Real Estate Focus – October 2022

COVID-19: what next for tenants of commercial premises?

In previous editions we have reported on a number of cases between landlords and tenants relating to arrears of commercial rent accrued as a result of measures taken in response to the pandemic. Generally these did not go well for the tenant. The deadline for applications to refer a pandemic rent dispute to arbitration under the Commercial Rent (Coronavirus) Act 2022 has also now expired. 

So what next for tenants with pandemic-related losses? Three recent court cases focus on insurance claims by tenants for business interruption losses. A skim through the transcripts highlights the complexity of the issues – as do press reports which claim success for both insurers and tenants. But one of the cases does appear to secure a significant victory for tenants.  

The tenant had over 2,200 stores across the UK and claimed that each of these stores suffered interruption or interference as a result of COVID-19 and its consequences. The tenant closed all its stores in March 2020, resulting in significant losses. There was then a phased re-opening from May 2020, but further restrictions imposed by government in one or more of the four nations in the UK led to additional losses. The tenant sought to recover those losses, which amounted to a sum in excess of £150 million, under its insurance policy which insured against, amongst other things, business interruption losses.  

The insurer argued that all the tenant’s business interruption losses arose from, or were attributable to, a ‘single occurrence’ and should therefore be aggregated as one single business interruption loss. Under the terms of the policy, each business interruption loss was subject to a limit of liability of £2.5 million.

The tenant, on the other hand, contended that each of the numerous governmental announcements and measures amounted to a separate ‘single occurrence’, each triggering a separate business interruption loss with its own limit of liability.

The judge agreed with the tenant: "The informed observer, in the position of a policyholder such as the tenant, would regard the adoption of governmental measures which significantly affected whether, when and to what extent, its shops could open as being separate occurrences".

It is now for the parties to agree on the number of separate "single occurrences" in order to calculate the amount of the insurance proceeds. Given that the tenant cited 120 at trial, this will be no mean feat.

Real estate tax update

Stamp duty land tax (SDLT): The SDLT changes announced in the September “fiscal event” have, unlike most of the other proposed changes, survived – so far, anyway. In fact the Stamp Duty Land Tax (Reduction) Bill was introduced in parliament on October 24, 2022.

The SDLT nil rate band for residential purchases has been doubled from £125,000 to £250,000 with effect from September 23, 2022. The threshold for the 3% surcharge on the purchase of additional dwellings has also increased from £125,000 to £250,000. 

Additionally, there are increased reliefs for first time buyers. The nil rate band for first time buyers has been extended from £300,000 to £425,000 and the maximum property price for which first time buyers' relief can be claimed has risen from £500,000 to £625,000. Both measures (assuming they are retained) are expected significantly to reduce SDLT bills for first time buyers, and it will be interesting to see how the property market responds given the economic climate more generally.

Investment Zones: It was also announced that the government intends to establish 'investment zones', similar to the freeports in many ways, carrying tax benefits over ten years including:

• an SDLT exemption for land bought for commercial or for new residential purposes;
• no employer NICs on earnings (up to £50,270 p.a.) for each new employee working at least 60% of their time in the zone;
• 100% first year capital allowances for qualifying plant and machinery expenditure; and
• 100% relief from business rates on newly-occupied business premises.

The outlined proposal suggests that this is a significant measure that could offer comprehensive tax and regulatory incentives for businesses to establish themselves in the designated investment zones. But the question is: will it survive? Apparently, hundreds of bids for investment zones have already been submitted and it has been reported in the press that “sources within government have indicated that plans for the zones could be scaled back or even scrapped” because of concerns that an unlimited number of zones across the country “would become an unbearable drain on public finances”.

VAT: Option to tax acknowledgement procedure: If a landowner wishes to exercise the option to tax its interest in the land so that supplies of the land are generally subject to UK VAT at 20%, it must notify HM Revenue & Customs (HMRC) of that decision within 30 days. 

Historically, a landowner notifying HMRC of an option to tax would receive an acknowledgment from HMRC, who would also carry out a check on the notification itself. In a change to this process, the acknowledgement letter issued by HMRC will be replaced by a “receipt” confirming that a notification of an option to tax has been received; HMRC will no longer carry out checks on the validity of the option itself. This will be the responsibility of the landowner making the option and record keeping is key.

For further information please contact Property Tax Partner Julia Lloyd.

The Smoke and Carbon Monoxide Alarm Regulations: social landlords take note

The Smoke and Carbon Monoxide Alarm (Amendment) Regulations 2022 (the 2022 Regulations) came into effect on October 1, 2022. These amend the Smoke and Carbon Monoxide Alarm (England) Regulations 2015 (the 2015 Regulations) to bring registered providers of social housing into the scope of the existing requirements. They also extend mandatory requirements for carbon monoxide alarms in both private and socially rented homes.

The reason for extending the scope of the 2015 Regulations to apply to social landlords is that it was widely seen as unfair that they only imposed obligations to provide such alarms on landlords of private rented properties. Over 90% of respondents to the Social Housing Green Paper said that safety standards between the two rented sectors should be aligned.

The 2015 Regulations, as amended, place duties on a “relevant landlord” of a “specified tenancy” of residential premises in England to ensure that:

• a smoke alarm is installed on each storey of the premises which is wholly or partly used as living accommodation;
• a carbon monoxide alarm is installed in any room which is used wholly or partly as living accommodation and contains any fixed combustion appliance (excluding gas cookers). This  goes further than the obligations in the 2015 Regulations which were limited to solid fuel burning combustion appliances only; 
• the smoke and carbon monoxide alarms are in proper working order at the start of any new tenancy; and 
• following a report from a tenant, the landlord repairs or replaces alarms as soon as reasonably practicable when they are found to be faulty.

A “specified tenancy” is a tenancy, licence, lease, sub-lease or sub-tenancy of residential premises which grants one or more persons the right to occupy the premises as their only or main residence in return for the payment of rent.

Certain categories of letting arrangement, where the accommodation is shared with the landlord or falls outside of the traditional rented sector, are excluded. For example, agreements which grant a right of occupation in a care home, hospital, hospice, or other accommodation provided in relation to healthcare by an integrated care board or the National Health Service Commissioning Board, are specifically excluded. The reason for these exclusions is that such properties already benefit from existing protections under the Regulatory Reform (Fire Safety) Order 2005. In a healthcare setting, it is therefore important to consider the type and level of care being provided in order to establish which regime the landlord might be required to comply with.

The 2022 Regulations also make changes to improve the procedure to be followed when a Local Housing Authority serves a remedial notice on a landlord. 

Finally, it is worth noting that there may be other legislative requirements for landlords to consider. For example landlords should make informed decisions and choose the best alarms for their properties and tenants with due regard for their residents’ circumstances such as particular disabilities, as certain landlords may have additional duties under the Equality Act 2010.

For further information please contact real estate senior associate Roopa Modi.

Real Estate Podcast - The Building Safety Act 2022: who pays for defective cladding?

Welcome to our Real Estate Podcast series where each month we explore the themes and trends that our clients are facing in today’s fast changing real estate market. Our partners, together with clients and collaborators will be sharing their experiences and stories as well as providing market updates.

This month’s Podcast features David Stevens, Partner in our specialist Real Estate Litigation team in the UK and Amy Armitage, Counsel in our contentious Construction team.  David and Amy explore the highly topical and complex issue of defective cladding in residential high-rise buildings: who pays for its replacement?

Real estate focus podcast - Building Safety Act 2022