Real Estate Focus: April 2021

COVID-19: Restrictions on landlords of commercial premises - have your say

As reported in our March Focus, the Government has again extended the trio of temporary restrictions imposed on landlords of commercial premises in response to the impact of COVID-19 and related measures on tenants’ businesses. The restrictions are:

• A moratorium on landlords forfeiting a business lease for non-payment of rent;
• A restriction on landlords’ use of Commercial Rent Arrears Recovery (CRAR); and
• Restrictions on the use of statutory demands and winding-up petitions by creditors pursuing sums owed by corporate debtors, including landlords pursuing outstanding rent from tenants.

The extension ends on June 30, 2021 – what then?

The Government published a call for evidence on April 6, 2021 to help it decide on the best way to withdraw or replace these measures. The objective is to gather more evidence from anyone with an interest in or connection to the commercial property market to understand how landlords and tenants are responding to the rent arrears that have built up as a result of businesses being unable to trade normally during the pandemic. There is a warning that if the evidence indicates that productive discussions between landlords and tenants are not taking place, the Government will intervene further.

The call for evidence also seeks views on six suggested ways forward:

1. Allowing the existing measures to expire on June 30, 2021.
2. Allowing the moratorium on commercial lease forfeiture to lapse on that date but retaining the insolvency measures and CRAR restrictions for a period of time.
3. Retaining the existing measures for a limited period in relation to certain businesses, based on the extent to which they have been affected.
4. Encouraging increased formal mediation between landlords and tenants.
5. Non-binding adjudication between landlords and tenants. For example, non-binding adjudication could be required as a precondition to parties taking their dispute to court; and
6. Binding non-judicial adjudication between landlords and tenants, which would require legislation.

In relation to options 5 and 6, the call for evidence asks what remedies should be available to adjudicators when determining how disputes should be resolved. The suggested menu includes:

• Resetting future rent under the lease.
• Extending the term of the lease.
• Reducing the term of the lease; and
• Deferring/waiving an obligation to replenish a rent deposit.

Given that option 6 is a binding adjudication, this would appear to give the adjudicator the right to ride roughshod over the negotiated terms of a lease and permanently to re-write them.

The deadline for responses is May 4, 2021. The Chief Executive of the British Property Federation has said: “It is vitally important that property owners large and small respond to the Government’s call for evidence”.

In court: Claims for outstanding rent during the pandemic

In Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd [2021] EWHC 863 (Ch), the court was asked to consider for the first time three issues directly related to the pandemic and their impact on a landlord’s claim for rent arrears.

The claimant landlord is the leasehold owner of the Westfield Shopping Centre in Shepherd’s Bush and the tenant has a lease of one of the Centre’s units, granted in 2019 for a term of five years at an initial yearly rent of £200,000.

As a consequence of Government measures in response to the pandemic, the tenant was obliged to close its business at the unit for substantial periods between March 26, 2020 and April 21, 2021. The tenant paid no rent from April 2020 and the landlord issued a claim for outstanding rent plus interest amounting to £166,884.82.

The tenant raised three main issues in its defence and failed on each count.

The tenant argued that the landlord’s claim had been issued prematurely, contrary to the Government’s Code of Practice for Commercial Property Relationships during the pandemic.

The judge disagreed. It was clear that the Code does not affect the legal relationship between landlord and tenant. It was also clear that the Code was not a charter for tenants to stop paying rent: “Tenants who are in a position to pay in full should do so. Tenants who are unable to pay in full should seek agreement with their landlord to pay what they can”. In this case the evidence indicated that there had been significant engagement by the landlord but a lack of engagement on the tenant’s side.

The tenant also argued that the landlord’s claim was a means of circumventing temporary measures to prevent forfeiture, winding up and recovery using CRAR and exploited a ‘loophole’ in the restrictions put in place by the Government on the recovery of rent.

Again the judge disagreed. The Government had placed restrictions on some, but not all, remedies open to landlords. There was no legal restriction on a landlord bringing a claim for rents. The steps the landlord may be able to take if judgment is entered are restricted, but the entitlement to bring a claim before the court for a determination about liability was unaffected.

The tenant’s third defence related to insurance: the landlord was in breach of its obligation in the lease to insure as it was reasonable to expect that the landlord would insure against loss of rent due to forced closures/denial of access due to notifiable disease and/or Government action.

The judge found that the lease did not place an obligation on the landlord to insure against such losses and, even if it did, there was nothing to say that the landlord was obliged to insure the tenant’s business against loss. The fact that the tenant was obliged to contribute to the cost of insurance did not change that.

The judgment is clearly and resoundingly in favour of the landlord, which was entitled to the rent claimed with interest. We shall see if it lives up to the expectation that it “will send a shockwave through retail tenants as unpaid rents continue to pile up”.

New Government consultations on energy efficiency

On March 17, 2021, the Government launched two important consultations focusing on energy efficiency.

The first consultation seeks views on proposals to introduce a national performance-based framework for rating the energy and carbon performance of large commercial and industrial buildings. The second seeks views on the Government's proposed framework for a minimum energy performance certificate (EPC) B rating for privately rented non-domestic buildings in England and Wales by 2030.

Consultation on a framework for rating the energy and carbon performance of large commercial and industrial buildings

The consultation applies to commercial and industrial buildings above 1,000 m² in England and Wales and will be relevant to building owners, landlords, tenants, real estate investors and asset managers, in particular in the office sector.

Currently, EPCs are the principal method of assessing a building’s energy performance. However, there is a lack of correlation between the EPC score and actual energy and carbon performance. The proposed performance-based scheme would measure energy efficiency by analysing the meter readings of the building and the actual energy use of occupants, rewarding a building with a higher score if it reduces its measured energy use and carbon emissions.

Benchmarking would occur against similar building types to produce a simple rating, for example between 1-6 stars. Two possible rating types are proposed – a ‘base building rating’ for building owners with tenant space and a ‘whole building rating’ for owner-occupier / single tenant sites. The intention is that ratings should improve over time and incentives and interventions may be rolled out in the future.

The framework proposed will require owners and single tenants of buildings to obtain an annual rating and undergo site assessments every four years. The rating would be disclosed publicly online and in the building. Prospective buyers and tenants must be made aware of the rating before the building is sold or let and the consultation considers how this would interact with the EPC regime.

Disclosure of the rating would be voluntary in the first year but subsequent disclosure would be mandatory. The Government also aims to introduce a similar system of performance-based ratings for buildings below 1,000 m² on a voluntary basis.

It is proposed that the rating will be introduced in three phases. Phase one, from 2022 to 2023, would apply to offices. Phases two and three, which the Government aims to deliver over the 2020s, would apply to the remaining commercial and industrial sectors such as health, education and retail.

The Government is seeking views on:

• The criteria for determining which phase each sector should fall into.
• Whether the rating could be used to meet some of the trigger points for EPCs.
• Whether the framework could be expanded to cover wider sustainability issues such as water, waste and indoor air quality.
• Whether to punish non-compliance by publicising the organisations or by imposing financial penalties.

Consultation on a minimum EPC B rating for privately rented non-domestic buildings

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (PRS Regulations) currently set a minimum energy efficiency standard (MEES) of EPC E for privately rented non-domestic buildings.

The 2020 Energy White Paper confirmed that the future trajectory for this sector will be EPC B by 2030, which it is estimated will see the proportion of the non-domestic rented stock within scope of the PRS Regulations increase from around 10 per cent to around 85 per cent. The Government is now consulting on how to implement that target and generally how to improve MEES compliance and enforcement.

The Government proposes a phased implementation of the EPC B by 2030 requirement, with the introduction of two ‘compliance windows’:

• During the first compliance window (2025-2027), landlords of all non-domestic rented buildings in scope of MEES must present a valid EPC by April 1, 2025 and, if not a C or above, must improve the building to a minimum EPC C by April 1, 2027 or register a valid exemption.
• During the second compliance window (2028-2030), those landlords must present a valid EPC by April 1, 2028 and, if not a B or above, must have improved the building to a minimum EPC B, or register a valid exemption by April 1, 2030.

However the Government recognises that this proposed new framework is unlikely to be successful unless it is supported by effective compliance and enforcement regimes. Views are therefore also sought on proposed reforms, including:

• The introduction of a PRS Exemptions and Compliance database to provide the data local authorities require for enforcement and compliance monitoring.
• Updating the penalty framework to enforce the new requirements.
• A requirement for landlords to have a valid EPC at all times.
• Replacing the ‘three quotes’ system for the seven-year payback with a user-friendly ‘payback calculator’.
• The introduction of tenant obligations to take on a share of the responsibility for MEES compliance.

Both consultations close on June 9, 2021.

For further information please contact Counsel Lucy Bruce Jones.

Electrical safety standards in the PRS now in force across the board

The Electrical Safety Standards in the Private Rented Sector (England) Regulations came into force on June 1, 2020. They have applied to all new specified tenancies in the private rented sector (PRS) since July 1, 2020 and from April 1, 2021, to all existing specified tenancies. A “specified tenancy” is, with some exceptions (including leases of over seven years, student halls of residence and a tenancy where the landlord is a private registered provider of social housing), a tenancy of premises occupied by a person as their only or main residence.

Amongst other things the Regulations require that landlords meet national standards for electrical safety and have the electrical installations in their properties inspected and tested at least every five years by a person who is qualified and competent. A copy of the report must be supplied to existing tenants within 28 days of the inspection and to new tenants before they occupy the premises.

Local authorities may impose a financial penalty of up to £30,000 on landlords who are in breach of their duties.

Government guidance for landlords, tenants and local authorities has been updated to reflect the fact that the regulations are now in force for all tenancies.