UK landlords seize the reins on commercial rent arrears

The ground-breaking Covid Commercial Rent Arrears arbitration scheme imposed a moratorium on landlord’s enforcement action for ringfenced arrears until 23 September 2022. Tenants have not, on the whole utilised the scheme. As the end-date looms closer and there are no whispers of an extension (unsurprising in the wake of the reshufflings at Downing Street… there are likely one or two items further up their current agenda!), debt enforcement action is on the rise and we are seeing an upturn in landlords and developers considering all of the options open to them to protect income streams in their investments.

In this blog, we highlight two recent cases which will only serve to bolster landlords considering action against defaulting tenants for Covid-19 period arrears.

Landlord secures summary judgment for £141,000 of rent arrears from former tenant and guarantor, dismissing claims that the assignee tenant’s court sanctioned restructuring plan varied the lease or released their liability

Oceanfill Ltd v Nuffield Health Wellbeing Ltd & Cannons Group Limited

This case concerned a gym in Leeds, originally let to Nuffield Health and later assigned to Virgin Active. Nuffield and their guarantor, Cannon, guaranteed Virgin Active’s performance of the lease covenants in the Licence to Assign.

In 2021, the High Court approved a part 26A restructuring plan for Virgin Active under the Companies Act 2006. The effect for the landlord, Oceanfill, was that all past, present and future payments which Virgin Active were obliged to make under the lease were compromised. Oceanfill received a lump sum under the restructuring plan, but it fell (very) short, so it issued proceedings against Nuffield and Cannon for the shortfall.

The defendants argued that the restructuring plan had varied the lease so that payments had not fallen due to invoke their obligation to pay under the term of the Licence. In the alternative, they argued that the restructuring plan operated as a variation of the lease and as they had not consented to any variations, it had released their obligations in the Licence.

Both defences failed. Whilst the restructuring plan released the tenant’s liability, it did not vary the terms of the lease. The Licence was clearly drafted that a release would not arise on a variation of the lease but could only be given under seal (ie in a formal deed of release).

Court of Appeal dismisses “Covid defences” based on implied terms and failure of basis

Bank of New York Mellon (International) Ltd v Cine-UK Ltd; London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others

Avid readers of our blog will recall our previous posts on these cases. The High Court acknowledged that for certain periods it was unlawful to operate the premises as a cinema due to Covid-19 restrictions, and at other times it was uneconomic to do so. But there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during those periods. Nor was there any real prospect of establishing that there had, in the circumstances, been a “failure of basis“. As such, the tenants could not avoid paying rent for the affected period. However, the tenants appealed, leaving uncertainty for landlords with similar cases.

The Court of Appeal has now dismissed appeals against the grant of summary judgment to commercial landlords for payment of accrued rent in two cases where the relevant premises (in each case operated as cinemas) had to be closed for extended periods due to Covid restrictions.

Click here for our full article analysing these cases (previously published on our Litigation Notes blog).

Of course, court proceedings against the tenant or a third-party guarantor are just a couple of the options in the suite of remedies that may be available to a landlord of commercial premises, now that the various moratoriums imposed during the Covid-19 period have expired (and assuming that the arbitration scheme is not extended). Which remedy will be the appropriate next step for landlords will depend on many factors, including the relationship between the parties, the viability of the tenant’s business and whether it holds assets against which a judgment may ultimately be enforced. For forfeiture, the potential for reletting will be critical. However, with the ‘cost of living crisis’ and businesses buckling under the weight of energy costs, landlords will be monitoring tenant default particularly closely over the coming months.

For further information please contact:

Matthew Bonye
Matthew Bonye
Partner and Head of Real Estate Dispute Resolution, London
+44 20 7466 2162
Shanna Davison
Shanna Davison
Professional Support Lawyer, Real Estate Dispute Resolution, London
+44 20 7466 7561
Matthew Weal
Matthew Weal
Senior Associate, Real Estate Dispute Resolution, London
+44 20 7466 7535

Residential Leasehold up for grabs – change is coming, get ready!

The report of the Parliamentary committee on residential leasehold reform has been published containing strong recommendations, many of them radical, and some where it is not at all clear how they could work in practice.  Nevertheless, this is likely to be the future and a good commercial conclusion may be to assume that this will be the direction of things, and then to “adapt and survive”, and, preferably, prosper.

Mixed use and pure residential schemes may be affected by reform, in terms of investment value of existing portfolios, the ability to finance development or acquisition, and indeed the very legal basis upon which residential flat owners will hold their properties.  The motivation of Parliament is to right the anomalous way in which residential homes, particularly flats, are owned and managed.  This, despite the fact that there have been rafts of legislation, enacted over the last 50 years, that were meant to give leasehold house and flat owners far stronger rights and control over the properties they owned.  Other countries around the world have a “condominium” land holding system for flats, viewed as much less problematic than the UK system where a landlord keeps a role as property owner even when all the flats in a building are sold.  This motivated the creation of the law of Commonhold here, which although already on the statute books has had little or no impact on the way in which homes are owned.  The Parliamentary committee asked itself the valid question as to where things currently are.

A no-choice Commonhold revival?  Banishment of Ground Rents, potentially without proper compensation to landlords? In this “deep dive” article by head of Real Estate Dispute Resolution at HSF, Matthew Bonye sets out how the laws are currently framed, what is thought to be wrong with them, what Parliament wants to do, and then he tells you what he really thinks about it all.

Click here to read on

Author: Matthew Bonye, Partner and head of real estate dispute resolution, London

For more information please contact:

Matthew Bonye
Matthew Bonye
Partner and head of real estate dispute resolution, London
+44 20 7466 2162

Changes confirmed to permitted development rights and use classes

In our blog post of 10 December 2018 (see here), we discussed the potential impact on developers and landlords of changes to permitted development (PD) rights and Use Class A which were being consulted on by the government. Despite widespread criticism, and counter to some calls for a greater role for local authorities in securing the futures of their town centres through holistic town planning, in a Written Statement on 13 March 2019 James Brokenshire announced that the government is implementing the majority of the proposals. Some of the changes to PD rights are to be made later this spring; other changes, such as upward extensions for residential use, will be dealt with in further regulations in the autumn. We were also told that we can expect an Accelerated Planning Green Paper later this year. Whilst the changes are intended to “[simplify and speed up] the planning system, to support the high street, make effective use of land and deliver more homes”, whether this can be achieved by these changes remains to be seen. This post discusses what the changes are, and what their impact could be within the context of wider change. Continue reading

Brexit isn’t frustrating…at least for leases

Landlords can (for now at least) breathe a sigh of relief as the High Court has ruled that a tenant cannot bring its obligations under a lease to an end by invoking the doctrine of frustration simply because it will have no option but to relocate if/when the UK leaves the EU.

In Canary Wharf (B4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch), the Court held that even though the European Medicines Agency (“EMA“) would be forced under EU law to relocate outside the UK after Brexit the nature of the bargain between the parties was not made radically different by Brexit and the lease is therefore not frustrated.  On the contrary, the inclusion of carefully negotiated alienation provisions in the lease indicated that the parties had contemplated that the EMA might at some point wish to dispose of its interest.  The EMA will therefore remain fully liable under the lease for the remainder of the term, unless of course it successfully appeals this ruling.

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Opening the door to community and landlord engagement

This article was first published on Lexis®PSL Property on 24 January 2019. 

Fiona Sawyer, professional support lawyer in the planning team at Herbert Smith Freehills LLP, and Frances Edwards, senior associate and specialist real estate litigator at the firm, point out that although the government’s ‘open doors’ scheme will certainly help reinstate the high street as a destination for the community, the reality is that town centre rents need to be cheaper and action taken to ameliorate the cost of business rates to enable community uses to occupy town centre premises on a longer-term basis.

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Real Estate EP4: Brexit and the UK real estate market

In this podcast, Herbert Smith Freehills’ Matthew Bonye and Tom Leech QC  discuss the important Canary Wharf Group v European Medicines Agency court case.  This case is highly relevant to real estate development. The tenant, the European Medicines Agency (EMA), argues that Brexit is a frustrating event for its lease and that it can assert that the lease is thereby terminated. If EMA wins, then it can only be on the basis that the law of frustration is considerably wider than it is currently thought to be: until now, there is no English case where a lease has ended due to frustration. If a lease can come to an end due to frustration, then how will this affect investment values and therefore development appraisals, particularly for longer-term commercial leases such as those for anchor tenants or whole building lets to major banks and other institutions, often a key element of a development scheme? Matthew Bonye and Tom Leech QC discuss how the law of frustration has developed and whether this may open the floodgates for other claims by tenants where the parties have not legislated in their lease for an unexpected turn of events in the future.

Our Brexit Hub has further in-depth, sector-by-sector Brexit analysis.

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Proposed changes to permitted development rights and use classes – impact on developers and landlords

Two key themes of the Budget on 29 October 2018 were increasing the supply of housing and improving the health of high streets and town centres. Published with the Budget was the consultation ‘Planning reform: supporting the high street and increasing the delivery of new homes’. Also announced was the government’s ‘Open Doors’ project, aiming to help improve the vitality of town centres by facilitating meanwhile use of vacant units. The ‘Planning reform’ consultation closes on 14 January 2019. A call for applications from landlords who wish to pilot the Open Doors project closes on 31 December 2018. We have prepared a briefing for clients, summarising key proposals that will be of interest to retail landlords, developers and advisers and assessing how these might impact new or existing developments and the lettings of these assets.

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Indigestion for landlords: a new acid test for redevelopment under ground (f)

In October, we wrote about the Supreme Court case S. Franses Ltd v The Cavendish Hotel (London) Limited [2018] UKSC 62, concerning a landlord’s ability to oppose a lease renewal under the Landlord and Tenant Act 1954 (the “Act”) using ground (f) (redevelopment). Yesterday, the Supreme Court handed down judgment in favour of the appellant tenant. On face-value, the implications of this case seem to be tenant-friendly; however, here we discuss further the commercial implications of the ruling for both landlords and tenants. Continue reading

Landlords’ motives for redevelopment – good, bad or irrelevant?

Today the Supreme Court will hear the case of S. Franses Ltd v The Cavendish Hotel (London) Limited, a case which property litigators have been following closely since last year. The case concerns a landlord’s ability to oppose a lease renewal under the Landlord and Tenant Act 1954 (the “Act”) using ground (f) (redevelopment). If the tenant is successful in today’s hearing, the evidential burden on landlords contemplating redevelopment could increase dramatically. Continue reading

LANDOWNERS AND DEVELOPERS – BEWARE THE RIGHT OF FIRST REFUSAL

Are you a landlord or developer of property which includes residential flats?  Are you going to dispose of your interest in that property?  If so, you may be obliged to offer your residential tenants a right of first refusal before selling to anyone else. If you don’t, you could face serious consequences including criminal sanctions.

In this blog we go back to basics to explain when the statutory right of first refusal applies, what the consequences are when it does and how it is relevant in the context of mixed-use developments.

The Landlord and Tenant Act 1987 gives tenants this statutory right, however, the legislation was rushed through parliament in the run-up to the 1987 general election by a Conservative government who were under pressure to redress the balance of power between landlords and tenants in the residential sector. The result was a complex and defective piece of legislation which has been heavily criticised by the courts over the years.

1. When does the right of first refusal apply?

2. What are the consequences when the right of first refusal applies?

3. How is the right relevant to mixed-use developments?

 

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