Real Estate monthly digest – April 2020

COVID-19 and real estate – recent developments

Statutory demands, winding up petitions and CRAR cannot be used by landlords where tenants cannot make payments due to COVID-19

On 23 April 2020 the government announced that in addition to the moratorium on commercial lease forfeiture it was introducing new measures that would offer further protection to commercial tenants who could not pay their rent due to COVID-19. The measures set out by the government involve:

• a temporary ban the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions (presented from 27 April 2020 to 30 June 2020) where a company cannot pay its bills due to COVID-19; and
• preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.

The announcement notes that any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why, and states that the law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19. Further detail on the temporary ban on the use of statutory demands and winding up petitions is expected when the Corporate Insolvency and Governance Bill is published.

The announcement confirms that the measures will be in place until 30 June 2020 and can be extended if required.

The announcement also highlights that the Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulatory Authority have also issued a joint statement encouraging investors and lenders to take into account the issues arising directly from the COVID-19 pandemic in responding to potential breaches of covenants.

The government continues to emphasise that landlords and tenants should look to work together in these unprecedented times.

Clarification from MHCLG on the moratorium on forfeiture of commercial leases for non-payment of rent

The Property Litigation Association (PLA) recently sought clarification from the Ministry of Housing, Communities and Local government (MHCLG) regarding the protection for business tenancies from forfeiture for non-payment of rent under the Coronavirus Act 2020.

The full Q&A response is available here. Some points of note from the response are below.

• MHCLG confirmed that winding up proceedings, debt action and CRAR, are not covered by section 82 of the Coronavirus Act 2020. However, the government has now made a separate announcement in relation to these measures (see above).
• It is clear that the moratorium applies to ‘any sum’ a tenant is liable to pay under a relevant business tenancy and the implication from the response is that this may be the case even if a sum is not specifically reserved as rent.
• MHCLG confirms that the policy objective is to cover all commercial leases including those which are contracted out and others which may be excluded from the protection of the Landlord and Tenant Act 1954.
• The PLA queried whether forfeiture by agreement could occur for non-payment of rent – MHCLG’s response is unfortunately unclear and notes that it will depend on the facts of the case. However, a cautious approach would suggest this is not possible. A surrender of the lease is likely to be preferable if this is being considered or other insolvency procedures may come into play.
• MCHLG confirms that the sanction for breaching the legislation is to render the forfeiture ineffective.

The responses are intended to set out MHCLG’s aims and objectives for the policy and are not legally binding.

Amendment to CPR to stay proceedings for possession

On 26 March 2020 the Civil Procedure Rules were amended (effective until 30 October 2020) by Practice Direction 51Z. The effect of the Practice Direction was to stay, for a period of 90 days, all proceedings for possession brought under CPR 55 and all proceedings seeking to stay an order for possession.

This stay applies to claims against ‘trespassers’, as defined in CPR 55.1(b). It also appears to extend to claims against former tenants of commercial premises where the expired tenancy is not covered by the 1954 Act and the tenant fails to deliver up vacant possession at the end of the term (where the tenant is ‘holding over’). The PLA requested urgent clarification of PD51Z which it believed had the (possibly unintended effect) of affording squatters in commercial premises up to 3 months protection from eviction for trespass and which does not, in their view, reflect the intention of the Coronavirus Act 2020.

On 20 April 2020, following the PLA’s request for the Practice Direction to be amended to make clear that it does not apply to trespassers, paragraph 2A has been inserted. This new paragraph states expressly that the stay “does not apply to a claim against trespassers to which rule 55.6 applies” and does not apply to “an application for an interim possession order under Section III of Part 55 including the making of such an order”.

The new paragraphs also clarifies that the stay does not preclude the issue of claims, but simply stays claims.

The additions to PD51Z seem to clarify that the stay will not apply to claims against trespassers. However, it remains unclear whether or not this applies to all trespassers since rule 55.6 refers both to “possession claim(s) against trespassers” but also, specifically, such claims being issued against ‘persons unknown.’” There is therefore some ambiguity as to whether or not the amendment to PD51Z is intended to apply to any possession claim or just to claims against those trespassers who fall within the meaning of “persons unknown”. The latter interpretation may be a further unintended effect of the drafting of PD51Z and it is possible that further clarity will be found either in a further update to the practice direction or simply by way of practical application by the courts in due course.

In respect of those trespassers to whom the stay of proceedings applies, other methods of enforcement may still be available. For example, where the landlord has demanded possession in writing but the tenant wilfully remains in occupation as a trespasser the landlord is entitled to receive payment at a rate equal to double the yearly value of the premises in accordance with section 1 of the Landlord and Tenant Act 1730 during the period of holding over.

Unpaid rent and COVID-19: Should I look to the rent deposit?

As a result of the COVID-19 situation, many tenants defaulted on the March rent payment. With the situation remaining uncertain landlords must consider the next best steps for their own cash flow as well as how they can work with and support their tenants in these unprecedented times.

The Coronavirus Act 2020 (the Act) has the effect of postponing the Landlord’s right to exercise its right to forfeit business tenancies (as defined in Part II of the Landlord and Tenant Act 1954) for non-payment of rent from 26 March 2020 until 30 June 2020 (the Relevant Period). As set out above the government is now also taking steps to prevent landlords using statutory demands, winding up petitions and CRAR where tenants cannot make payments due to COVID-19. However, the Act and new proposals do not affect the sums due nor does it prevent the landlord from looking to the rent deposit in relation to the unpaid rent.

A rent deposit is a sum of money which is held as security for non-payment of rent and other breaches of the lease. It usually represents somewhere between three and twelve months’ rent depending on what was agreed. If a rent deposit exists in relation to the tenancy, this may be a good option for landlords whose tenants are in difficulty and have missed a payment.

However, there are administrative, legal and practical steps which need to be considered where a landlord is looking to the rent deposit.

Immediate and pro-active steps that landlords may seek to take now, following the March quarter date and in advance of the June quarter date, are to:

• ascertain what arrears there are (if any) and in respect of which leases they have arisen;
• identify rent deposits held, check account balances and review key terms of rent deposit deeds;
• ascertain whether tenants have complied with rent deposit top-up obligations;
• consider tactics, including whether it is preferable to hold off withdrawing at this time;
• review tenants’ positions and whether insolvency is anticipated. Is the tenant in breach of other lease covenants (ie repair) which are not linked to non-payment of rent?; and
• prepare for drawdown on rent deposits where appropriate (ie prepare withdrawal notices to issue to tenants as required).

Please get in touch if you would like a more detailed note in relation to rent deposits.

COVID-19 - corporate residence and PE issues

HMRC has released guidance on its approach to company residence and permanent establishment issues during the coronavirus pandemic.

You can read our tax team’s commentary here.

COVID-19 and cladding remedial works – an impossible choice?

In this webinar, we tackle the government’s Building Safety Notice of 27 March 2020 on cladding remedial works, which provides that “making buildings safe… remains a priority for the government. The government’s view is that this work is critical to public safety.” There is a difficult balance to strike between the fire safety of individuals living in the buildings and the safety of those required to work on-site and their risk of exposure to COVID-19. We will also look at the recent failure of BS8414 tests carried out using High-Pressure Laminate and other recent developments in cladding claims.

Watch the webinar here.

COVID-19: Key considerations for construction professionals

In this webinar we cover:

• commercial and legal steps consultants should be taking in response
  to COVID-19;
• common issues consultant contract administrators will need to address; and
• legal/insurance considerations following a sub-contractor/consultant insolvency.

Watch the webinar here.