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Company Voluntary Arrangements: The Challenges & Consequences for Landlords in a Changing Commercial Landscape

We are all aware of the challenges that coronavirus has brought to the high street over the last year. With a combination of lockdown and forced closure arguably accelerating a broader trend of online customer migration, the need to provide viable business models has challenged both independents and large, long established brands facing dwindling footfall and ongoing operational costs. For many commercial enterprises, the need to restructure has become imperative and company voluntary arrangements (CVAs) have provided a route by which insolvency can be avoided and creditor obligations met, albeit on a flexible - or more reduced - basis than originally intended.

Implications:

However, these arrangements can also present implications for landlords beyond the need to financially compromise with commercial tenants, in regard to ensuring proportionate representation in agreeing revised terms and the ability to preserve important rental income. With CVAs commonly comprising an agreement with creditors under the supervision of an insolvency practitioner, many CVAs require approval by 75% of creditors – and become binding for those that vote against it. For a landlord, perhaps unwillingly facing the prospect of significantly reduced rents as part of the arrangement, there is the possibility that certain tenant organisations could manipulate the agreement, particularly where rent is linked to the value of sales and a shop premises serves as little more than a showroom to drive online sales, making proportionate attribution difficult and further driving down rental incomes. This has become increasingly prevalent in recent months, and most recently, with a group of landlords filing a legal challenge to the restructuring of Clarks and seeking redress on the issue of unfair revenue retention.

There is also the prospect that a commercial tenant could effectively enact a surrender or change to the terms of their lease, exposing the landlord to further risk. However, a CVA does not close off a landlord’s rights entirely and there are, even under the ongoing emergency legislation, legal options for landlords to explore – particularly where a tenant still refuses or fails to pay the agreed rent beyond what has been enshrined within any CVA.

Options & Remedies for Commercial Landlords:

The Coronavirus Act 2020 introduced significant restrictions on landlords in terms of their ability to recover commercial rent arrears (CRAR) or pursue options for forfeiture. With the “relevant period” of these moratoria extending to June 2021, the following points are noteworthy:

  • Possession proceedings – from the 1st of July 2021, unless the moratorium is extended again, landlords will be able to forfeit the lease and take action to recover property. Landlords can also continue to issue proceedings for forfeiture for breaches other than failure to pay sums due under a lease.
  • CRAR – Similarly after restrictions end, CRAR can be used for rent arrears with the minimum number of days’ outstanding rent required being 457 days’ rent between the 25th March and 23rd June, and 554 days’ rent between the 24th and 30th June. Remember, this is not a “rent-free” period when considering what is owed.
  • Section 146 – Where there are potential breaches of covenant, such as carrying out unauthorised alterations, serving a s146 notice and requiring the breach to be rectified could be applied, and if the tenant in fails in this requirement, a landlord can apply to forfeit the lease.
  • Statutory demands - Under the Corporate Insolvency and Governance Act (CIGA) statutory demands served since the 1st March 2020 can form the basis of a winding up petition after the expiry of the current moratorium (after the 30th June 2021).
  • Recovery from former tenants & guarantors – If the commercial tenant has a third-party guarantor, a landlord may be able to recover rent arrears due, from the guarantors.
  • Debt Recovery – Proceedings can still be issued in the Courts and is a practical alternative should a landlord no longer have the right to forfeit.
  • Voting rights in a CVA – And, returning specifically to CVAs, in mitigating future risks, agreements on rent concessions could record that those arrangements will automatically terminate, where a proposal for a potential CVA is submitted to the creditors of any tenant company to vote upon. 

As we begin to emerge from what is hopefully the worst of the crisis, with the end of legislative as well as social restrictions, the range of options for landlords to consider in preserving the value and integrity of their investments under challenging, and even restrictive conditions, will continue to open. Should you need advice and support, we would be happy to discuss effective options and remedies with you.

Contact Phil Parkinson: p.parkinson@jbleitch.co.uk

Company Voluntary Arrangements: The Challenges & Consequences for Landlords in a Changing Commercial Landscape

A Clear Responsibility?

A Clear Responsibility?

In this blog, Associate Katie Edwards and Legal Director Phil Parkinson consider recent case law and the need for clarity and accuracy in insurance certification, notably where there is potentially error, assumption or a clear disconnect in the liability of named parties.

One could be forgiven for providing a robust challenge to the adage of “what’s in a name?” when considering the ramifications for those named on insurance certification, specifically in regard to property transactions and instances where special purpose vehicles (SPVs) are involved.

The recent case of Sehayek v Amtrust Europe (2021) serves as a cautionary example to highlight this.

The case focused on cover under the LABC New Homes Structural Warranty scheme, where homeowners sought new build insurance cover as part of the conveyance process for the purchase of a luxury penthouse apartment. The buyer had purchased from Grove End Gardens Ltd, but the certificate of insurance named the ‘developer’ as Dekra Developments Ltd, an associated company with the same directors and shareholders. The contention arose when the homeowners made a claim for over £700,000 (pursuant to the defects insurance period, not remediated by the developer within the first two years of cover) and the underwriter subsequently denied liability on the basis that the developer named on the certificate (Dekra Developments Ltd) was incorrect and did not meet the definition requirement that it must be a party to the purchase agreement (which stated Grove End Gardens Ltd, of whom the underwriter was unaware).

Supporting the underwriter’s argument, were the insurance clauses which specifically stated:

“Any person, sole trader, partnership or company who is registered with the LABC New Home Warranty and has registered the New Development and i) with whom the Policyholder has entered into an agreement or contract to purchase the Housing Unit on either a Freehold or Leasehold basis….”

Despite the claimants’ argument that it was necessary to imply that the term ‘developer’ should be read to cover ‘associated companies,’ the Court found that the evidence did not support the contention that it was a mistake that Dekra Developments Ltd had been proposed as the developer.

Misnomers, Implied Terms & Mitigation

The judgment noted that there was no clear mistake, nor was it clear what correction ought to be made, as per Liberty Mercian v Cuddy Civil Engineering (2013).

Referencing this case is noteworthy, in that judgment in that instance had found there had been no misnomer and no mistake, either mutual or unilateral, for which rectification could be available where there was a discrepancy as to the naming of contracting party in a construction contract.

With regard to implied terms, proceedings highlighted the necessity test for an implied term, as set out and clarified in Marks & Spencer v BNP Paribas Security Services Trust Co (Jersey) Ltd (2016) where it was noted “the exercise of implying a term in to a contract is not one and the same as the exercise of interpreting a contract, not least because the express terms of a contract must be interpreted before one can consider any question of implication”.

“Obvious” Conclusions?

Fairness or reasonableness alone may not be sufficient to challenge a contractual agreement such as insurance certification. It will be interesting to note whether this decision will be subject to appeal. However, salutary lessons can be learned. The need to be explicit, clear and to avoid “assumption by association” are all highlighted by this case and the supporting authorities – obviousness is a watch word to consider.

The need to ensure diligence when confirming the definitions relevant to the capacity of each party named on the certificate is crucially important. Some beneficial points that can be taken include:

  • When naming the correct contractual parties, it is important to properly understand the company formation and structures with which you are seeking to enter into an agreement or contract with (implied association will not suffice).
  • Exercising due diligence and ensuring all company checks are conducted prior to drafting an agreement or agreeing the policy. Pre-contractual communication will allow discrepancies to be identified and uncertainties clarified via correspondence with the other party before entering into any binding agreements.
  • Ensure the language of the contract is explicit - not implicit, adding context as well as clear definition.
  • If you are uncertain on how to proceed and require support, seek legal advice.

If you wish to discuss this article, or how we can help, please contact us: p.parkinson@jbleitch.co.uk / k.edwards@jbleitch.co.uk


With Urgency, Without Prejudice…

Earlier this week, the litigation team secured another success for a dispensation matter at the First tier Tribunal (FTT). Despite error in the s.20 consultation process, we successfully argued that dispensation from consultation was required for building safety works - and that the actions undertaken were conducted without prejudice to the leaseholders.

The matter concerned a five-floor building comprising over 50 flats and 3 commercial units, all held on long leases. Our client’s agent was served an enforcement notice by the local Fire & Rescue Service which outlined a range of measures to ensure the block was safe from a fire safety perspective. The agent commissioned a fire safety report, with our client proposing installation of a fire safety system and remedial works on manual and automatic vents.

The managing agent subsequently began the consultation process in accordance with the requirements of section 20 of the Landlord and Tenant Act (1985) and a waking watch was introduced as an interim measure. However, the second stage notices contained errors and third stage notices were not sent regarding the potential work on the vents. Despite this, the managing agent received no objections or formal responses from leaseholders, and given the urgency of ensuring safety, our client proceeded with the works on the basis of making a retrospective application for dispensation with a newly appointed managing agent.

Whilst the respondent leaseholders recognised there was a need for the safety work to be conducted, their primary contention was that they had been effectively misled on the true range of costs due to the failure in the consultation process - and subsequently denied the ability to engage and challenge the proposals and costs. Secondly it was argued that transition between the managing agents had caused delay in works being conducted.

The Tribunal reiterated that its jurisdiction in the matter was solely focused on the reasonableness of dispensing with the consultation requirements, noting that lessees would have opportunity to raise issues as to reasonableness and payability of the cost of the works and to further question the costs if they so desired.

Ultimately the Tribunal found that the respondents could not identify any prejudice, despite defective consultation, and there was no evidence for consequential loss being suffered as the works were deemed necessary for health and safety. With careful consideration of the extent of their remit, the Tribunal recognised that the costs were exactly as per the quotes received and nor was there a causal link between the delay and the errors in consultation. The Tribunal concluded it was therefore reasonable to dispense with the consultation requirements.

Associate Katie Edwards, who acted on the matter, comments further: "This case is noteworthy in that it highlights that the Tribunal has focused solely on the validity of dispensation when safety is the critical factor, despite error in the consultation process. The issues of payability, reasonableness and recoverability under the service charge have been clearly differentiated from the primary concern around ensuring a safe environment for residents when considering the granting of dispensation”.

With Urgency, Without Prejudice…

INFORMED CONSENT & UNAUTHORISED CHANGE OF USE

INFORMED CONSENT & UNAUTHORISED CHANGE OF USE

Victoria Bottomley of our litigation team recently posted a popular blog on the subject of change of use from commercial to residential. In this follow up piece, Victoria provides a cautionary note based on a recent County Court judgment, which saw the lease of a shop validly forfeited for change of use to two studio flats, a breach of a covenant without the landlord’s consent.

With increasing consideration of the sustainable and viable conversion of vacant commercial premises for residential purposes, the recent decision by the County Court in the Zash Properties Ltd v Mayworth Ltd  & Landau Consulting & Investments Ltd  case provides a timely reminder on the issues of consent, breach of covenant and relief from forfeiture.

Background:

Zash (the landlord) was the freeholder of a three-storey building, The top two floors each contained a flat let by the landlord on assured shorthold tenancies and the ground floor was let as a shop on a 999-year lease. That lease contained a user covenant, prohibiting use otherwise than as a shop without the landlord’s consent, such consent not to be unreasonably withheld.

The commercial tenant, Mayworth, converted the ground floor shop into two studio flats without consent, and marketed each of them on long sub-leases. On learning of the conversion, the landlord served a s.146 notice and issued forfeiture proceedings. Shortly after this Mayworth assigned the lease to a third party, who then assigned the lease to Landau.

It was argued that the s.146 notice was invalid and that the landlord was not entitled to forfeit on the basis that s.168 of the Commonhold and Leasehold Reform Act 2002 (CLRA 2002, s 168) applied and had not been satisfied. This applies to a landlord under a long lease of a dwelling, and would prohibit the service of a s.146 notice without an admission or determination that a covenant had been breached.

On this argument, Landau also applied for relief from forfeiture on the basis that permission for the change to residential use could not have been reasonably withheld on the basis of the rights afforded to long residential leases.

The Court’s Decision:

The judge found in favour of the landlord on both points, holding that the lease had been validly forfeited and granting relief on condition that the premises were reinstated to commercial use. It is noteworthy that CLRA 2002, s 168 did not apply to the premises because they were not “used or intended to be used as a separate dwelling” and therefore did not apply to a long lease of multiple dwellings. It was further noted that the lease was for a shop, not a dwelling, and it could not be said that the demised premises were a ‘separate’ dwelling, because the premises comprised two independent studio flats.

On the matter of relief from forfeiture, this would be granted on terms that the premises were reinstated as a shop, along with payment of compensation and costs.

In Summary

This case not only highlights the precedence of the lease in determining the nature and purpose of the premises, but also emphasises that CLRA 2002, s 168 does not apply to a long lease of multiple dwellings, which in this instance, preserved the issue of the s.146 notice and helped mitigate both points of the argument. Landlords should note that if presented with similar challenge, that engagement and communication with tenants and leaseholders on conversion, along with a mutual understanding of the definitions within applicable statutes will help ensure they can provide informed consent.

If you wish to discuss this article further, please contact us: v.botttomley@jbleitch.co.uk


A Matter of No Appeal

Readers may recall that in September 2020, we reported on a case in which JB Leitch acted for the Right to Manage (RTM) Company of a property, (comprised of two residential apartment blocks of seventeen storeys with 182 individual apartments), with our team securing two successful determinations at the First-tier Tribunal (FTT) for dispensation and the variation of multiple leases.

Specifically, the case focused on dispensation from all or some of the section 20 consultation requirements, in respect of qualifying works to install a fire alarm system at the property in order to reduce the extent of the waking watch in place and also to reduce the financial burden to Leaseholders by the operation of the waking watch. Secondly, we successfully argued for variation of all long residential underleases at the property, to allow inclusion of interim expenditure under the service charge clauses.

In December 2020, an application was made to the Upper Tribunal challenging the earlier outcome and seeking to appeal under S.11 of The Tribunals Courts and Enforcement Act 2007.

The application argued that there had been insufficient notice of the FTT hearing and that directions were confusing because of the consolidation of the variation application with the dispensation application, adding that the hearing was a case management hearing and that it was surprising when the substantive application was dealt with.

Upon review of the application for appeal, the Judge took the view that the arrangements made by the FTT were within the range of reasonable decision open to it in the management of this case and permission to appeal was refused on procedural grounds.

Key points included that the FTT had set out its reasons for taking the view that the applicant had adequate time to prepare for the hearing and it was clear that directions were being given for a determination of the matter, not for a case management hearing, in view of its urgency.

Furthermore, the substantive grounds of appeal were found to be without substance. The applicant stated that the higher insurance premium was the result of a failure in proper administration by the RTM company and that the higher premium arose from the discovery of fire safety issues at the property which was not the case. The applicant’s argument that the RTM company could have raised interim funding by way of voluntary contributions from some leaseholders was also found to be an unsatisfactory and unfair arrangement, and would not remedy the omission in the lease.

Associate Katie Edwards comments: “The decision to refuse the appeal is predicated on the original need to vary the lease which arose from the need to insure the property and also to protect the leaseholders from the risk of fire. It did not give rise to any higher service charges overall and it is noteworthy, as the decision states, that the additional funds would have been payable at the end of the year in any event. It is good to see that this refusal reaffirms the rationale and reasonableness of our approach with regard to this matter”.

A Matter of No Appeal

Is the Ministry of Housing’s Latest Announcement Regarding Leasehold Reform Actually Harming Leaseholders (At Least in the Short Term)?

Is the Ministry of Housing’s Latest Announcement Regarding Leasehold Reform Actually Harming Leaseholders (At Least in the Short Term)?

Rob Denman, Principal Associate & Head of Real Estate at JB Leitch, comments on the Government’s recent announcements on leasehold reform…

On 7th January 2021 the Ministry of Housing, Communities and Local Government, via Robert Jenrick (the Housing Secretary), confirmed that they would be giving all leaseholders the right to extend their lease by a maximum of 990 years at a zero ground rent. This announcement was the Government accepting part of the recommendations on leasehold reform put forward by the Law Commission in their reports from January 2020 and July 2020.

Existing Rights

At present the right already exists for leaseholders of flats (providing they meet the qualifying criteria) to extend their lease for 90 years in addition to the unexpired term at a peppercorn ground rent. Leaseholders of houses (providing they meet the qualifying criteria) can also extend their leases by 50 years at a modern ground rent. Leaseholders of houses (providing they meet the qualifying criteria) also have the right to purchase their freehold.

Lack of Substantive Detail

Although, on the face of it, this announcement appears to be good news for leaseholders it lacks any detail other than the new lease being for 990 years at a nil ground rent. As a rather mischievous aside it would be interesting to see how many leasehold properties that exist now will be in existence in 990 years’ time!

There are no timescales confirmed for this reform other than “legislation will be brought forward in the upcoming session of Parliament”. Even more importantly there is no confirmation as to how the premium for these new forms of lease extension will be calculated. The Government’s announcement simply confirmed that “an online calculator will be introduced”. The Law Commission’s paper from January 2020 gave the Government three options to calculate the premiums for lease extensions and the summary concluded stating “it is now for Government to decide which of the options to pursue”. Given the lack of detail on this point it does not appear that the Government have yet decided which option to pursue despite the options being put to them 12 months ago. Detail on this point is critical here as it the price payable that is the crucial issue for leaseholders and freeholders alike.

Potential impact on the Housing Market

Throughout the Covid 19 pandemic the Government have been keen wherever possible to keep the housing market buoyant. Estate Agents are free to operate in the latest lockdown and a Stamp Duty Land Tax holiday has been in place since July 2020. The holiday expires on 31st March 2021.

This latest leasehold reform statement may significantly impact the current housing market to the detriment of existing and new leaseholders. Anyone who saw last week’s statement on leasehold reform may be forgiven for thinking this reform was either already in place or would come in to law in the short term. That is simply not the case and any such legislation (particularly in the current climate with more pressing issues) is unlikely to become law for at least 12 months if not more. Particularly when you factor in that the Government appears yet to have decided on the key question of the valuation options.

There are an estimated 4.5 million leasehold properties in England and Wales so any sale and purchase chain of transactions is likely to include a number of leasehold properties. This latest statement is therefore likely to have cast doubt in the minds of some existing leaseholders as well as new ones on how to proceed with buying and selling leasehold property. If lease extensions are required now to enable property sales should they proceed under the old regime or wait until the new one is in place? Would a potential leaseholder be happy with a new lease that is for only for a term of 90 years plus the current unexpired term as opposed to a 990 year lease? Why would a leaseholder extend their lease now if it is likely to be cheaper in the future? If so what impact will this potential doubt and indecision have on existing chains of transactions and would some collapse because of this?

Impact of Pension Funds and Investments

I have made this point several times previously but it is still a pertinent one. Like it or not, most people are invested in ground rent income in one way or another through their pensions. Ground rent investments have proved very popular for pension funds as they offer steady returns with a low risk profile. If this asset class ceased to exist through this proposed reform it would likely have a significant impact on the value of such investments and pension funds would have to source an alternative asset class that mirrored these current low risk returns. The lack of detail regarding the premium calculation and timescale of implementation may have an adverse effect on the value of pension funds and investments within which we are all stakeholders.

Conclusion

Uncertainty is the enemy of any market and this Government statement with its lack of detail, as detailed above, may actually do more harm than good in the short term for both leaseholders and freeholders.

As many have already commented, it may have made more sense for the Government to comment further on leasehold reform once they had made the key decisions on how premiums would be calculated and the intended timescale of implementation. Rhetoric does not benefit anyone. Well considered, detailed and clear messaging on leasehold reform is what is needed for all sectors of leasehold property otherwise the law of unintended consequences will continue to apply.  


Time to Convert?

Trainee Solicitor Victoria Bottomley looks at the increasingly prevalent subject of the conversion of commercial premises for residential use, providing insight into the key matters landlords should consider.

In the wake of the Covid-19 pandemic, many landlords may increasingly find themselves with tenants who no longer want to occupy the premises with a business tenancy - or with a prospective tenant looking to acquire the lease and then convert the premises to residential. Whilst typically the landlord may not be inclined to permit the change, the current circumstances may prove that it is beneficial to at least carefully consider it.

A Case for Change?

Amidst the sea of legislative change that has taken place this year, the Prime Minister announced that radical reforms to the planning system would allow vacant buildings in town centres to be converted to housing and that existing commercial properties, including newly vacant shops, could be converted into residential housing more easily. This would therefore provide a means for landlords and developers to expediently repurpose vacant premises and protect their interests in the longer term.

An initial consideration for landlords is the overarching viability of the conversion – essentially the business case for doing so. There are many factors to consider. Location is a critical factor. Are the premises located in an area within reach of key amenities? Shops, schools, transport or healthcare settings? Is the local infrastructure accessible and convenient for domestic purposes? Perhaps more fundamentally, are the premises appropriate for conversion and is it served by key utilities? Are there VAT implications for both parties for each supply (i.e. the premium and any rent) which would depend upon whether the parties have opted to tax the property and whether the landlord is VAT registered?

Once addressed, there are additional considerations when permission to change the use is sought and how such a transaction should be recorded.

Change of Use

Most leases include restrictions on the permitted use of a premises and the circumstances in which consent may be required. A change of use may also be prohibited by statute, planning permission or restrictive covenants on title. There are some instances where planning permission is not required for change of use to residential, if it falls within permitted development. However, even with planning permission for change of use to residential, it may be necessary to secure permission for the actual development of the property if the external appearance is to be changed for example. The government has recently updated the guidelines for permitted development rights and changes to the Use Classes Order, which can be reviewed here: https://www.gov.uk/government/publications/permitted-development-rights-and-changes-to-the-use-classes-order

Reasonableness

Where tenants are seeking consent to convert the use of premises, the issue of reasonableness is a key factor to consider in providing consent, particularly where there may be implications for the value of the property, its suitability or impact on its immediate environment or similar. As an overview, leases will typically include types of covenant that preclude, prevent or make change permissible:

  • An absolute covenant precluding the tenant from doing something.
  • A qualified covenant that prohibits a tenant from a particular activity without first seeking the landlord’s consent; which is not be unreasonably withheld.
  • A partially qualified covenant prohibiting the tenant from undertaking a particular activity without the landlords consent however, there is no obligation on the landlord to act reasonably in giving consent.

In determining what is deemed reasonable, landlords should be aware that many long leases contain qualified covenants which may place an obligation on the landlord no to withhold consent unreasonably. In the context of change of use, and where the covenant is qualified, s.19(3) of the Landlord and Tenant Act 1927 provides that a landlord may not impose a fine in respect of the application. In the case of International Drilling Fluids v Louiseville Investments [1986] 1 All ER 321 it was notable that the responsibility of proving that consent has been unreasonably withheld was with the tenant and further, that other prominent cases* highlight that consent could be refused on the grounds that change would detract from the value of the premises or the economic fabric of the immediate area, If the landlord is provided with insufficient information to make an informed decision or where the change would increase the risk of enfranchisement and the landlord is withholding consent as a means of protecting the value of the premises.

Deed of Variation or Surrender & Re-Grant?

Providing that the changes to the lease are unsubstantial, a change of use could be dealt with by a Deed of Variation to amend the existing terms of the lease (where required). This transaction would not attract Stamp Duty Land Tax (“SDLT”). A surrender and re-grant occurs if a lease is varied in such a way that the variations cannot be effected without the grant of a new lease. It should be noted that surrendering the lease will release the parties from their respective obligations and any previous breaches, with any covenants expressed to arrive at or upon expiry of the term falling away. The effect on any registered third-party charges or rights, guarantees or underleases would therefore need to be considered.

In summary, there are key points for careful consideration – both in the benefits and potential pitfalls. Granting a change of use to an able tenant may lessen or remove the burden of liability to maintain the premises, (which would include paying the service charges, and paying the business rates) – however, consenting to a change of use may open the landlord up to issues which usually arise only from residential tenants, such as their ability to apply for the right to manage, their statutory right to extend their lease and their ability to challenge the reasonableness of service charges via the Tribunal.  If the premises forms part of a mixed-use development, a change of use may classify the premises as “qualifying”; meaning that the leaseholders could make a claim for enfranchisement, which if successful, could remove a landlord.

If you wish to discuss any of the areas discussed in this article, please contact us: v.bottomley@jbleitch.co.uk

*See: (Tollbench v Plymouth City Council [1988] 1 E.G.L.R 79); (Kened v Connie Investments [1995] 70 P & CR 370), (Warren and another v Marketing Exchange for Africa Ltd [1998] 2 EGLR 247) OHS v Green Property Co) [1986] I.R. 39); and  (Supreme Court Case: Sequent Nominees Limited (formerly Rotrust Nominees Limited) v Hautford Limited [2019] UKSC 47, [2019] All ER (D) 186).

Time to Convert?

A Question of Quiet Enjoyment

A Question of Quiet Enjoyment

When is a landlord in breach of covenant of quiet enjoyment and non-derogation from grant?

Lauren Walker of JB Leitch’s litigation team considers the question of preserving quiet enjoyment and highlights some of the issues that may face landlords in terms of breaching their lease obligations when considering necessary works…

As a result of the government driven “brownfield first approach”, redevelopment of existing commercial premises is becoming increasingly popular. In contemplation of redevelopment works, landlords should be mindful of their obligations pursuant to the lease including or in addition to the covenants of quiet enjoyment and non-derogation from grant.

This blog explores the interaction between the covenant for quiet enjoyment and the doctrine against derogation from grant, with particular reference being made to the case of Timothy Taylor v Mayfair House Corporation and another [2016] and where the erection of scaffolding can open up a landlord to potential claims against them.

Doctrine against derogation from grant v covenant for quiet enjoyment

The implied covenant of non-derogation from grant prevents landlords who have granted a benefit to a tenant from acting (or failing to act) in a way which substantially deprives the tenant of enjoyment of that benefit. In other words, and as established in Harmer v Jumbil (Nigeria) Tin Areas [1920], landlords are not to “take away with one hand what is given with the other”. This doctrine applies to land retained by the landlord and exists to prevent landlords from acting in a way which interferes with the use for which the premises is let to the tenant.

An express covenant drafted into a lease cannot exclude the principle of non-derogation from grant, where this is attempted it shall be wholly rejected by the court as a tenant cannot be deprived of an “irreducible minimum” protection (Platt v London Underground [2001]). Conversely, the covenant for quiet enjoyment in favour of the tenant protects a tenant against interference and disturbances by a landlord. It is most often the case that a lease will contain an express covenant for quiet enjoyment.

The courts have frequently construed the two covenants as being almost synonymous and it is established that the covenants are to be considered in conjunction with one another.

A Case in Point: Timothy Taylor v Mayfair Corporation and another [2016]

In this case, the landlord had let the premises to the tenant for use as a high-end art gallery in Mayfair. The lease contained an express covenant for quiet enjoyment in favour of the tenant but also granted rights in favour of the landlord to carry out works. Pursuant to the lease, the landlord was permitted to erect scaffolding on a temporary basis provided that it did not restrict access to or enjoyment of the premises.

Upon commencement of the landlord’s redevelopment of the upper floors of the building, the tenant claimed that the manner in which the scaffolding had been erected around the building had given the appearance that the gallery was closed. The tenant sought to claim damages for a breach of quiet enjoyment and non-derogation from grant on this basis, in addition to the level of noise emanating from the works. The tenant also sought an injunction to remove the scaffolding.

Whilst the tenant accepted the landlord’s right to carry out the works under the lease, they argued that the actions taken by the landlord were unreasonable and in breach of covenant.

The decision

In reaching its decision as to whether the landlord had been in breach of covenant, the High Court considered a number of factors including:

  • Whether the landlord was acting under its repairing covenants under the lease, or whether the works were being carried out for the landlord’s own financial benefit;
  • Whether reasonable steps had been taken by the landlord to minimise disturbance;
  • The nature of the property itself;
  • Whether the tenant had been notified as to the extent of the intended works, for example the time period in which the scaffolding will be required, at the time of the grant; and
  • Whether the landlord had been unreasonable in failing to offer compensation to the tenant albeit the court recognised that the landlord was under no obligation to do so.

The court found that the landlord was in breach of its covenant for quiet enjoyment under the lease in that (considering the noise and scaffolding in conjunction) the works had ‘materially adversely’ restricted access to the use and enjoyment of the gallery. Furthermore, it was considered whether in granting occupation to the tenant for use as an art gallery yet commencing works which significantly impacted upon enjoyment of the premises, the landlord was in breach of the covenant for non-derogation from grant.

Considerations

In consideration of redevelopment works, landlords should be mindful of their obligations pursuant to the lease, especially the covenant of quiet enjoyment.

Landlords should also question whether the works will impact significantly upon the purpose for which the premises is let. In any dispute concerning derogation from grant, the extent of the grant itself and the surrounding circumstances (particularly at the date of the grant) will be vital considerations. By failing to act reasonably with a view to limiting interference, landlords are at risk of claims for damages being made against them for breach of covenant for quiet enjoyment and non-derogation from grant.

Scaffolding

Where scaffolding will be required for any necessary works, landlords should give thought to how the impact of the scaffolding upon the tenant’s use and enjoyment can be minimised. For example, ensuring that scaffolding is erected only in areas where it is absolutely necessary and in a manner which does not restrict access to the building. Providing notice of the extent of the scaffolding (for example, with regards to the timeframe and appearance) allows for any dispute to be raised and addressed in the early stages. Further, this affords the tenant time to make alternative arrangements where necessary. Landlords may also wish to consider whether an offer of compensation or reduction in rent would be appropriate. In the case of Jafari v Tareem Ltd [2019] it was held that waiver of the rent during the period in which the works were carried out constituted adequate compensation.


JB LEITCH SECURE THE SAFEST OPTION

This week, JB Leitch have enjoyed further success with a notable determination of the liability to pay service charges under section 27A of the Landlord and Tenant Act 1985 at the First tier Tribunal (Property Chamber).

The case concerned a listed, five storey Victorian building in central London. The property has 3 separate entrances with eleven flats served by a lift which had suffered from frequent breakdowns and had been out of service for three years. Further to commissioning a number of reports (concluding that replacement of the lift would be safer and more cost effective in the long term than repair) and undertaking an unchallenged section 20 consultation, a series of tender proposals were obtained by the property management company and the leaseholders notified. The respondents, comprising a group of leaseholders, contested that:

  1. The lift does not serve all of the property and therefore those not benefitting considered they should not need to contribute.
  2. That the leaseholders are not liable to pay for the works towards the cost of a new lift because Listed Building consent is required which may impose addition conditions for the works.
  3. The construction and interpretation of the lease is under dispute, with regard to repair versus replacement.

With our client bringing an application to determine whether replacement was reasonable and payable in accordance with the demand for on-account service charge, we argued on point one, that the leases are clear, with a clause clearly stating the contractual obligation to “Keep the lifts situate within the Building in repair and replace any thereof that require to be replaced” with a further clause outlining that each numbered flat constituted part of the property.

On the second point, we highlighted that the construction of the lease entitles the Landlord to demand on-account service charges for the forthcoming year if the service charge funds held are not sufficient to meet the anticipated expenditure. It was noted that a pre-application for advice on general acceptability for Listed Building consent and a formal application was made in a timely fashion, adding that a decision was likely in a short time and unlikely to have significant impact on the costs.

On the third point regarding repair versus replacement, the key matter was whether a repair of the singular parts would provide a properly functioning lift which complied with current health and safety regulations. Interpretation of the relevant lease clause implied it did not provide for rebuilding/entire replacement, only to “replace any parts”. Both parties therefore referred the Tribunal to the case of The London Borough of Hounslow v Waaler which considered the approach a Landlord must take when determining the cost of improvement works passed through the service charge were reasonably incurred. Although the Upper Tribunal held in that instance that particular consideration should have been given to the view of the leaseholders, in the context of this matter, the clause of the lease that stipulated keeping “the lifts situate within the building in repair and replace any parts thereof that require to be replaced” and the expert reports (prepared by ILECS), supported the option to replace the lift which was installed in 1935, was currently defective and had not been in use for three years.

In summary, the Tribunal determined that the Respondents are contractually bound to contribute towards the cost of the lift, agreed that construction of the lease entitles the Landlord to demand on-account service charges for the forthcoming year and that replacement works would be in accordance with the provisions of the lease. Furthermore, the Tribunal noted that when the Section 20 consultation process was undertaken, no objections whatsoever were received in connection with the choice of contractor or final tender price.

Associate Katie Edwards adds: “this is an interesting case it touches upon a number of important points, such as the case for replacement versus repair - and ultimately recognises the immediate and longer-term benefits in terms of safety and cost. With regard to the reasonableness of costs and attribution to the service charge, the case highlights that consultation and communication are crucially important”.

JB LEITCH SECURE THE SAFEST OPTION

Tenant Insolvency

Tenant Insolvency

Solicitor Jennifer Hollyoak looks at the obligations, protections & risks around tenant insolvency in a period of ongoing uncertainty.

With the UK Covid alert level being raised alongside the  implementation of tighter social restrictions this week, it’s fair to say that everybody is “feeling the pinch”.  Both residential and business tenants are finding it difficult to continue working during these uncertain times, which may result in some tenants being unable to make payments under the terms of their leases. This may also result in more leases being disclaimed by insolvency practitioners seeking to dispose of onerous property.

In turn, it is increasingly more difficult for landlords to raise funds to meet their own obligations under the leases as they are being met with a rise in tenant insolvencies. In June, our Legal Director Phil Parkinson and Associate Katie Edwards provided a practical guide for dealing with the issue of tenant insolvency (available to download on the link below).

Commercial Tenants and the Corporate Insolvency and Governance Act 2020

Since this guidance, the Corporate Insolvency and Governance Act 2020 (CIGA 2020) has gained royal assent in the government’s attempt to provide some breathing space for businesses to explore options for rescue. This act introduces a number of measures, the most notably restrictions on statutory demands and creditor winding up petitions in addition to a free-standing moratorium.  

Restrictions on Statutory Demands and Winding Up Petitions

Originally, CIGA 2020 placed a restriction on the service of statutory demands between 1 March 2020 – 30 September 2020. During this period, any statutory demands issued could not be relied upon as evidence of a debt to support a petition presented to the court. This deadline has now been extended until 31 December 2020 (inclusively). This restriction is not conditional upon Covid having impacted the debtor.

In addition to the above extension, a creditor is unable to present a petition for winding up between 27 April 2020 and 31 December 2020 (inclusively), without reasonable grounds for believe that the company would have become insolvent regardless of the impact of Covid.

Moratorium

The CIGA 2020 introduced a moratorium within the Insolvency Act 1986 whereby eligible companies would be able to invoke a moratorium so businesses can consider restructuring opportunities free from creditor action.

The moratorium, which is not a gateway to a particular type of insolvency (or any action at all if the company can be rescued), has an initial period of 20 working days, but this is capable of being extended up to 40 business days without consent from the court or creditors being required.

Whilst this moratorium is overseen by an insolvency practitioner, the directors of the company will remain in charge of the running of the business on a day-to-day basis. During this time, no steps may be taken without the permission of the court in relation to commencing / continuing any legal process.

As a result of Covid, the government included within the CIGA 2020 a temporary relaxation to the criteria company must meet in order to invoke a moratorium during a temporary period. These included:

  1. If a company is subject to an outstanding creditor winding up petition, they will not have to apply to court to invoke the moratorium during the temporary period.
  2. If a company has previously been subject to a CVA, administration or a moratorium within the past year, they will not be disqualified from invoking a further moratorium during the temporary period.
  3. During the temporary period, the Monitor for the moratorium will only have to certify that “it is likely that a moratorium for the company would result in the rescue of the company as a going concern or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus

This temporary period has now been extended until 30 March 2021, albeit the government are expected to lay a further statutory instrument which is anticipated to roll back some of the above temporary modifications.

Landlords will therefore need to bear in mind the above extensions in restrictions when seeking to recover arrears from insolvent tenants. This process will now be a more onerous task and subject to delays as a result of the above restriction.

Furthermore, with the Business Tenancies (Protection from Forfeiture: Relevant Period) (Coronavirus) (England) (No 2) Regulations 2020 extending the protections from forfeiture for business tenancies until 31 December 2020, the options available for landlords to pursue commercial tenants for arrears are limited.

In the circumstances Landlords, their advisors and managing agents will need to take care when considering their obligations pursuant to their leases balanced against the likely challenges they may face if action is required to recover arrears from an insolvent commercial tenant. Specialist advice by our team can provide Landlords with a clear overview of the potential risks and obligations they may face in order for practical and commercially considered strategies to be formed.

Should you wish to discuss any of the issues and points discussed in this blog, please contact us.


JB Leitch Secure Further Building Safety Successes

The JB Leitch litigation team have further consolidated their reputation and expertise in building safety and tribunal matters, with two successful determinations for dispensation and the variation of multiple leases last week.

Both matters concerned the same property, comprised of two residential apartment blocks (of seventeen storeys with 182 individual apartments) with JB Leitch acting for the Right to Manage (RTM) Company.

Securing Dispensation

The first matter concerned an application for dispensation from all or some of the section 20 consultation requirements, in respect of qualifying works to install a fire alarm system at the property in order to reduce the extent of the waking watch currently in place and also to reduce the financial burden to Leaseholders by the operation of the waking watch.

The urgency of the work was identified in reports from both the Fire Service and a building safety consultancy commissioned to review the building cladding system, which found that that the High-Pressure Laminate Panels enclosing the roof top apartments were “…not fire resistant, has a Class D Fire Rating and is a significant fire risk to the property.” The report advised that the property was no longer suitable for a “stay put” strategy in the event of fire and a “simultaneous evacuation” strategy should be adopted. The Fire Service added their advice to “incorporate a simultaneous evacuation system to any block that has a form of flammable cladding.”

The respondent’s objections included that the intended works were an improvement and therefore not covered by the Lease and that there was no urgency or proper basis to dispense with the consultation. The respondent also noted that the applicant had sought to avoid Leaseholder scrutiny by the application and there was a failure to inform Leaseholders of the intention to apply for dispensation.

Our response countered that a significant risk of fire requires urgent action, as highlighted in the reports, that there had been appropriate engagement with Leaseholders via a series of updates and monthly bulletins, zoom meetings and a Notice of Intention. On the matter of costs, it was highlighted that the Lease did allow for “providing operating … and adding to any security, firefighting appliances … fire alarm system”.

Dispensation from full consultation was granted. The Tribunal found that this provision enabled the Applicant to carry out the proposed works of installing a fire alarm, and further acknowledged that there is a degree of urgency given that the alarm system will significantly improve the process of giving warning the residents to evacuate. The summary also noted that Leaseholders had received adequate documentation and updates, and that the costs of the system would mitigate those of the waking watch.

Lease Variation & Inclusion of Interim Expenditure

The second matter focused on a variation of all long residential underleases at the property, to allow inclusion of interim expenditure under the service charge clauses.

The need for the application was the discovery of fire safety issues at the property, with the Applicant experiencing difficulty in arranging insurance cover which is only available at a much higher premium than it estimated for the advance payment of the service charge. The Applicant wished to recover those higher premiums by way of a supplemental demand payable within the current financial year.  With the urgency of installing a fire alarm system, a supplemental demand would also need to be made within the same period. The terms of the Lease did not allow the Applicant to demand a service charge payment within the financial year, and as an RTM company has no funds of its own to cover service charge costs which arise. Our application addressed the following key points:

  • Should a variation be made if the leases failed to make satisfactory provision?

The arguments raised in respect of the additional service charge obligation and limiting the variation on a one off basis would not work in accordance with the Landlord and Tenant Act. The provision, as JB Leitch drafted, allowed for interim demands to be served in respect of other expenditure including the fire alarm and any other unforeseen expenditure.

  • Was the variation within the grounds of section 35(2)(e) of the Act, that is to say, did the underleases fail to make satisfactory provision?

It was highlighted that the Act states “recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party or of a number of persons who include that other party.”

  • Did the variation make satisfactory provision?

The Tribunal found that the draft does provide adequately for the service of interim demands, thereby enabling the Applicant to serve a supplemental demand more than once in the financial year without notice.

The Tribunal determined that the underleases failed to make satisfactory provision for costs that may be incurred and require to be paid in the course of the financial year and the proposed variation was required to meet this need.  It had been shown in that it would not be possible for the Applicant as a RTM Company to insure the property without the proposed variation. Also, it would not have been possible to carry out urgent works for the safety of the Leaseholders which arise and for which payment is required during a current financial year.

It is noteworthy that the Tribunal also found that the recovery by the Applicant from the Leaseholders of the expenditure incurred (or to be incurred) is for the benefit of the Leaseholders. Indeed, so far as the expenditure in the present circumstances it would be detrimental to the Leaseholders for it not to be paid. 

Associate Katie Edwards comments: “Both cases serve to illustrate the ongoing prioritisation and urgency of safety works, the obligations of all parties and challenges in areas such as insurance. In a climate of uncertainty and evolving legislation, we are delighted to have provided both clear guidance and positive results for our client”.

JB Leitch Secure Further Building Safety Successes

Fire Safety Work & Cost Recovery via the Service Charge

Fire Safety Work & Cost Recovery via the Service Charge

JB Leitch secure an important determination at the First-tier Tribunal for the recoverability of costs for urgent fire safety work costs under the service charge.

With considerable attention being given to the urgency and liabilities surrounding building safety, notably with the reach of the new £1bn remediation fund, the new Fire Safety Bill or concerns around EWS1 and safety certification, this week sees JB Leitch secure a determination on the cost liabilities associated with safety works and the reasonableness of cost recovery via the service charge. This decision is both timely and significant given the ongoing debate and uncertainty on the extent to which landlords and Managing Agents should be liable.

Background:

JB Leitch represented the Applicant Landlord in an application under section 27A of the Landlord and Tenant Act 1985, for a determination of liability to pay and reasonableness of service charges against the Respondent leaseholders at the development.

The application related to urgent fire safety work, specifically the replacement of flat and communal area doors, ancillary works to frames surrounding panels and separate parcel boxes that had been identified as damaged and failing to comply with FRA standards. The main issue for our client was whether the apartment door sets were demised to the leaseholders and would be part of their repairing covenants and not a service charge or were part of the landlord’s repairing obligations and are a service charge. Of specific focus was:

·         The replacement of doors, frames and surrounding joinery in communal areas

·         The replacement of doors, frames, parcel boxes and side panels to the individual flats.

Once recoverability had been determined under the charge, our client confirmed to the Tribunal that consultation would subsequently begin under sections 20 and 20ZA of the Landlord and Tenant Act, and that quotations for the works had already been obtained.

Lease clauses and the service charge mechanism:

In presenting the agreed obligations of both parties within lease covenants, attention was drawn to the pertinent terms and clauses on the service charge and maintenance. Clause 4(3) provides that the lessor will “maintain in good and substantial repair and condition” the external main walls, the internal concrete walls, main hall, staircases and landings. Clause 2(1) of the lease outlines that the lessees are obligated to pay the service charge and notably that that charge provisions consist of services stated in clause 4.

The decision:

The Tribunal concluded that:

·         The replacement of the communal door sets is covered by the landlords covenant at clause 4(3) and the leaseholders are liable to contribute to the costs of the works through the service charge.

·         The individual door sets are not covered by the landlord’s covenant at clause 4(3) and the leaseholders are not liable to contribute to the costs of the works through the service charge –although leaseholders will be responsible for their own entrance door sets and will need to carry out the works themselves under their repairing obligations.

·         The section 20 consultation should be carried out in respect of the communal doors, which should produce a quotation that could be considered reasonable by the FTT. The process will also allow for any concerns raised by the responding leaseholders to be addressed.

·         Although the flat doors are not a service charge, it worth noting that there is no reason why the work cannot be arranged and co-ordinated by the landlord or managing agent and dealt with as a separate contract between the landlord and leaseholders who agree to such an approach.

Summary:

The decision also illustrates that demised premises refer to individual fats and not the block, and that an entrance door to a flat is the leaseholder’s obligation as it is part of the flat when constructed. In relation to the final bullet point above regarding flat doors, this would be likely be taken up by the majority of the leaseholders as it will be easier and likely result in a cost saving as opposed to having to appoint contractors individually.

In conclusion, the decision provides a timely reminder of the significance of the service charge in both maintaining property and ensuring sufficient levels of safety. Despite the current crisis, service charge recovery is integral to providing adequate provision to conduct urgent building safety work, and in accordance with the terms of the lease and subsequent consultation, ensuring reasonable apportionment of cost.

Fort further information on this case and our experience in building safety matters contact Katie directly: k.edwards@jbleitch.co.uk


Solving the Issues of Tenant Insolvency

Legal Director Phil Parkinson and Associate Katie Edwards offer succinct guidance on the issue of tenant insolvency, providing practical and direct answers to some of the most pressing and frequently asked questions.
 
Within the complex landscape that landlords, their advisors and agents are operating, the issue of insolvent tenants is becoming more frequently encountered. Complicated legal and practical questions arise as the required action depends on a number of variable factors, including the form of insolvency and whether the lease is encumbered with a legal charge. Any form of tenant insolvency imposes various restrictions on enforcement remedies available for a landlord, which presents an issue within a block that may be suffering from cash flow issues due to a lack of service charge funds. A review of the legal position a landlord may be in, together with which remedies are available, is set out below:
 
Bankruptcy
 
Can Court proceedings be issued for recovery of rent/service charge?
Not without permission of the Court due to the restrictions contained at s285(3) of the Insolvency Act 1986 (“IA 1986”). An application can be made for permission to issue and serve recovery proceedings but the Court will need to be persuaded that there is good reason to do so.   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes. Bankruptcy of a direct tenant provides no restriction on pursuing their Guarantor. Accordingly, a landlord ought to verify whether any Guarantors exist in relation to situation involving tenant insolvency.   
 
Can a rent deposit deed be called upon?
Yes. There is no restriction on calling on a rent deposit deed – on the strict basis that no specific contractual provisions are engaged due to the insolvency event.   
 
Can forfeiture proceedings be issued?
Yes, pursuant to s285 of the Insolvency Act 1986 and the Court of Appeal authority of Sharples v Places for People Homes  [2011] EWCA Civ 813. A restriction does exist preventing a landlord from being unable to plead recovery of any arrears as a debt.
 
Individual Voluntary Arrangement (IVA)
 
Can Court proceedings be issued for recovery of rent/service charge?
During the initial moratorium, not without leave of the court as per s252 IA 1986. Once the IVA has been approved, proceedings can only be issued for claims not governed by the IVA.
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes, unless released by the wording of the IVA.   
 
Can a rent deposit deed be called upon?
Yes, but only with leave of court pursuant to s252 IA 1986.
 
Can forfeiture proceedings be issued?
During the moratorium, not without leave of the court. Upon approval of the IVA proceedings can be issued in certain circumstances – see Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504.
 
LPA Receivers
 
Can Court proceedings be issued for recovery of rent/service charge?
Yes.
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes.   
 
Can a rent deposit deed be called upon?
Yes.   
 
Can forfeiture proceedings be issued?
Yes, following Transag Haulage Ltd v Leyland DAF Finance plc [1994] 2 BCLC 88.
 
Administration
 
Can Court proceedings be issued for recovery of rent/service charge?
Not without leave of court or administrator's consent under Schedule B1, paragraphs 43 and 44 IA 1986.   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes.   
 
Can a rent deposit deed be called upon?
Only with permission of the court or administrator's consent and only where the deposit is a financial collateral arrangement.   
 
Can forfeiture proceedings be issued?
Only with permission of the Court or with the administrator’s consent.
 
Liquidation (Creditors/Members Voluntary Liquidation)
 
Can Court proceedings be issued for recovery of rent/service charge?
Yes, although the liquidator can apply for the proceedings to be stayed under s112 of IA 1986.   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes. 
 
Can a rent deposit deed be called upon?
Yes.   
 
Can forfeiture proceedings be issued?
Yes, although the liquidator can apply for the proceedings to be stayed under s112 of IA 1986.
 
Company Voluntary Arrangement (CVA)
 
Can Court proceedings be issued for recovery of rent/service charge?
During the moratorium, no proceedings can be issued without leave of the court Schedule A1, paragraph 12 IA 1986. Following approval of the CVA, only for claims not governed by the CVA following Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch).   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes, unless the wording of the CVA releases a Guarantor’s liability.   
 
Can a rent deposit deed be called upon?
During the moratorium, the consent of the Court is required. Following the finalisation of the CVA no such consent is required.   
 
Can forfeiture proceedings be issued?
During the moratorium, not without leave of the court. Following the approval of the CVA, only for rent as modified by the CVA, or not within its terms, or on the ground of insolvency if the lease permits as per Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504.
 
In summary, deciding on specific action and a way forward when dealing with an insolvent tenant takes detailed consideration and, usually, specialised legal advice – in particular in advising on situations where a discretionary application is required to be made to the Court for consent to pursue a particular option. It should be noted that the issues and implications can be severe and involve consequences for the landlord, tenant and other third parties.
Should you wish to discuss any of the issues and points discussed in this blog, please contact us.
Solving the Issues of Tenant Insolvency

EWS1: Who Pays the Price?

EWS1: Who Pays the Price?

Legal Director Phil Parkinson and Associate Katie Edwards, our leading experts in all matters related to building safety, comment on recent government guidance in relation to the External Wall Fire Review process (EWS1) and the implications for “building owners”.

Context & Background

Three years on from the Grenfell Tower fire, the issue of building safety remains as prevalent today as it was in the aftermath of the tragedy. This has recently been highlighted in the government’s guidance on maintaining remediation work through the COVID-19 crisis and the progress of the Fire Safety Bill which is now at its second reading. Last week saw the publication of the long awaited prospectus for the new £1bn remediation fund and a response to consultation on the previous funding scope and processes. Following revised government guidance, in recent months we have also seen increasing debate around the implications to leaseholders on the potential value of their property where fire risk assessment or remedial work is deemed necessary - and mounting confusion on where the cost liability for such work should be attributed.

EWS1 and the Mortgage Trap

Given increasing concerns regarding the potential length of time needed to commission and conduct the work with a finite pool of qualified expertise available, an emerging issue is that mortgage lenders have been unwilling to lend money on flats in such buildings unless they receive a confirmation of what the external wall system consists of. Failure to provide this statement is leading to many potential sales and remortgages falling through, leaving owners and prospective buyers frustrated, seemingly trapped by some valuers placing £0 value rating on a property – widely referred to as the mortgage trap. In addressing this dilemma, the Royal Institution of Chartered Surveyors (RICS), the UK Finance Association and the Building Societies Association developed the External Wall Fire Review (EWS1) form in December 2019, designed to standardise the reporting of what materials make up an external wall system and assessing the suitability lending purposes based on a "qualified professional" conducting a fire-risk assessment, before signing the form which is then valid for five years.

Although the introduction of the EWS1 has been a welcome step in attempting to unblock the market and reduce the zero value ratings, there are still areas of concern that need clarification. Many of these issues centre upon the definitions used in recent guidance. In January 2020, the Government published a new Advice Note (Building safety advice for building owners, including fire doors) on providing guidance for anyone responsible for, or advising on, the fire safety of external wall systems of residential buildings 18 metres or above in height. The note states that the owners of all multi-storey, multi-occupied residential buildings should investigate and remedy the risks of combustible cladding.

“Building owner” has therefore become something of a catch all term, but it’s not that simple. Who is an owner? A freeholder in a two party lease? What about three party leases where the freeholder may have no relationship, liabilities or automatic permissions with regard to a property?  What about Right to Manage (RTM) companies where leaseholders have acquired the landlord’s management functions by transfer to a company set up by them? Similarly how does the definition apply to comonhold arrangements and the unit holders therein?

Avoiding Mixed Messages

Whilst the Housing Secretary has reiterated that leaseholders will not be expected to meet the costs of remediation which will fall to building owners under the new £1bn fund, it is important to highlight the need to specify that the term building owners includes responsible persons when looking at the EWS1. In the context of the concerns raised above, the term “building owners” has indirectly caused confusion and concern around sole liability that could, on face value, be seen to apply to freeholders only and prevent the recoverability of costs. Perhaps, and as made explicit in the RICS website (https://www.rics.org/uk/news-insight/latest-news/fire-safety/cladding-qa/), it may have been advisable to be more specific in the Advice Note, using a similar description to that put forward by the Institute (toward the end of May):

“The seller should request that their building owner or managing agent commission an EWS assessment for those buildings in scope. The building owner or managing agent is responsible for confirming what materials are on their building. In respect to the EWS form, the person responsible for the building needs to confirm what the wall system is made up of and whether an assessment is required”.

January’s revised Advice Note, outside the main body of the text, does however provide a footnote which states that for the purposes of the document a building owners is “the owner of the building or the person, group, company or other entity on whom duties are imposed or enforcement action could be taken under the following legislation: (i) the Housing Act 2004 in relation to certain hazards; or (ii) the Regulatory Reform (Fire Safety) Order 2005 to ensure the safety of occupants of a building from fire (see Articles 3 & 5 of Regulatory Reform (Fire Safety) Order 2005 for those with duties)”.

Again, specifying that this encompasses and refers to owners, responsible individuals or managing agents, may have mitigated further confusion - and may be worth clarification in subsequent modifications to the guidance. It is also noteworthy, that the prospectus published last week for £1bn Building Safety Fund is clearer in this definition, (although in the content of eligibility for the capital remediation and associated costs only), the document states:

In the private sector, registration is open to building owners, freeholders or the responsible entity ( A responsible entity is the body that has the legal right to carry out the remediation works and to legally recover the costs from leaseholders as service charge)  for buildings within scope that

Advice: Who Pays the Price?

On the assumption that the term “building owner” does indeed encompass freeholders, managing agents and RTMs as responsible persons, there is the question of clarifying who will bear the cost of an EWS1 assessment by a suitably qualified individual.

As in many cases, this will depend on the lease. Leaseholders should always look carefully at the provisions of their leases and the extent to which they  are liable to contribute to the costs of any works the landlord carries out such as the EWS1 assessment and other safety measures. If such work falls under the definition of the services the landlord is obliged to provide then leaseholders may be required to contribute to the cost of the works through the service charge.

Additionally, contingency for the assessment and certification may be provided for landlords and managing agents within the schedules of their insurance policies, and if suitably comprehensive with regard to building safety matters, may not necessarily represent a potential increase in premiums.

Whilst debate continues, it is also worth noting that the majority of residential landlords and managing agents will have undertaken safety checks as a norm, with many buildings signed off by the appropriate building control authority in accordance with building regulations at the time of construction. These regular checks will have identified and allowed the effective management of safety risks, including planning, budgeting and providing notice for any work required and apportionment of costs incurred for which notice would have been served.

Debate around the practicality of obtaining expert advice to conduce EWS1 assessment continues, with the Association of Residential Managing Agents (ARMA) estimating many months delay given the potentially intrusive nature of work, restricted access due to Covid-19 and a limited pool of qualified experts to draw upon. Given the urgency reiterated by the government, it is likely we will soon see further measures, amendments – and clarifications - to facilitate the certification process in supporting leaseholders and “building owners” alike. We will keep watching and keep you updated.

If you are experiencing challenges with regard to building safety matters or EWS1, please contact us:

Phil Parkinson, Legal Director: p.parkinson@jbleitch.co.uk

Katie Edwards, Associate: k.edwards@jbleitch.co.uk


Covenants, Consent & Caution: Commenting on Duval v 11-13 Randolph Crescent Ltd [2020]

As you may be aware, the Supreme Court recently handed down its decision on the high profile and long running case of Duval (Respondent) v 11-13 Randolph Crescent Ltd (Appellant) [2020], which arose from an appeal by the landlord and freehold owner of the building. The appeal considered whether, on the construction of the clauses in the lease, the landlord was entitled, without breach of covenant, to grant a licence to a lessee to carry out work which, but for the licence, would breach a covenant in the lease, where the leases of the other flats required the landlord to enforce such covenants at the request and cost of any one of the other lessees. There has been considerable comment already made on the decision, and we thought we would share a balanced perspective on the case and its implications.

The Case in Context:

At the heart of the case was the issue of breach of covenant. A leaseholder had sought a licence from the landlord to carry out works to a flat, which involved removal of a substantial part of a load bearing wall. Each of the flat leases for the block included:

  1. a covenant against making improvements to the demised premises without previous written consent;
  2. an absolute covenant against cutting any wall within or enclosing the demised premises;
  3. a covenant that each other flat lease would contain like covenants, and that the landlord would enforce those other covenants at the request of the lessee, subject to payment of, and security for, its costs.

Following objection from another leaseholder (Duval), the licence was refused, but the landlord subsequently reconsidered the matter and granted a licence. Duval consequently issued proceedings against the landlord seeking, amongst other things, a declaration that the landlord did not have the power to licence the works, which were in breach of the lease, specifically an absolute covenant, which prevented lessees from cutting into any roofs, walls, ceilings or service media. It was agreed by all parties that the works would breach the covenant. The initial decision found that the landlord had no power to waive any of the covenants without the prior consent of all of the lessees of the flats in the building – a decision that was appealed by the landlord. 

The appeal, in 2017, then found that the landlord had the power to license works that would otherwise amount to a breach of a clause within the lease and that, once licensed, such works could not be the subject of enforcement action.

In response, a further appeal was filed by Duval in October 2018, in which the Court of Appeal declared that in granting a licence, the landlord would be in breach of Duval’s lease, thereby finding in Duval’s favour. The landlord consequently appealed to the Supreme Court.

The Recent Decision at the Supreme Court:

The decision on the 6th May dismissed the landlord’s appeal, holding that the complainant lessee was entitled, on provision of security, to require the landlord to enforce it as an absolute covenant. In essence, this decision held that the landlord could not give its consent without breaching Duval’s lease.

In Consideration of the Decision:

There has been considerable discussion on the impact of the decision for landlords over the last two weeks. Some commentators have highlighted the extreme importance of the decision, noting that it will have a serious impact on how landlords manage their estates going forward and challenge existing practices for issuing retrospective or prospective licenses of consents.

The Practical Implications of the Case:

In our experience, landlords often already provide careful consideration on requests for permission against the covenants within a lease. There is also a question of balance - as to whether, as seen in many breach of covenant claims, a lessee would have to suffer a loss to claim any damages? Does a request for license significantly impact or impede the other leaseholders in a significant way? Theoretically, it could argued that many alterations actually improve a building.

Advice:

In many regards, the case does offer a cautionary note to landlords in reiterating the need to be vigilant in the drafting and consideration of lease covenants and licensing consent – specifically noting the need to be clear and specific regarding absolute covenants and mutual enforceability – however, in practical terms it may well that be the impact of such breaches will continue to be minimal and the majority of breach of covenant matters continue to follow form. We will watch with interest the level of influence the decision provides.

 

Covenants, Consent & Caution: Commenting on Duval v 11-13 Randolph Crescent Ltd [2020]

“Let There Be Light”

“Let There Be Light”

Associate Camilla Waszek draws upon recent case law and first-hand experience to comment on the challenges and remedies associated with establishing rights to light.

A "right to light" can be defined as an easement that gives a landowner the right to receive light through defined apertures in buildings on his or her land. This could be seen as the right to receive uninterrupted light, which passes across adjacent land, into a window. If a building owner has a right to light and the path of light is interfered with or obstructed - for example by a new building or development, then a legal challenge could be brought to ensure the value, amenity and utility that available light brings, are preserved.

Background:

The issue of the right to light has a long history in English property law, extending as far back as 1663, with the Ancient Lights act being based on the theory that a landowner acquired an easement to the light by virtue of his use of the windows for that purpose for the statutory length of time. Since the Prescription Act of 1832, the right to light is protected under common law, adverse possession or by establishing a claim to the right to light where you have:

  • Acquired the right;
  • Not have the claim defeated by having lost the right; and
  • Be able to prove an actionable nuisance.

Casting a Shadow:

Typically, rights to light are lost if the right is interrupted for more than 12 months, within a 20 year period, so if a right is obstructed then swift action needs to be taken, otherwise any claim will be statute barred. Interruption includes actual physical interruption or by service of a Light Obstruction Notice, which is a notional physical interruption, which has the same effect of an actual physical interruption.

If there is an interruption to the right to light, in order to be actionable, it must be a substantial interference so that that the amount of light left following the interference provides insufficient light “according to the ordinary notions of mankind” rendering it uncomfortable.

In order to assess whether an interference is substantial, the Court will typically consider whether the room with the right has moved from being adequately lit to poorly lit, by reference to the Waldram method.

An Illuminating Approach:

The Waldram method essentially involves plotting the area of a room which receives adequate light before the proposed infringement, and the area that will be adequately lit afterwards. Light is measured in lumens, and one lumen is regarded per square foot. It is then possible to ascertain how much of a room was adequately lit before and after the infringement with the convention being that if the remaining area of adequate light exceeds 50% of the area of the room, there is no infringement or nuisance. This is commonly referred to as the “50/50 rule”. Remedies for the interference can include injunctions or damages in lieu of an injunction, including diminution in the value of the owner’s interest to the value gained by the infringement.

A Case in Point:

In Beaumont Business Centres Ltd v Florala Properties Ltd the property was already deemed to be poorly lit prior to the interference, however it was held that where a room is already poorly lit, in order to establish a claim in nuisance the Claimant needed to prove that the reduction in light to its premises had made them substantially less comfortable than prior to the interference. The Waldram method therefore remained a useful starting point for considering the interference.

As the defendants premises were occupied by a third party tenant, not a party to the proceedings, Beaumonth was awarded a declaration against the freeholder that it was entitled to an injunction so, if so advised, it might join the tenant to the proceedings to seek an injunction. In the alterative, Beaumont was entitled to “negotiating” damages of £350,000 representing just under 1/3 of the defendant’s profits gained from its nuisance.

Shining a Light on Some Key Points:

The Beaumont case also provides some useful points for consideration, specifically:

  • That artificial light is not considered when assessing a right to light claim and that poorly lit rooms can still have actionable loss, even if the reduction in light is small.
  • Reiterates the decision in Coventry v Lawrence that the Court has an unfettered discretion to award damages in lieu of an injunction where the facts of the case warrant it, however, injunction remains the primary remedy and the onus remains on the infringing party to show why it should not be granted; and
  • Profits gained from the nuisance may be used when assessing damages.

For landlords and leaseholders, the decision in Coventry v Lawrence, as reaffirmed in Beaumont, is a useful tool when considering injunctive action for a breach of covenant or, alternatively, the assessment of damages in lieu of the injunction as a consequence of a breach.

If you would like to discuss rights to light further, please contact Camilla directly:

c.waszek@jbleitch.co.uk


A Case for Conventional Conduct

JB Leitch succeeds in providing a persuasive and satisfactory conclusion to a high value building safety case drawing on the principle of estoppel by convention.

Further to posts regarding our success in urgent safety matters, we have recently succeeded in a case where we acted on behalf of a freehold client seeking to maintain the regularity of service charge payment from a head lessor, in order to secure valid insurance in a building suffering issues with safety – specifically in the insulation behind the exterior cladding.

The background:

Our freehold client was having difficulties finding an insurer given the identified issues. However, after finding one provider only, this presented a significant increase to the premium payable which needed to be paid urgently to ensure the insurer’s offer did not expire. This left the client with no option or possible alternatives.

The challenge:

The main area of contention was based upon the fact that our client demands the service charge and insurance to the head lessor (in this case a housing association) who then subsequently demand down to the lessees.

The head lessor had always paid yearly for the service charge and insurance, but was now disputing this as the lease stated that service charges are to be paid on a quarterly basis. We advised the client on the complex principles of estoppel by convention and how they could make arguments that the head lessor’s conduct of regular payments throughout the years created an assumption that they could not now go back on.

As previously defined in the High Court, estoppel by convention is established where parties have established “a convention by agreement or understanding and have regulated their subsequent dealings according to that convention” (be it tacit agreement or assumption based previous conduct) concluding that “it would be unjust or unconscionable” if one of the parties moved away from it.

A successful conclusion:

Our advice and subsequent correspondence between the parties resolved the situation very favourably for our client, with the head lessor eventually making payment in full for the whole service charge without the need for any costly litigation.

In summary, the case also serves to illustrate that building safety and urgent risk mitigation continue to be critical and influential priorities for the sector.

A Case for Conventional Conduct

Service Charge Recovery & COVID-19

Service Charge Recovery & COVID-19

Legal Director Phil Parkinson provides advice on the importance of taking a balanced & pragmatic approach to residential service charge recoveries during the COVID-19 crisis.

During this challenging period, it can be difficult to get a clear picture on the best way forward. Many landlords and managing agents are seeking clarification on the matter of service charge recovery and the provision of services under the current conditions. Many report having recently received or heard a lot of information about the need to comprehensively change the way they work.

Some advice being provided across the sector is placing heavy emphasis on managing agents negotiating payment holidays, arranging deferred payment plans or reducing the provision of services almost as a default position. Although commendable in anticipating some of the operational challenges faced, and appreciating that clear, frequent and empathetic communications are a given with lessees in extenuating circumstances, we would caution that setting up entirely new processes, systems and arrangements should be made to accommodate what may likely be a small proportion of instances that require further action.

In supporting this view, we would repeat the broad consensus on the practical actions that can continue to be undertaken:

  • Service charges can still, and are being recovered now
  • Claims can still be made online and default judgments obtained
  • Credit control and recovery processes are continuing as is correspondence with lenders and leaseholders
  • Applications and Appeals can still be lodged electronically and matters set up for later enforcement beyond the standstill of the Courts and Tribunals

The reasons for maintaining continuity as far as possible will benefit landlords, managing agents and leaseholders in the long term. Primarily, this will ensure services can still be provided and developments can continue to be well run, safely and securely.

In our experience, the majority of service charge recoveries will not require actions such as deferment, discount or appeal. Broadly establishing new credit control measures, agreements, materials and resources – along with an administrative framework - could be impractical, disruptive, costly and potentially contentious later. It would be prudent to consider these changes as the exception, not the rule.

Continuing normal recovery functions (as far as possible) also manages expectations and provides clarity for all parties as to their ongoing obligations under the lease. Unpaid service charges may be considered as a breach of lease and given the uncertain duration of the crisis, continued recovery mitigates the cumulative build up and compression of debt arrears, supporting both business continuity and the continued provision of services under the service charge. However, it would also be advisable that leases are carefully reviewed to gauge the level of obligation in providing services (or conversely the scope for service reductions) whilst service charge is in arrears, as in the longer term disrepair and such works may cost more in the long-term if left unmanaged due to low funds.

In some instances, revised service charge budgets may need to be considered as a matter of urgency, given the need to ensure escalating and additional cleaning costs can be met. Additionally, checking the lease to see if the use of the reserve fund, under the service charge, can be deployed as a contingency would be advisable. It should be remembered that landlords are still under a legal obligation to keep their property in repair and ensure any necessary inspections of the property are performed (but which must also be safely balanced against the risk of the infection or spread of the coronavirus). If there are insufficient funds from lack of service charge recovery, landlords may potentially be opening themselves up to being sued, or having to provide a loan to the service charge account creating further liability.

As matters stand, preserving continuity may be key. Changes should be balanced and proportionate to anticipated need. We are all in a period of uncertainty. Preserving stability - where we can - in our lives, routines and work, will be a foundation that helps carry us through.

If you would like to discuss this post further, please contact Phil directly: p.parkinson@jbleitch.co.uk


OUR SERVICES: UPDATE

Due to necessary precautions and current Government guidance as a result of COVID-19 (coronavirus) our offices are closed and all our staff are working remotely. We will do our best to reply in good time, but during this period response times may be delayed. Please also be aware that post, payments or documents sent to us by Royal Mail or other physical delivery services may take longer to process.

We are still routing calls via our main number but this may also be affected depending on call volumes.

We apologise for any inconvenience caused. We are however committed to ensure we prioritise public health guidance for the health of our staff, clients and community.

OUR SERVICES: UPDATE

Comment on the CMA Investigation Update  Regarding the Selling of Leasehold Property

Comment on the CMA Investigation Update Regarding the Selling of Leasehold Property

The Competition and Markets Authority (“the CMA”) recently published an update on its ongoing investigation in to the selling of leasehold properties. This investigation is running parallel to the Law Commission’s leasehold reform consultation.
 
JB Leitch’s Head of Real Estate, Rob Denman, offers analysis and comment on the update and its potential implications.
 
The Report

Within the report, the CMA have identified six main areas of concern:

  1. Ground rents that increase significantly over time
  2. Grounds that may mean that a long lease is considered to be an assured tenancy under the provisions of the Housing Act 1988
  3. Ground rent increases linked to RPI
  4. Sales practices for leasehold houses 
  5. The cost of permission fees and service charges
  6. The lack of checks and balances protecting homeowners from potentially harmful terms and practices

The report is only an update at this time but the CMA have confirmed that they are preparing to take action through the powers of the Enterprise Act 2002 to “tackle certain instances of mis-selling of leasehold property” and “to address the problems faced by homeowners from high and increasing ground rents”.

Comment

The report raises some interesting points regarding developers sale processes and it is against developers that I envisage the CMA’s ire and future action will be initially directed.

Despite freeholders not being the immediate target of such action it is they who now hold the reversions of such properties and it is they who will bear the brunt of any enforced/agreed variations to existing lease terms. Freeholders will therefore need to consider their current relationship with developers that they have previously purchased freehold reversions from and what recourse they have against them (if any) if the freehold reversion values were to diminish due to enforced variations.

Rather surprisingly the CMA report does not refer to the 14 point government-backed ‘Public Pledge for Leaseholders” issued in March 2019 (“the Pledge”). The Pledge itself goes someway to address the concerns raised by leaseholders in the CMA report albeit that the CMA report does not agree with ground rents with RPI increases. Those signatories to the Pledge demonstrated their strong commitment to leasehold reform. Their commitment can be viewed in stark contrast to that of the government whose various agencies pontificate about such reform but never put any flesh on the bones of their findings. In any event it is those stakeholders in the industry itself that will bring about meaningful and practical change.

The CMA themselves have suggested that the requirement for action could be negated as “it is able to accept formal undertakings from traders in lieu of court action where they agree to address the CMA’s consumer protection concerns”. There have been a number of projects instigated by freeholders (following agreements with developers) to vary leases with supposed ‘onerous terms’.

If the CMA’s position does not change once they have concluded their investigation I envisage a potential scenario where developers provide the required undertakings to the CMA (following agreements between developers and freeholders who have subsequently purchased freehold reversions) to stave off court action so that all leases that are deemed onerous are varied accordingly.  This position could be further strengthened with a freeholder driven enhanced pledge for leaseholders which mirrors what the CMA and mortgage lenders consider to be acceptable lease terms for all stakeholders. This would give the CMA a much vaunted win but also allow the freehold sector to survive and potentially thrive in a scenario where all parties know what a ‘non-onerous’ lease is and how it can work.