Real Estate Focus – November 2021

COVID-19: Government publishes details of a landlord and tenant arbitration scheme

The Government has recently published its anticipated draft legislation aimed at tackling the significant and longstanding issue of unpaid commercial rent built up by tenant businesses forced to close during the COVID-19 pandemic.

The introduction of the draft Commercial Rent (Coronavirus) Bill (the Bill), while still subject to Parliamentary approval, confirms the Government’s previous announcement that it intends to establish a new legally-binding arbitration scheme, with the aim of resolving disputes over debts accumulated during the pandemic when businesses were legally required to close under COVID-19 regulations. 

A new Code of Practice has also been published alongside the Bill. The key message (as with previous iterations of the Code) remains that tenants’ rental liabilities under commercial leases continue to accrue despite the COVID pandemic and tenants who can pay their rent in full must continue to do so. However, if tenants cannot afford to meet their rental liabilities in full, they should approach their landlords and be prepared to disclose evidence to substantiate the need for assistance. Landlords are encouraged to be open to negotiations over the possible waiver or deferment of rental liabilities if tenants request assistance, but should also be prepared to disclose evidence as to what is affordable to them, for example if a proposed reduction in rent would create a threat to their solvency. 

When will the arbitration scheme come into force and how will it apply?

Assuming its safe passage through Parliament, the new arbitration scheme is likely to come into force on March 25, 2022. 

Eligibility for the arbitration scheme is presently limited to tenant businesses which were required to close (in whole or part) under COVID-19 regulations and who occupy premises as a business tenancy under Part II of the Landlord and Tenant Act 1954 (including any leases “contracted out” under that Act). These eligibility criteria will capture most sectors which were subject to mandatory closures, including (amongst others) hospitality and nightclubs; non-essential retail; theatre, cinemas and personal care. However, it is presently uncertain whether pure office-based businesses will fall within the scope of the arbitration scheme, given that the Government’s guidance to “work from home where possible” does not (by itself) satisfy the eligibility criteria set out in the Bill. 

What rents will be protected by the arbitration scheme?

If enacted as drafted, the Bill will ring-fence certain “protected rent debts” and require parties to work together to agree terms for payment or, if resolution is not possible, to refer the matter to arbitration.

The “protected rent debts” will include not only traditional rent, but also service charges, insurance rent, interest and VAT for the relevant “protected period” that the tenant was mandated to close its premises or cease trading. 

The “protected period” in each case began on March 21, 2020 (the date that businesses were first required to close under the first national lockdown in England & Wales) and will continue up to the date on which restrictions were removed from that tenant’s sector – the latest date in England being July 18, 2021. Whilst not yet confirmed in the draft Bill, it appears that any periods during the pandemic when tenants were permitted to re-open temporarily or in part before being required to close again as restrictions were re-introduced will be treated as part of one overarching protected period. An annex to the new Code sets out the relevant dates across various sectors, reducing the scope for argument between the parties. 

Any unpaid rent accruing before or after the relevant protected period, apportioned on a daily basis, will not be protected by the Bill and will not be capable of determination under the arbitration scheme. 

What is the arbitration process?

If parties have not reached an agreed resolution to the payment of protected rent debts by the date the Bill comes into force, there will be a six month window (although this could be extended by further legislation) during which either the landlord or the tenant can apply to the arbitration scheme for a determination as to what, if any, relief the tenant should be given in relation to the protected rent debt. That relief can include:

• writing off the whole or any part of the debt;
• affording more time to pay the whole or any part of the debt - up to 24 months – and allowing payment in instalments; and/or
• reducing any interest due on the debt (including writing off any interest).

Whichever party makes the application to arbitration, it must be accompanied by a formal proposal for resolving the dispute, based on the principles set out in the Bill and the revised Code (see below), and must provide supporting evidence of affordability. 

The respondent must be notified in advance of the proposed application, to allow it time to either accept the formal proposal or to prepare its response. If the latter, the respondent should include a formal counter-proposal for resolving the dispute, again based on the principles set out in the Bill and the revised Code, and provide supporting evidence. 

The parties will then be able to choose to have a final hearing in person or to have the arbitrator make a paper-based award on the documentation provided. The arbitrator will consider its decision based on the written evidence and any hearing, before issuing its legally-binding award within 14 days.

Principles to be considered by the arbitrator’s award

In order to be entitled to some form of relief under the arbitration scheme, the tenant will effectively have to demonstrate that the viability of its business would be undermined if it was required to pay the protected rent debts in full. The Bill makes it clear that any borrowing or refinancing arrangements should not be considered as part of that viability analysis.

The first part of the arbitrator’s determination will therefore consider the viability of the tenant’s business with respect to the protected rent debts. The arbitrator must dismiss the reference if it determines that the tenant’s business is “not viable” and would not be viable even if relief on the protected rent debt was awarded (and presumably the protected rent debt will then form part of a subsequent insolvency process of the tenant company).

If the arbitrator determines that the tenant’s business is or would become viable if relief was awarded, the arbitrator will then consider the proposals put forward by each party and must make an award in favour of the proposal which is most consistent with the principles in the Bill (or, if no proposal is consistent, come to its own decision). Those principles include prioritising the viability of the business of the tenant but not at the expense of the landlord’s solvency, and disregarding the possibility of either party borrowing money or restructuring its business. 

Costs of the arbitration 

Initially, the applicant will be required to pay the arbitration fees before the release of the award. When making the final award, the arbitrator must also make an award requiring the respondent party to reimburse the applicant either for half of the arbitration fees, or such other amount as the arbitrator considers appropriate in the circumstances (which allows scope for following the usual principle in litigation that the unsuccessful party will bear most of the costs).  However the parties will be required to meet their own legal fees and other costs. 

Can landlords pursue other remedies to recover the “protected rent debts”?

In short, landlords will effectively have no option but to negotiate or pursue resolution through the arbitration scheme to determine payment of any protected rent debts.

Existing temporary moratoriums to prohibit landlords from pursuing: (1) lease forfeiture; (2) CRAR; and (3) the commencement of winding up petitions in respect of rent debts have all been extended until the end of March 2022, by which time the Bill should come into force. The Bill will introduce a new moratorium period prohibiting the same remedies from being used but only in respect of protected rent debts.

The Bill also introduces a new six month moratorium period for the duration of the arbitration scheme window (or longer if extended) which will prohibit landlords from seeking to recover protected rent debts by:

• drawing down on existing tenancy deposits (irrespective of the terms of the deposit) or requiring the tenant to “top up” the tenancy deposit; or
• issuing debt claims for County or High Court judgments. There is a retrospective element to this: in the case of any debt claims issued on or after November 10, 2021 up to the date the Bill comes into force which seek recovery of protected rent debts (either wholly or in part), either party can make an application to stay those proceedings in order to resolve the issue, whether by arbitration or otherwise. Where such an application is made, it must be granted by the court. 

In addition, any judgment in current proceedings passed on or after November 10, 2021 can also be referred back to arbitration for relief. In the meantime, and during the six month moratorium, the judgment debt cannot be enforced.

At present, the Bill does not appear to give the ability to stay proceedings that were issued by landlords before November 10, 2021. This may be intentional or, if not, may be altered. 

We will report further on significant amendments made to the Bill as it passes through Parliament over the coming weeks.

For further information please contact partner David Stevens or associate Greg Rouse in our Real Estate Litigation team.

COVID-19: landlords v. tenants in court

As if to illustrate why the Commercial Rent (Coronavirus) Bill was introduced, debt claims for COVID-related rent arrears have proliferated over the past few months. 

In London Trocadero (2015) LLP v (1) Picturehouse Cinemas Ltd (2) Gallery Cinemas Ltd (3) Cineworld Cinemas Ltd [2021] EWHC 2591 (Ch) the claimant was the landlord of two leases of cinema premises. No rent had been paid by the tenant under the leases since June 2020. The arrears (together with service charges) were in the region of £2.9 million by July 2021 and the landlord brought a claim to recover the outstanding amounts.

The tenant argued that it was not liable for rent and service charges which had arisen during periods when the premises could not be used as a cinema. 

The tenant’s first line of defence was that terms should be implied into the leases to the effect that payment of rent and service charges should be suspended during any period when the use of the premises as a cinema was illegal and/or attendance was not at a level commensurate with that which the parties would have anticipated at the time that the leases were granted. 

The judge did not agree. The starting point for implied terms was whether they were so obvious that they went without saying, or were necessary to give the leases business efficacy. In this case it could not be said that the terms were so obvious that they went without saying. In addition, the requirement to pay rent even though the premises could not be used for their intended purpose as a result of unforeseen events did not deprive the leases of business efficacy, or mean that they lacked commercial or practical coherence. It was a matter for negotiation between the parties as to where the risk should lie. The fact that, as matters stood, the risk was left with the tenant did not lead to the conclusion that the leases lacked commercial or practical coherence.

The tenant also argued that there had been a partial failure of consideration. This was on the basis that the payments due under the leases were for the use of the premises as a cinema, with the result that no payments were due in respect of periods when the premises could not be used as such. 

Again the judge disagreed. The question, taking into account the terms of the leases, was whether the continued and uninterrupted lawful use of the premises as a cinema was fundamental to the basis on which the tenant entered into the leases, or whether it was simply an expectation which motivated it to enter into the leases. In the judge’s view, it was the latter.

It will be interesting to monitor the impact of the Commercial Rent (Coronavirus) Bill on such claims and court proceedings for rent debt over the coming months.

Publication of the Finance Bill 2021-2022: update on real estate tax measures

In the October edition of our Real Estate Focus, we wrote about a number of measures that were announced (or had previously been trailed) at the Autumn Budget. We now have the Finance Bill 2021-22, published on November 4, 2021 and containing updated draft legislation in respect of the measures relating to Real Estate Investment Trusts (REITs), Qualifying Asset Holding Companies (QAHC) and residential property developer tax (RPDT). While the draft legislation is largely as expected, there are a couple of amendments which are noteworthy.

The Bill confirms a number of exemptions to the RPDT including, amongst others, profits from build-to-rent development and student accommodation (as defined in the RPDT legislation) and non-profit housing companies. The Bill also confirms the tax rate of 4% and the allowance of £25 million per group, below which level profits will not attract RPDT.

The Bill introduces a number of changes to the draft legislation in respect of the REIT rules. The relaxation of listing requirements for REITs that are at least 99% owned by qualifying institutional investors has been reduced to a threshold of 70%. In addition, REITs are able to consider indirect ownership in evaluating whether that threshold has been met. 

Insofar as the QAHC regime is concerned, there are now a number of exemptions to the entry charge which operate to exempt non-UK companies migrating to the UK to become a QAHC and minimising the risk of multiple entry charges applying in respect of a single asset where a number of companies join the regime. In addition, the gains exemption now applies to interests in unit trusts and equivalent.

For further information please contact tax partner Julia Lloyd or another member of our Property Tax Team.

The Environment Act 2021: what is new?

On November 9, 2021 the Environment Act 2021 (the Act) finally received Royal Assent - 1,056 days after the Government first introduced the Environment Bill (the Bill) into Parliament.

The Act, which is described by the Government as “world-leading”, sets out new post-Brexit statutory environmental principles and establishes an independent environmental watchdog, the Office for Environmental Protection (the OEP), tasked with holding public authorities, including ministers, to account for breaches of environmental law.

We summarise below some of the new concepts introduced by the Act into UK law and also some of the controversial provisions which were the subject of disagreement between the House of Lords and the Government during the Bill’s parliamentary journey.

New legally binding targets: there is a new requirement for the Secretary of State for the Department for Environment, Food & Rural Affairs (DEFRA) to set long-term legally binding targets of no less than 15 years in duration. These are in relation to air quality, water, biodiversity, resource efficiency and waste reduction. In addition, an environmental improvement plan to improve the natural environment must be established. 

Enshrining five environmental principles: the Act enshrines some well-established principles: 

• Integration principle: integrating environmental protection into policy-making;
• prevention principle: taking preventive action to avert damage to the environment;
• polluter pays principle: polluters to pay for the costs of pollution control and remediation; 
• rectification at source principle: rectifying and preventing environmental damage by targeting its original cause as a priority; and 
• precautionary principle: regulating activities that may be harmful to the environment even in the absence of scientific certainty.  

Specific provisions for biodiversity, woodland protection and waste recycling: in addition to the requirement to set a long-term legally binding target for biodiversity, the Act introduces biodiversity net gain requirements in planning decisions.  

The Act also contains enhanced forestry enforcement measures as well as waste recycling incentives. For example, the Act allows the Government to introduce charges for single-use plastic items. 

New duties on water companies: following the Government’s tussle with the House of Lords, the Act contains a provision requiring water companies to reduce progressively the impacts of sewage pollution from storm overflows. Originally, the House of Lords had introduced an amendment requiring water companies to take “all reasonable steps” to prevent sewage discharge from storm overflows. This language, however, was not included and a less stringent requirement made it into the Act. 

There is also a new requirement for water companies to publish annual reports covering storm overflows and monitoring water quality. 

Stronger powers to the courts: in a last-minute amendment to the Bill, the Government extended the courts’ powers to grant legal remedies for breaches of environmental law.  

Under the Act, where the OEP has given a decision notice to a public authority, it may apply to the courts for an environmental review. Courts are empowered to issue remedies following their review where this is necessary to prevent serious damage to the environment and if there is an exceptional public interest reason, even if this may cause substantial hardship to a third party or is detrimental to good administration. 

Independence of the OEP: the OEP’s degree of independence from the Government has been a key area of disagreement between the House of Lords and the Government.  

The House of Lords failed in its efforts to ensure the OEP enjoys complete discretion as the Lords’ proposal to restrict the power of the Government to issue guidance on the OEP’s enforcement policy was voted down. Notably, however, Government ministers have confirmed that no guidance will be issued until the OEP develops its own policy. 

In summary, many hope that the Act will promote environmental protection and bring long-awaited changes to the framework of environmental governance. The OEP, for example, has the potential to ensure that actions of the Government and public authorities in relation to the environment come under real scrutiny. However, the extent of the OEP’s effectiveness will depend on the OEP’s enforcement policy and its implementation in the coming years. 

More generally, the real impact of the Act will be seen once meaningful actions are taken and effective targets are set by the Government, which will need to be monitored for progress.