Real Estate Focus: December 2019

Introduction

In this edition we take a look at property guardianship schemes, energy efficiency standards, air quality v. development and waiving the right to forfeit a lease.

Energy efficiency: Raising the bar in the private rented sector

Minimum energy efficiency standards (MEES) for landlords in the private rented sector have been in force since April 1, 2018. These provide that, with some exclusions and exemptions, a landlord cannot grant a new – or renew an existing – tenancy of a “sub-standard” property. A property is sub-standard if it does not have an Energy Efficiency Certificate (EPC) rating of E or higher.

These requirements do not currently apply to tenancies granted before April 2018, but that is about to change.

From April 1, 2020, private sector residential landlords will not be able to continue to let a sub-standard property. Given that this is just over three months away, now is the time for landlords to check if their residential letting portfolios contain sub-standard properties and to put their house in order if they do. Commercial landlords with existing tenancies have a little longer to comply, until April 1, 2023.

On a related note, one of the exemptions for both residential and commercial premises used to be that energy efficiency improvements were only required if they were at “no cost to the landlord”, for example because of the availability of government or local authority funding.

This changed on April 1, 2019, when the “no cost” exemption was removed and replaced with a landlord financial contribution capped at £3500 (inclusive of VAT) per property. Landlords should note that any “no cost” exemptions already claimed will end on April 1, 2020.

Can property guardianship schemes mitigate liability for business rates?

There have been several recent cases in which rates mitigation schemes have been challenged. Ludgate House Limited v Ricketts (Valuation Officer) and London Borough of Southwark [2019] UKUT 278 considered the impact of a property guardianship scheme on the owner’s liability for business rates.

A property guardian is someone who has been granted accommodation at a reduced fee in an empty building (or part of a building) pending the owner needing it back, usually for re-letting or development. Their right to occupy is granted by way of a temporary contractual licence from a guardian agency appointed by the property owner. Key advantages for a property owner using a property guardian scheme are that (i) it may minimise exposure to business rates when a property is otherwise vacant whilst also protecting the property against squatting and damage and (ii) a guardian can be required to leave the property at short notice as they occupy under a licence not a tenancy.

In this case, Ludgate House Limited (LHL) owned a large commercial office building. Planning permission had been granted to redevelop the site and whilst the property was vacant pending demolition, LHL entered into an arrangement with a firm to provide security services which included placing property guardians in the building. While the licences granted to the guardians specifically stated that there was no right to exclusive occupation, in practice most of the guardians occupied their own lockable room with shared use of common parts.

Generally properties are exempt from business rates and liable to council tax instead if they are used “wholly for the purposes of living accommodation”. LHL argued that the areas occupied by the guardians within the building were used wholly for residential purposes and so subject to council tax. The Valuation Officer, on the other hand, claimed that the whole building should be assessed as a single non-domestic unit in the occupation of its owner, and therefore subject to business rates.

The Valuation Tribunal agreed with the Valuation Officer and as a result the property was entered in the non-domestic rating list with a rateable value of £3,390,000.

LHL appealed and the Upper Tribunal reversed the original decision, finding that each guardian had exclusive occupation of a dedicated lockable room used wholly for the purposes of living accommodation. On that basis the rooms amounted to dwellings subject to council tax. As a result the building was removed from the non-domestic rating list, resulting in a significant saving for LHL.

While the decision is good news for property owners from a rates mitigation perspective, given that much was made of the fact that the guardians were in exclusive occupation of their room, it raises the possibility of guardians claiming that they have a tenancy not a licence, with the resulting security of tenure.

Property owners will need to weigh up what is more important to them: the certainty of obtaining vacant possession at short notice through non-exclusive contractual licences or giving guardians sufficient rights of occupation to reduce liability for business rates, running the risk of inadvertently creating a tenancy.

Air quality and planning

Air quality issues are attracting a lot of attention, notably as a result of a number of successful legal challenges by ClientEarth including challenges to the government’s Air Quality Plans. In one such challenge the Supreme Court held that the UK government was in breach of Air Quality Directive 2008/50/EC.

In Gladman Developments Ltd v Secretary of State for Communities and Local Government and others [2019] EWCA CIv 1543, the Court of Appeal was asked to consider the likely effects of a proposed housing development on air quality.

The developer in this case applied for planning permission for two developments totalling 590 residential units in Kent. Permission was not granted. The planning inspector appointed to consider the matter had concluded that, “I find that it is more probable than not that both…proposals would have at least a moderately adverse impact on air quality… and thus a significant effect on human health. While measures are proposed to mitigate those adverse impacts, there is no clear evidence to demonstrate their likely effectiveness….”

The developer challenged the planning inspector’s approach to air quality all the way to the Court of Appeal, but with no success as the Court could not find fault either with the inspector’s reasoning or his conclusion.

This is the first court case which has tested the refusal of planning permission on air quality grounds and highlights the growing influence of air quality issues on development projects, particularly where they may have an adverse impact on health. Is it a sign of things to come?

Does CRAR waive forfeiture?

The Court of Appeal has confirmed that a landlord’s exercise of Commercial Rent Arrears Recovery (CRAR) waives the right to forfeit a lease for arrears of rent then outstanding.

Since the abolition of distress in 2014, landlords who want to recover rent arrears by taking control of the tenant’s goods and selling them must do so through a statutory procedure known as CRAR. CRAR is more limited than distress and is only available to recover arrears of basic rent from commercial premises.

Leases of commercial premises usually contain an express right for the landlord to terminate the lease by forfeiture if the tenant is in breach of any of its terms. It is all too easy to waive the right to forfeit unintentionally. If the landlord (or its agents) does anything that effectively acknowledges an ongoing landlord and tenant relationship once it is aware of a breach, it will have waived the right to forfeit for that particular breach.

In Brar and another v Thirunavukkrasu [2019] EWCA Civ 2032, commercial premises in Teddington were let for a term ending in 2034 at an annual rent of £15,000 subject to review, payable by four equal instalments in advance. The lease contained a proviso for re-entry if any rent was unpaid 21 days after becoming payable.

The rent due on December 25, 2015 was not paid and on January 18, 2016 the landlord instructed enforcement agents to exercise CRAR to recover the rent arrears, which they did. In February, the landlord purportedly forfeited the lease by peaceable re-entry. The tenants argued that the purported forfeiture was unlawful and claimed damages for trespass and breach of covenant.

The judge confirmed the decision of the lower court that the exercise of CRAR contained an “unequivocal representation” that the lease was continuing, so that the right to forfeit the lease had been waived and the forfeiture was unlawful.

Accidental waiver is a particular problem in the context of “once and for all” (as opposed to “continuing”) breaches because if the right to forfeit in respect of such breaches is waived, it will be waived permanently. Non-payment of rent is a “once and for all” breach. However, it may be of some comfort to landlords that the right to forfeit may arise again if the tenant fails to pay another instalment of rent in the future.