspective.

Please also see our recent blog on insurance policies and landlord and tenant issues:


 Your contacts at Hogan Lovells are more than happy to discuss this and help further.



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

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning



Posted in Real Estate News

COVID-19 UK: Landlord and tenant insurance issues

As the COVID-19 pandemic spreads across the globe, so does uncertainty. Landlords and tenants are facing unprecedented impacts on their businesses, and it is no surprise in this environment that both parties are looking to their insurance for comfort.

Business interruption insurance

Calling COVID-19 an interruption to business would be something of an understatement, and understandably commercial tenants are looking to their business interruption insurance as they have to close their premises, face unprecedented disruptions to their supply chains and deal with the implications of lockdowns and other similar measures.

Most commercial tenants will have taken out interruption cover as part of their usual business insurance packages. A policy will cover the tenant for lost revenue, mitigation costs and increased costs of working caused by certain triggering events.

Whether a tenant can rely on business interruption insurance due to COVID-19 will depend on the specific policy. Unfortunately most “standard” business interruption cover is only triggered by physical damage to the tenant’s premises or the building of which the premises form part, and insurers will not pay out for losses caused by the COVID-19 pandemic. This will apply to the majority of commercial tenants who will have standard coverage.

However, certain tenants may have purchased coverage extensions which expand the triggers for cover. These contingent triggers could include:

  • Notifiable disease – tenants may have coverage where their premises are closed or are subject to restrictions as a result of a “notifiable disease”. In England and Wales, COVID-19 only became a notifiable disease on 5 March 2020 (the date differs in different parts of the UK).
  • Denial of access – this would apply if the tenant’s premises cannot be accessed due to government, police or other regulatory action. COVID-19 “lockdown” measures – for example the government exercising its power to close or restrict entry to premises under the Coronavirus Act 2020 – could be a trigger in this context. The key question will be whether the closure is due to legally binding government action.
  • Loss of attraction – tenants may have a policy that responds to occurrences in the area its premises are situated which result in a reduction of business turnover. Hypothetically, a tenant who operates an essential business from its premises in a shopping centre where all other units are closed could seek to rely on this type of insurance, but ultimately it will be a factual question.

All tenants should be conducting reviews of their insurance policies if they have not done so already and be seeking advice on their position, as the devil is in the detail – whether their cover responds to certain triggers, and what type of loss is covered, will ultimately depend on the wording in each policy. If there is potential for an insurance claim, that claim needs to be notified to insurers promptly.

Can a landlord look to its loss of rent insurance?

Landlords will be just as worried about the adverse impact of the virus on their businesses, particularly on the flow of rental income. Commercial landlords will usually have taken out loss of rent cover as part of their property insurance, and as rent ceases to be paid due to the impact of COVID-19 landlords will be looking to their loss of rent cover for protection.

However, they are likely to be disappointed.

  • Pandemics are very unlikely to be included in the insured risks under a standard loss of rent insurance policy. As the policy will only kick in in the event of an insured risk, landlords will fall at the first hurdle
  • Loss of rent policies will normally only cover a landlord where its property cannot be occupied due to an insured risk causing physical damage to its property or the accesses to it, and will not provide cover where there is a loss of rental income due to a non-physical damage event

It is important to look at the specific policy – landlords may have purchased extensions, for example loss of rent due to the impact of notifiable diseases, or to cover denial of access caused by government action.

Can a tenant rely on the rent suspension provisions in a lease?

Most commercial leases will include rent suspension provisions, and tenants could be forgiven for assuming that they can rely on these provisions and cease to pay rent if they are unable to use their demised premises as a result of COVID-19. However, these arguments are not likely to go far because:

  • Rent suspension provisions in commercial leases are usually only triggered where there is physical damage to the property, estate or centre rendering the tenant’s demised premises unfit for occupation or inaccessible
  • In the unlikely event that this is not the case, rent suspension provisions usually only apply where the triggering event is caused by an insured risk (or an uninsured risk if the lease includes uninsured risk provisions). Most landlord insurance policies will not include pandemics as an insured risk. Similarly, pandemics will not be an uninsured risk. An “uninsured risk” is commonly defined as an insured risk against which insurance ceases to be obtainable in the London insurance market on normal commercial terms and commercial rates. If pandemics were never an insured risk, they will not fall into the uninsured risk definition

Whilst tenants will not be able to rely on the rent suspension provisions in their leases, the Coronavirus Act 2020 does give commercial tenants the opportunity to avoid paying rent up to the end of June 2020.


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

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning



Posted in Real Estate News

COVID-19 UK: The impact on rent review

It will not have escaped the attention of anyone in the real estate industry that today is the March quarter day. For many landlords and occupiers, the immediate focus will be on rent payments due today and the media are already reporting that large numbers of retailers are expected to withhold rent to ease cashflow pressures. However, in addition to the quarter day being a traditional rent payment pay, it is also very common for leases to provide for rent reviews to take place on a quarter day and, as such, it is likely that there will be a not insignificant number of leases out there where the rent falls to be reviewed today. In the case of a typical open market review, this means that the rent is to be reviewed by reference to the rent which the property would command if let on the open market today. Given the enormous impact which COVID-19 has had upon the economy (and society more generally) it seems fair to assume that many properties (particularly in the retail and leisure sectors) would let for much less today than they might have just a few short weeks ago. Given that any rent reviews taking place today are likely to determine the rent for the next 5 years of the lease, that is unlikely to be good news for landlords. However, there are a few points worth bearing in mind:

  1. in the vast majority of cases, rent reviews will be upwards only and so, whilst landlords may not see an uplift in rent, they should not see a reduction. Given the pressures already prevailing in the retail and leisure sectors, many landlords may have been anticipating a nil increase in any event;
  2. whilst experts cannot be certain as to how long the current crisis will last, they do agree that it will ultimately be temporary. The open market rent review requires an assumption of a willing tenant who wishes to take a new lease of the property for the hypothetical (usually 5 or 10 years). It is not unreasonable to think that the hypothetical willing tenant would appreciate the essentially temporary nature of the current climate and would make a rental bid which reflects the fact that he is seeking to take the property on a longer term basis. In this regard, landlords are perhaps in a better position than they might have been on a 29 September 2008 (two weeks-post Lehman Brothers collapse) rent review, where the duration of the market disruption was arguably much less certain;
  3. the courts have consistently made clear that the open market rent review requires an assumption of a hypothetical willing tenant – ie. tenants cannot argue that no one in the market would take the property today and so it is worthless;
  4. in many cases rent review clauses provide for specifications assumptions and disregards which displace reality. One common assumption is that the premises can lawfully be used for the permitted use. If the lease contains that assumption it will not be open to tenants to argue that the rent review should reflect the fact that retail and restaurant uses are currently unlawful. This will not prevent the rent review being impacted by the overall market sentiment but it does raise an interesting point.. if the hypothetical premises are assumed to be available for lawful use whereas, as a matter of reality, all other similar premises in the market cannot lawfully be used, does this mean that the hypothetical willing tenant may actually pay a premium to secure the one property which can be lawfully used?

Ultimately, these are discussions which landlord and tenants will not want to engage in until the dust has settled. However, where landlords do have rent reviews either today or perhaps on 24 June 2020, they might want to think about agreeing with the tenant to push back the review date in return for any rent concessions or deferrals which tenants may be seeking.

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: Permitted development rights to help take away the strain

The UK government’s actions are ramping up as it battles to contain the spread of COVID-19 and enforce social distancing.  To assist with this, secondary legislation has been enacted to establish a new permitted development right for takeaways.

What are the new permitted development rights?

As of 10am yesterday, permitted development rights have been granted for a temporary change of use from either Class A3 (restaurants and cafes), Class A4 (drinking establishments), a mixed use within Classes A3 and A4, and a drinking establishment with expanded food provisions, to a use for the provision of takeaway food, which includes any use within Class A5 (hot food takeaways) and any hot or cold pre-prepared food for takeaway or delivery. This means that the usual requirement to secure planning permission for these changes has fallen away.  The temporary change of use applies for any period between 24 March 2020 and 23 March 2021, and the developer must notify the LPA that the property is being or will be used for providing takeaways during this period.  At the end of this period (or, if earlier, when takeaway food ceases to be provided) the use of the building automatically reverts to its previous lawful use – developers don’t need to take any additional steps other than no longer providing takeaways.

However, developers should keep an eye on the government’s advice as the public health situation develops.  It’s possible that they may take away this right if more stringent measures are required. Whilst the government’s actions will be welcomed by a number of tenants considering moving to a new, temporary business model to deal with the COVID-19 repercussions, that is not quite the end of the story.

What are the practical implications?

A key term in any commercial lease from a tenant’s perspective will be that they can use the property for the permitted user only. Similarly, a landlord will inevitably want to protect its property and the landlord may operate “good tenant mix” policies and may be inclined to try and maintain a particular “quality” of tenant  in, for example, its shopping centres. The landlord may therefore have relevant restrictions included in their leases, and should carefully check the lease of any property proposed to be used as a takeaway under the new permitted development rights.

Equally, if a tenant operating a pub or restaurant is considering a change of use to a takeaway, it will first need to consider whether it has the ability under its lease to do so.  Whilst the government’s actions mean that a tenant does not have to be authorised by planning permission, or need their landlord’s consent to apply for planning permission, the tenant may still need their landlord’s consent to change the use of the premises.

If the use is not permitted, then the wording of the user clause will be important.  Landlords will be familiar with the wording “such consent not to be unreasonably withheld or delayed” in a fully qualified user covenant, but if the user clause does not specify that the landlord’s consent cannot be unreasonably withheld or delayed, then there is no such wording implied by statute and the landlord would be able to prevent the tenant from changing its use.

If the landlord does gives its consent, it should consider specifying that it is for the temporary period to 23 March 2021 only so it is not deemed to be giving its consent for a change of use after that date, although a tenant would likely have to apply for landlord’s consent to apply for planning permission after that time anyway.  If there is an absolute prohibition on takeaway use in the lease, but the landlord nevertheless wishes to consent, then it will need to consider carefully how to protect its position against possible unintended consequences, particularly as regards guarantors, given that this could amount to a deemed variation of the lease.

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.

Posted in Real Estate News

UK COVID-19: Commercial tenants to be given three months’ protection from forfeiture

Yesterday, as well as locking down the country, the government published critical amendments to the emergency Coronavirus Bill protecting commercial tenants from the risk of forfeiture until the end of June 2020.

The Bill, together with these amendments, has now been approved by the House of Commons and is, today, going before the House of Lords.

Prohibition on forfeiture

The Bill provides that a right of forfeiture “under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period”.  This amounts to an absolute prohibition on a landlord forfeiting for non-payment of rent, with no clear mechanism for assessing whether the non-payment relates to COVID-19 or not.

Therefore this legislation allows any commercial tenant, whether in the retail and leisure sectors or otherwise, and no matter what their financial position, the opportunity to avoid paying the March 2020 quarter’s rent, and any other rent payments falling due up to the end of June 2020, without risk of forfeiture (follow the link here for more information on the right to forfeit).

The landlord’s right to forfeit is effectively suspended.  Therefore, provided the landlord has not given “an express waiver in writing”, a landlord will still be able to forfeit for non-payment of rent that falls due if it is not paid after 30 June 2020.

Forfeiture proceedings

If a landlord has already started forfeiture proceedings for non-payment of rent, then the courts will not be able to order that the tenant has to give possession before 30 June 2020.

Further, if the court has already ordered possession for non-payment of rent, and the date for possession falls before 30 June 2020, the tenant will be able to apply to vary the court’s order to postpone the possession date until after 30 June 2020.

A landlord who has issued forfeiture proceedings for non-payment of past rent, which was unrelated to COVID-19, will still be caught by these provisions.

Renewal of business tenancies

A landlord shall not be entitled to rely on the tenant’s non-payment of rent during the relevant three month period to oppose renewal of a business tenancy under the Landlord and Tenant Act 1954.  Non-payment of rent is rarely used as a ground for opposing renewal; therefore, in reality this will probably have little effect.

Other remedies

Crucially the proposals do not appear to prevent landlords taking other action against a tenant for non-payment of rent because the proposals only suspend a landlord’s right to forfeit; they do not suspend a tenant’s obligation to pay rent.

This could include serving a statutory demand prior to a bankruptcy or winding up petition, issuing court proceedings for payment or taking steps to take control of a tenant’s goods under the Commercial Rent Arrears Recovery (CRAR) regime.  However, given the lockdown that has been announced, it may be difficult to exercise CRAR as the premises in question should be closed.

The Bill also does not appear to stop time running for the accrual of late payment interest on any arrears that fall due under the lease.

What does this mean for landlords?

Forfeiture is one of a landlord’s most powerful remedies to enforce non-payment.  However, in the current climate, where it would be extremely challenging for a landlord to find a new tenant for empty premises, forfeiture is not necessarily an attractive option.

Landlords may find that tenants that were previously eager to agree rent deferral deals for the March 2020 quarter now simply rely upon their statutory rights, or at least take a harder line in such negotiations.

As currently drafted, however, the Bill does not prohibit landlords from taking other action to recover unpaid rents, or forfeiting for non-payment of other charges due under the lease.  It also means that all unpaid rents (which for most commercial tenants means the whole of the March and June 2020 quarters’ rents) will become enforceable by forfeiture in three months’ time, when quite possibly the trading environment for tenants will not have significantly improved.  It may, therefore, still be sensible for landlords and tenants to agree commercial terms between them for dealing with the March 2020 quarter’s rent, including what will and will not be paid, when it will be paid, whether interest will accrue and what rights the landlord will forgo in the meantime.

Posted in Real Estate News

COVID-19 in the UK: emergency legislation for renters

The government has confirmed it will bring forward emergency legislation to protect residential tenants from eviction. Following the Budget which announced mortgage “holidays” for those who own their homes, the government has been urged to assist private renters impacted by COVID-19.

Under the emergency legislation landlords will be unable to start proceedings to obtain possession of their property for at least three months. All new evictions will be suspended and no new possession proceedings will be permitted “during the period of national emergency”.

While the government’s intention is clear, there are many unanswered questions on the scope and nature of the changes. The Prime Minister has stated that they will avoid “pass[ing] on the problem” by “taking steps to protect other actors in the economy”. The move will have far reaching consequences for institutional investors in the private rental market and it is not clear what these protective steps will be.

The National Housing Federation, which represents housing associations in England, has also confirmed that housing associations will not evict tenants who are affected by COVID-19 and are unable to pay their rent.

There are many practical questions including how this will be implemented, documented  and policed. Landlords in the PRS sector may have a mixed response to this new plan. The government has confirmed that the three month mortgage payment “holiday” would be extended to landlords whose tenants are experiencing COVID-19 related financial problems but this move will not benefit institutional investors if they own the properties being rented. The government’s intention is to protect tenants whose incomes are affected by COVID-19 and also to protect landlords facing financial pressures if their rental payments dry up, but balancing the two is no easy task, especially when the government has so many conflicting demands on its agenda.




Posted in Real Estate News

Coronavirus UK – has your tenant asked for a concession?

In Boris Johnson’s first daily coronavirus update yesterday, he urged the general public to stop “non-essential contact” and “all unnecessary travel“, and to avoid social venues including “pubs, clubs and theatres“.

Although supermarkets have been doing a roaring trade in pasta, hand sanitiser and loo roll in recent days, other retailers, restaurants and pubs have been conspicuously quiet.  Therefore, with the March quarter day fast approaching it is unsurprising that a number of retailers and other operators have approached their landlords seeking various concessions including rent deferments/waivers and changes to opening hours.

Deferment or waiver of rent

Some landlords will be amenable to a tenant’s request for a deferment or waiver of rent in respect of the March quarter, given the unprecedented impact that the coronavirus has had, and will continue to have, on tenants.  If landlords wish to grant concessions they should make sure that the concession is clearly documented.  Both landlords and tenants need to be clear on:

  • whether the concession is a waiver or a deferment; and
  • if a deferment, how long the deferment is for.

Six months down the line when the coronavirus is (hopefully) just a bad memory, what landlords and tenants do not want to be doing is arguing over the scope of the concession.

If landlords do not want to agree a deferment or a waiver of rent, then they have a range of options open to them if a tenant fails to pay the March quarter’s rent:

  • Forfeiture: The landlord will invariably have a right to forfeit for non-payment of rent.  However, it is worth bearing in mind that if the tenant has only requested a relatively short deferment, then the tenant is likely to obtain relief from forfeiture on the basis that it will be able to remedy the breach (i.e. pay the rent) in the near future.  As always the landlord will also need to weigh up the commercial risk and cost of having to re-let an empty property, as well as becoming embroiled in relief proceedings.
  • The Commercial Rent Arrears Recovery regime: A landlord of commercial premises can recover rent arrears by taking control of a tenant’s goods at the leased premises. Importantly rent, for the purposes of CRAR, means principal rent only.
  • Other options: If a tenant has provided a rent deposit, then the landlord should be able to draw down on the deposit in respect of any unpaid rent.  Alternatively, if there is a guarantor on the hook, then a landlord may wish to pursue it for any unpaid rent.  Landlords should also look at their Authorised Guarantee Agreements if the current tenant is not the original.

Closure/change to opening hours

If a lease does not contain a keep open covenant, then the landlord cannot prevent a tenant from shutting up shop or reducing its opening hours.  If a lease does contain a keep open covenant but, nonetheless, the landlord is willing to agree to a change to trading hours or, even, a temporary closure, this should be clearly documented.  Of crucial importance when documenting such a concession will be how/when the concession will end.

Even if a lease does contain a keep open covenant which the landlord wants to rely on, case law makes clear that a landlord cannot force a tenant to trade from its premises.  If a landlord does not want to see its premises closed or the opening hours changed, then this leaves the landlord with the following options:

  • Seek damages for breach: A landlord could issue proceedings against its tenant seeking damages for the tenant’s failure to comply with its keep open covenant; however, it will be very difficult for the landlord to show any measurable loss.  Even if the landlord is entitled to a turnover rent, given the impact that the coronavirus is having a tenant may well be able to argue that, had it traded, it would not have met any given turnover threshold in the lease and, as a result, its landlord hasn’t suffered any loss.  Turnover clauses are usually bespoke and the landlord should consider how long the turnover period is, whether rent is annualised, whether there is a carve out for periods where the property is closed without permission and whether there is a base rent or ratchet.
  • Forfeiture: The landlord is likely to have a right to forfeit for breach of a keep open covenant.  However, if a tenant were to apply for relief from forfeiture, then by the time the matter went to court the tenant would likely be in a position to resume trading (which would remedy the breach) entitling the tenant to relief from forfeiture.  As above the landlord will need to consider the commercial risk and cost of re-letting empty premises and becoming embroiled in relief proceedings.

It is not clear what will happen over the coming weeks, nor what the eventual impact of the coronavirus will be; however, what is certain is that retailers, restaurants and other tenant operators will face unprecedented pressure.  Therefore landlords need to expect more requests for concessions from tenants and will need to consider their options on a case-by-case basis.

Posted in Real Estate News

You can’t just wash your hands of it… A landlord and tenant’s guide to COVID-19 in the UK

As hand gels and toilet paper fly off the shelves and children across the world cross their fingers for school closures, the COVID-19 strain of coronavirus has taken over the news. The outbreak has now been declared as a pandemic and is showing few signs of slowing.  But what does the virus mean for commercial landlords and tenants?

How can landlords keep their buildings safe?

Unfortunately, they can’t. Washing hands and self-isolating after visiting affected areas can help to contain the spread of the virus, but from a landlord’s perspective such measures are totally reliant on the compliance – not to mention hygiene – of the tenants and their visitors, and the landlord’s own staff.

Whilst there can be no certainty in keeping the virus out of their buildings, landlords can take certain measures to protect them – and should. Unlike registered medical practitioners, landlords are not yet under any statutory obligations to notify positive cases to the local authority, and there are no specific statutory duties in relation to COVID-19 to be followed. However, commercial landlords are under a general obligation to take reasonable measures to protect the health and safety of their tenants and anyone entering the building.   In addition to this, many commercial landlords have an explicit right in the terms of their leases to impose reasonable regulations on their tenants, with which the tenants would be obliged to comply.

What regulations should a landlord consider introducing?

But what is a reasonable measure or a reasonable regulation in this fairly extraordinary situation? Barring visitors who have visited affected areas or enforcing deep cleaning might interfere with the tenants’ rights to quiet enjoyment of their premises. But on the other hand, if it became illegal (for example) to open a shopping centre because of the virus, then quiet enjoyment would necessarily be trumped.

Fortunately, Public Health England has issued best practice guidance on COVID-19 in the workplace. It’s not set in stone, but asking tenants to adopt this guidance as building policy is surely a reasonable measure for the landlord to take from a health and safety perspective, and the guidance itself should constitute reasonable regulations in the workplace.

The guidance sets out what employers should do, both whilst someone is awaiting test results and if that someone tests positive for COVID-19.  In the first scenario, the guidance points out that most cases turn out to be negative, but the individual should self-isolate pending the test results.

If there is a positive result, the local health protection team will undertake a risk assessment of the workplace and help the management team work out a deep cleaning and waste removal plan for communal spaces, and where necessary an isolation strategy for staff.

What if the landlord’s employees are affected?

From a landlord’s perspective, if a tenant’s staff are infected then it will be the tenant’s responsibility to manage the situation directly and work with the local medical authorities to control the spread of COVID-19. But if the landlord’s own on-site staff or contractors (e.g. cleaning, security, reception, management  etc personnel) are infected, responsibility will fall to the landlord.  The service charge provisions in leases may not enable the landlord to recover all the costs that stem from this, but that will need to be checked on a case by case basis.  For instance, the costs of deep cleaning the common parts of a building might go beyond what is recoverable under the service charge (although a compliance with laws clause may allow the landlord to recover them instead).  Infection of staff and their workplace  i.e. the common parts of a building – could also lead to the building being closed because the landlord can’t provide the necessary services to keep it operational, which brings us back to landlord breach of its lease obligations.

Can you simply close a building?

If the situation becomes critical, the government could take steps to close premises in an attempt to prevent the spread of the disease. In such instances landlords should carefully consider the terms of their obligations. Disgruntled tenants could try to claim against landlords for derogation from grant, or breach of quiet enjoyment / keep open clauses (although, as noted above, if it becomes unlawful for the landlord to allow the building to open, that should be a sufficient defence).  However leases are likely to make provision for the closure of common parts in an emergency, and the principle of lawful interruption should also help protect landlords against such claims.

Are any sectors particularly exposed?

As well as the burden of looking out for the interests of customers and employees, businesses operating in the retail, hospitality and leisure industries will feel the impact of footfall decline as customers remain indoors to avoid the virus (and particularly if buildings close).  The decline in hotel occupancy in the UK is already remarkable, in China it is almost total.  The tourism industry will also be struggling – while staycationing may help regions it is unlikely that big cities will see anything like the tourist spend that they are used to.  The associated drop in income will undoubtedly put cashflow pressure on tenants, and potentially on their banking arrangements.

Developers are also likely to feel some impact.  Tenant decision making around new space is likely to be cooled, dampening the demand curve.  But developers and contractors are also likely to feel the heat through their supply chain, with workers throughout the chain unable to fulfil their roles and materials sourced from areas in lockdown becoming unavailable.  We are already seeing evidence of contractors requiring the impact of COVID-19 to be included as a force majeure event.  We also know of cladding supplies being delayed because the factories aren’t able to meet orders.

And then there is the housing market, just recovering from two years of economic and political stagnation – early indications are that the flames of recovery are more like a pilot light.  This may be of benefit to those providing rental accommodation but equally the co-living/student housing (particularly those that traditionally have a lot of international occupiers) providers may see a fall in demand.

There is a silver lining for some.  While bricks and mortar retailers struggle, e-commerce volumes are going up materially in a market that already has the deepest e-retailing penetration in the world.  Online supermarkets and other retailers are already seeing increased income from their online operations which in turn will of course benefit the logistics sector.

How will the credit markets react?

We know that some major banks are currently reviewing all of their positions with borrowers in the retail, hospitality and leisure sectors.  There will be concerns about EBITDA, interest cover and loan to value covenant breaches, and any lending that is maturing for renewal will surely be looked at with additional scrutiny – particularly if trading volumes decrease.  If lenders start withdrawing from the credit markets things could get very serious indeed.  The cut in interest rates is of course likely to help, but as rates were so low already the benefit of that may be quite moderate.

Will tenants be able to walk away from their leases if they can’t use their premises?

It is unlikely that COVID-19 alone will provide an opportunity for any tenant to step away from its lease obligations.

As we saw in the recent EMA case, the High Court has set down challenging hurdles to claims for frustration, and force majeure clauses are unlikely to apply here.

More on trend, though, is the use of the Company Voluntary Arrangement (CVA) process by many companies (particularly retailers) to reduce lease liabilities.  There could be a new wave of CVAs particularly in the retail, hospitality and leisure sectors.  However what is also possible is that (particularly with a rent quarter day coming) a material, and sudden, negative impact on revenue means there is no time for a CVA and the tenant will have to seek a rent holiday/concession or, worse, the protection of administration or another insolvency process.

Can a tenant get a rent suspension?

Some tenants may struggle to meet rental payments, though it is unlikely that landlords would seek to forfeit leases.  This raises the tricky issue of balancing interests. Should tenants continue to pay rent even if their premises are forced to close, but then should the landlord bear the loss of income if its loss of rent insurance would not cover it for a rent suspension in these circumstances?  Now that COVID-19 is a notifiable disease, rent may be recoverable under a tenant’s business interruption insurance, providing some relief for those with applicable policies.

Conclusion: practical ramifications in the short and long-term

The UK government has estimated that, in a worst-case scenario, up to a fifth of the workforce could be absent from work at any one time.  This will result in a surge in remote working where offices or parts of organisations are closed and businesses will bring in alternating work practices and team rotations.  Businesses that make this work well may see a future with more remote working and less need for physical space.  Agile working is not a new phenomenon, but COVID-19 could be the catalyst to a sudden, significant and permanent change in occupational requirements.

Posted in Real Estate News

Budget 2020: real estate tax changes

Here is a brief summary of the measures in the March 2020 Budget which are relevant to the Real Estate sector.

Non-UK resident companies with UK property income – As previously announced, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax on UK property business profits or income from 6 April 2020 rather than being charged to Income Tax as at present. If such non-UK companies are not registered under the non-resident landlord scheme (to receive rental income without deduction of UK tax) and the tax deducted (at 20%) from the rental income will not meet their tax liability (for example, the company has interest expense on shareholder loans that would be disallowed for corporation tax purposes), there will now be an obligation on such non-UK resident companies to notify HMRC of their liability to corporation tax from 6 April 2020.

 Rate of Structures and Buildings Allowance – An increase to the annual rate of the Structures and Buildings Allowance (SBA) from 2% to 3% will apply from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes. This increase reduces the time it will take to relieve qualifying expenditure on a non-residential building from 50 years to 33 and one third years. Other changes will ensure that the legislation allows relief for the first day of qualifying use and allow simplified calculations for all qualifying non-residential structures or buildings.

Review of the UK funds regime – the UK government will be consulting on potential changes to the taxation of funds, including real estate funds. The consultation is very wide-ranging and is intended to make the UK a more attractive holding company location for fund vehicles, which could provide a significant boost to the UK fund management industry. The consultation will cover tax matters, including a potential widening of the capital gains tax exemption and the REIT regime, as well as relevant areas of regulation, with a view to considering the case for policy changes. It will also consider the VAT treatment of fund management fees (which are generally subject to VAT in the UK, but exempt from VAT in Luxembourg)

VAT on management fees – the provision of management services to the principal company of a Real Estate Investment Trust will be exempt from VAT from 1 April 2020

 Non-UK resident Stamp Duty Land Tax surcharge – As previously announced, there will be a 2% surcharge for non-UK residents acquiring residential property in England (and Northern Ireland) to take effect from 1 April 2021. There are a number of unanswered questions outstanding from a consultation last year, including whether all non-UK resident companies and non-UK funds (including Jersey unit trusts) will be caught and how you determine whether a person is non-UK resident for SDLT purposes. More information should be provided when the consultation response is published by the government in the next few weeks.

Construction Industry Scheme – Changes will be made to simplify the CIS rules covering deemed contractors (such as property investors with annual expenditure on construction operations in excess of the threshold) and to clarify the rules on allowable deductions for expenditure on materials. New rules will also allow HMRC to reduce or deny the CIS credit claimed on employer returns where the sub-contractor has received payment under a construction contract with tax deducted under the CIS but cannot evidence the deductions. This could lead to sub-contractors requesting certificates of tax deducted in respect of payment from their contractors.

Business rates – The government has already announced that, for one year from 1 April 2020, the business rates retail discount for properties with a rateable value below £51,000 in England will increase from one third to 50% and will be expanded to include cinemas and music venues. To support small businesses in response to COVID-19 the retail discount will be increased to 100% and expanded to include hospitality and leisure businesses for 2021.  Businesses will note that a fundamental review of business rates is now on the government’s agenda which will take place in the spring with a view to reporting this autumn.