Real estate focus

Introduction

A round-up of some key legal developments in England and Wales for the real estate sector.

In this edition we take a look at whether Brexit can frustrate a lease; an imminent ban on letting fees; more comprehensive terrorism insurance cover; and a new structures and buildings allowance for certain property rental businesses.  

Landlords rejoice as Brexit fails to frustrate a lease

In a much anticipated and comprehensive judgment, the High Court has rejected a tenant’s argument that its lease of a substantial office building in Canary Wharf will be terminated by frustration if the UK leaves the EU on or after 29 March 2019. 

The claimant in Canary Wharf (BP4) T1 Limited and others v European Medicines Agency [2019] EWHC 335 (Ch) is the owner of a substantial office building in Canary Wharf, E14. The defendant, a decentralised agency of the European Union known as the European Medicines Agency (EMA), is its tenant of floors 1-10  under a lease granted in 2014 (pursuant to an agreement for lease entered into in 2011) for a term of 25 years, reportedly commanding an annual rent of approximately £14 million. EMA occupies the premises as its headquarters and it asserted that it is legally obliged by EU law to be located in an EU member state. 

Canary Wharf issued proceedings in June 2018 seeking a declaration that Brexit would not frustrate the lease and that it will continue in full force and effect even if the UK leaves the EU. EMA counterclaimed seeking a declaration that the UK’s exit from the EU will amount to an event of frustration of the lease and/or that it will render EMA’s future performance of the lease ultra vires and so unenforceable as a matter of EU law. 

The judge comprehensively dismissed EMA’s case. He rejected the argument that EMA’s continuing performance of its obligations under the lease would be rendered illegal following Brexit but even if it was, EMA’s position was self-induced because the EU could have taken steps to ameliorate the position. He also rejected EMA’s argument that Brexit would frustrate the parties’ original common purpose because, although Brexit itself was not foreseeable in 2011, the parties contemplated the possibility that EMA might have to vacate the premises involuntarily at some point over the long 25-year term and therefore included provisions entitling EMA to assign or sublet its lease.

Whilst it is possible that EMA may appeal the decision and indeed might ultimately seek to refer the matter to the ECJ on issues of EU law, the judgment is detailed and carefully considered and accords with most observers’ anticipated outcome.

The decision is good news for the UK commercial property industry, although as it turned principally on a consideration of the particular political and legal constraints on the EMA as an EU agency, it is not of wide application. However the judgment includes a detailed analysis of the law as it applies to frustration of leases and reiterates how difficult it is for frustration to arise. 

The lesson for tenants is that if they wish to take a lease of premises for a particular purpose or for a specific appointment or future event only, they should seek to include in the lease an express break clause entitling it to terminate the lease should unforeseen circumstances arise, rather than rely on the common law of frustration.

For further information please contact real estate litigation partner David Stevens.

… And good news for tenants as unfair letting fees are banned

The Tenant Fees Act 2019 is all set to come into force on the 1st June 2019 and is another step in the government’s plan to improve fairness, competition and affordability in the lettings sector.

The Act bans landlords of “tenancies of housing” in England and their agents from demanding any payments other than those specified from tenants, licensees and their guarantors. The phrase “tenancies of housing” covers assured shorthold tenancies (other than of social housing and long leases), lettings to students and occupational licences.   

The permitted payments are

• Rent;
• A security deposit capped at 5 weeks’ rent where the annual rent is less than £50,000 and at 6 weeks if it is £50,000 or more;
• A holding deposit capped at one week’s rent (and refundable except where the tenant withdraws, fails a right-to-rent check or provides false/ misleading information);
• Capped payments in respect of “relevant defaults” by the tenant, defined as the loss of a key or failure to pay rent in full within 14 days of the due date;
• Capped payments if the tenant requests an assignment, variation or early termination of the tenancy; and
• Payments in respect of council tax, utilities, television licences and communication services.

There is also a ban on landlords (and their agents) requiring fees to be paid to third parties, such as reference or inventory providers, or requiring tenants to sign up to insurance or a service contract with a third party, unless the contract is for the provision of a utility or communication service to the tenant.

The consequences of non-compliance are severe. A term in a tenancy in breach of the ban is void and a demand for a prohibited fee can incur a financial penalty of up to £5000. A subsequent breach within five years is a criminal offence, with enforcement authorities having the option of imposing a financial penalty of up to £30,000 as an alternative to prosecution. 

Landlords are also banned from recovering possession of the property under the fast-track procedure in section 21 Housing Act 1988 if they have not reimbursed a prohibited payment that has been made.

Significantly, while the Act initially applies only to agreements entered into on or after June 1, 2019, the reprieve for “pre-commencement” tenancies and licences does not last long: the Act will apply to them from June 1, 2020.

Plugging the terrorism insurance gap

Businesses will be relieved to hear that a significant gap in terrorism insurance cover has just been closed. 

The Pool Reinsurance Company Ltd (Pool Re) was established in 1993 in the wake of the IRA bombing of the Baltic Exchange. It is a government-backed terrorism reinsurer that enables commercial insurers to offer terrorism cover by giving them access to a central fund and a government loan facility.  

However, Pool Re has been restricted in that it could only pay out if an act of terrorism has resulted in physical damage to a property. Pool Re has therefore not been in a position to back terrorism insurance for purely business interruption losses, such as those arising in the wake of the June 2017 terrorist attack on Borough Market: there was very little physical damage but traders and restaurant owners lost business as a result of the week-long closure of the market for police investigations. This has had a knock-on effect on the cover available from commercial insurers.  

This omission has been rectified by the Counter-Terrorism and Border Security Act 2019 which received Royal Assent and came into force on 12th February 2019.  Pool Re can now extend its reinsurance cover to include losses resulting from business interruption following a terror attack that are not contingent on damage to commercial property. This in turn makes it much easier (and cheaper) for insurers to offer businesses more comprehensive terrorism insurance cover than has been the case to date.

Three cheers for those such as the British Property Federation who lobbied hard for the reform.

A new Structures and Buildings Allowance

A new Structures and Buildings Allowance (SBA) is now available for expenditure incurred on new non-residential structures and buildings intended for commercial use, provided that the contract for the works was entered into on or after 29 October 2018.  

The SBA is available to businesses carrying on a property rental business within the charge to UK tax in respect of both UK and overseas buildings and structures.  It can be claimed in relation to the costs of physically constructing the building or structure (including new conversions and renovations), the costs of demolition or land alterations (but not the cost of acquiring land or obtaining planning permission) and other direct costs that bring the asset into existence. 

Relief is given under the SBA at the rate of 2% per annum on a straight-line basis over a fixed 50-year period, starting from when the structure/ building comes into qualifying use.  Expenditure on the ‘integral features’ and fittings of a structure that currently attract capital allowances as expenditure on plant and machinery will continue to qualify for those allowances rather than being required to fall within the less generous SBA regime.  

In conjunction with the introduction of the SBA, the writing-down allowance in respect of ‘special rate expenditure’ (being expenditure on, amongst other things, certain long-life assets and integral features) will be reduced from 8% to 6% with effect from April 2019.

For further information please contact tax Of Counsel Julia Lloyd.