Real Estate monthly digest – March 2020

COVID-19 and real estate

The Government has announced that leases of commercial premises in England and Wales cannot be forfeited in the next three months if tenants miss a rent payment.

Please click here for an overview of these measures.

Other key Government announcements and resources directly impacting real estate are listed below:

• Remediation and COVID-19 Building Safety update – 27 March 2020
• Closing certain businesses and venues
• Government to grant permission for pubs and restaurants to operate as takeaways as part of coronavirus response

Residential

• Government advice on home moving
• Government support available for landlords and renters

Changes to UK insolvency law to protect companies impacted by COVID-19

A summary of the measures announced on 28 March 2020 by the Rt Hon Alok Sharma MP to support businesses following the coronavirus outbreak can be found here.

Injunction requiring part of a hotel to be cut back available against a freeholder in rights of light dispute

In Beaumont Business Centres Ltd v Florala Properties Ltd the High Court granted a declaration that an injunction was available against a freeholder (Florala) for a rights of light infringement requiring part of its building near Moorgate to be cut back. However, as the tenant of the offending building (SACO) had not been joined to proceedings, the injured party (Beaumont) had a choice whether to join that tenant to proceedings and seek an order for an injunction or take an award of damages in the sum of £350,000.

Some key points from the judgment…

• To establish its claim in nuisance the judge held that Beaumont needed to show that by virtue of the reduction in light, its premises had been made substantially less comfortable and convenient than before. It did not matter that the premises were not particularly well lit to begin with. Beaumont let the premises as high-quality serviced offices so, in practice, this meant that Beaumont had to show that the reduction in light resulted in a loss of rental income over the balance of its 26-year term that was more than trifling.

• The judge referred to the Law Commission consultation paper and noted that surveyors often apply what is known as the “50/50” rule when assessing the sufficiency of light received by the dominant building after an obstruction of light has occurred. The rule provides that a room or building is not adequately lit if it receives less than 50% of adequate light assessed using the Waldram method. The Waldram method was developed in the 1920s and ‘works on the basis of a fixed standard of light received from the sky’. However, the Law Commission paper notes that ‘whilst the courts often find the 50/50 rule to be a useful guideline as to what constitutes an actionable interference with a right to light, it is clear that it is not a rule of law and therefore the courts are not bound to follow it.’

• The judge noted that both the Waldram test and the 50/50 rule have been subject to criticism although the Waldram test has stood the test of time. However, ‘in a case such as this where the reduction in light is not great, its results provide only a starting point in the inquiry as to whether there has been an actionable interference’. The judge held the 50/50 test was irrelevant on the facts of this case. None of the rooms in question moved from “well lit” to “not well lit” but the judge noted that this did not matter because the tort of nuisance did not require this. On the facts of this case and the detailed evidence, there had been ‘whichever method one adopts, a perceptible reduction in the light’.

• The fact there was a reduction in light did not necessarily amount to a nuisance. However, based on a detailed analysis of the valuation evidence, the judge concluded that Beaumont had shown that the interference had played some part in a reduction in the rents it could charge for the space. Beaumont had therefore established Florala's works caused a nuisance.

• Subject to the position on the availability of injunctive relief (see below), it was held that negotiating damages rather than diminution in value damages was the correct approach on the facts of this case. The judge noting that ‘where a claimant has lost a right because the court has declined to enforce it by injunction, it can, where appropriate, compensate him for the loss of that right by awarding to him the sum which he could reasonably have exacted as a condition of giving it up.’ The judge concluded the correct amount was £350,000.

• As between Beaumont and Florala the judge noted the following factors which led him to the decision to make the declaration that Beaumont was entitled to an injunction: ‘Florala went ahead with the development knowing of the risk that it was taking and ignoring the offer to develop with a cutback… it acted in my judgment in a high handed, or at least unfair and unneighbourly, manner.’ The judge found Florala proceeded with the most profitable design and Beaumont simply did not want damages in lieu of an injunction.

  In applying the Shelfer criteria the judge found that the injury Beaumont would sustain was not small, nor easily quantifiable. Further, Florala had not contended that it would be oppressive to order a cutback (there was likely to be some loss of profit but no evidence had been put forward that the cost of re-building was so great as to make the order oppressive). The judge rejected the argument that in order to grant an injunction the court would have to be satisfied that Florala knowingly committed a deliberate breach of Beaumont's property rights. In exercising its discretion as to whether an injunction should be granted the court would look to Florala to discharge the legal burden to show why an injunction would not be appropriate.

• However, the decision to grant an injunction was complicated by the fact that SACO, Florala’s tenant, was not a party to the proceedings. The judge therefore gave a declaration that, as against Florala, Beaumont was entitled to an injunction but held that if Beaumont wished to pursue the order for an injunction it must join SACO to proceedings allowing them to be heard as to whether an injunction should be granted. Otherwise Beaumont was entitled to negotiating damages of £350,000.

Beaumont Business Centres Ltd v Florala Properties Ltd [2020] EWHC 550 (Ch)

From 1 April 2020, unless a registered exemption applies, landlords are prohibited from continuing to let domestic property with an EPC rating of F or G

Since April 2018 the MEES Regulations (“Regulations”) have provided a minimum energy efficiency requirement for commercial and domestic properties in England and Wales. The Regulations originate from the Energy Act 2011 and are designed to assist the UK Government in meeting carbon reduction targets. From 1 April 2018, if a building falls within the scope of the Regulations, commercial and residential landlords have been prohibited from renewing or granting new tenancies if the relevant EPC rating is lower than ‘E’ (other than where an exemption applies). The property can be let to new tenants or existing tenancies can be renewed but only when the landlord has achieved an EPC rating for the property of at least ‘E’. Certain buildings, such as holiday lets, industrial sites and tenancies of less than 6 months or over 99 years, do not fall within the remit of the Regulations.

A change for domestic property

For non-commercial, private rented property, since 1 April 2018, landlords have been prohibited from letting domestic property on new tenancies if the relevant property does not achieve the minimum rating (unless an exemption applies). For lettings that commenced prior to 1 April 2018 (and which run until at least 1 April 2020) Landlords must improve the rating of their property to the minimum rating (‘E’) or register an exemption by 1 April 2020 in order to continue to let the relevant property (even if there has been no change in tenancy).

Where there is an existing tenancy of relevant premises that commenced prior to 1 April 2018 but the landlord intends to enter into a new tenancy of such premises prior to 1 April 2020 the landlord must improve the property rating to E, or register an exemption, before completing the new tenancy or renewal. Landlords should have already taken steps to improve ratings to the minimum rating for any premises in respect of which a tenancy has been granted on or after 1 April 2018. Improvements to vacant property are not required until such time as the property is re-let.

Although landlords are required to comply with the Regulations the energy efficiency improvements that they are required to make are subject to a costs cap of £3,500 (including VAT). There are also a number of exemptions that can be registered on the Private Rented Sector Exemptions Register. Penalties for non-compliance with the Regulations are based on rateable value and are enforced by Local Weights and Measures Authorities. Additionally, the Local Authority has powers to serve a compliance notice on a landlord that breaches the Regulations and non-compliance may result in a fine.

Commercial property will follow on 1 April 2023

From 1 April 2023 the Regulations will apply to all commercial leases and, unless landlords have registered an exemption, they will not be permitted to continue to let premises that have an EPC rating lower than ‘E’ (i.e. the lowest ratings of ‘F’ and ‘G’).