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

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

 

 

 

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:

 https://www.ukrealestatelawblog.com/2020/03/27/covid-19-uk-landlord-and-tenant-insurance-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.