Real Estate Focus: December 2020

COVID-19: Restrictions on landlords of commercial premises extended (again)

The government announced on December 9, 2020 that temporary restrictions imposed on landlords of commercial premises seeking to take action against tenants for non-payment of rent are to be extended again.

One such restriction is a moratorium on forfeiture. Section 82 of the Coronavirus Act 2020 (the Act) creates a moratorium on landlords forfeiting a business lease for non-payment of rent (which is defined as including any sum the tenant is liable to pay under a business tenancy).

The moratorium applies during the “relevant period”. This began on March 26, 2020 and initially lasted until June 30, 2020, but has already been extended twice to December 31, 2020. New regulations coming into force in England on December 30, 2020 further extend the moratorium to March 31, 2021. A similar extension will take effect in Wales.

The government has stated that this will be the “final extension”, which has come as a great relief to industry bodies such as the British Property Federation.

Commercial Rent Arrears Recovery (CRAR) is a statutory method of enforcement to recover rent arrears relating to commercial property. Regulations in force since April 25, 2020 prevent landlords using CRAR unless they are owed a certain amount of rent. That was originally at least 90 days’ unpaid rent but was subsequently increased and currently stands at 276 days’ rent where the notice of enforcement is served on or before December 24, 2020 and 366 days where the notice is served on or after December 25, 2020.

This restriction on the exercise of CRAR applies where notice of enforcement is given during the “relevant period” as defined in Section 82 of the Act (see above), which will now end on March 31, 2021.

The Corporate Insolvency and Governance Act 2020 imposes temporary 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. Those temporary restrictions have also been extended to March 31, 2021 so that:

• A statutory demand served by a creditor between March 1, 2020 and March 31, 2021 cannot form the basis of a winding-up petition against a company.
• A creditor who wishes to present a winding-up petition against a company on the grounds that the company is unable to pay its debts (including rent) can only do so on condition that it has reasonable grounds for believing either that coronavirus has not had a financial effect on the company, or that the company would have been unable to pay its debts even if coronavirus had not had a financial effect on it. This applies to petitions presented between April 27, 2020 and March 31, 2021.
• If a creditor presents a petition between April 27, 2020 and March 31, 2021 for the winding up of a company on the grounds that it is unable to pay its debts, the court can only make a winding-up order if it is satisfied that the company would be unable to pay its debts even if coronavirus had not had a financial effect on the company.

Review of commercial landlord and tenant legislation

In addition to the extension of temporary restrictions on landlords seeking to take enforcement action against defaulting tenants of commercial property, the government announced on December 9, 2020 that it intends to launch a review of “outdated” commercial landlord and tenant legislation in early 2021.

The government has been keen to encourage transparency and collaboration in negotiations between landlords and tenants to help protect viable businesses that have suffered financially during the pandemic. In June 2020 it published a Code of Practice for commercial leases to promote good practice in these circumstances. The Code is voluntary but the government warned that, if not adopted, it would explore options to make the principles of the Code mandatory.

It would seem that the government may have been disappointed in the response to the Code as the proposed review “will consider how to enable better collaboration between commercial landlords and tenants”. The review will also consider how to improve the leasing process overall: the announcement states that there will be an examination of a broad range of issues, including the Landlord and Tenant Act 1954 Part II, different models of rent payment and the impact of coronavirus on the market.

In the meantime further guidance to support tenants and landlords has been promised, by way of a supplement to the June Code of Practice.

Assuming the review goes ahead as currently planned, 2021 may be a landmark year for commercial leases.

The Retail Prices Index: What’s ahead?

The UK Statistics Authority (the Authority) has been of the view for some time that the Retail Prices Index (RPI) has significant “shortcomings” as a measure of inflation and has recommended proposals for its reform.

The Authority considers the Consumer Prices Index including owner occupiers’ housing costs (CPIH) to be the most comprehensive measure of inflation and is seeking to address the shortcomings of the RPI by bringing the methodology of the CPIH into the RPI. The RPI and the CPIH would continue to be calculated separately on an ongoing basis and published as separate indices, although supplementary RPI indices and lower level detail would be discontinued.

On November 25, 2020 the Chancellor announced that, while he sees the arguments for the proposed reforms, he will not consent to them being implemented before 2030. However the Authority has stated that it intends to address the shortcomings of the RPI “at the earliest practical time” and has written to the Chancellor informing him that the Authority would legally and practically be able to implement its proposed reforms in February 2030, when the Chancellor’s consent will no longer be required to do so.

For more information, including a consideration of what the reforms would mean for leases with RPI-linked rent review clauses, read our Briefing on the topic.

Can property guardianship schemes mitigate liability for business rates?

In London Borough of Southwark v Ludgate House Limited and Mr Andrew Ricketts (Valuation Officer) [2020] EWCA Civ 1637 the Court of Appeal 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. The property guardian’s right to occupy is granted by way of a temporary contractual licence from a guardian agency appointed by the property owner. A key advantage for a property owner using a property guardian scheme is that it secures the property against trespassers and protects it from damage. But can it also minimise exposure to business rates?

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 building was vacant pending demolition, LHL entered into an arrangement with a firm to provide security services which included placing 32 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 should therefore be subject to business rates.

The Valuation Tribunal agreed with the Valuation Officer, with the result that the property was entered in the non-domestic rating list with a rateable value of over £4 million but the Upper Tribunal reversed that decision on the basis that each guardian had exclusive occupation of a dedicated lockable room so that the rooms amounted to dwellings subject to council tax. The building was removed from the non-domestic rating list, resulting in a significant saving for LHL.

The case went to the Court of Appeal. The Court decided that the position of a guardian under such a contractual arrangement was similar to that of a lodger and the fact that lodgers enjoyed their own rooms for their own purposes and had their own key was not enough to amount to rateable occupation.

The terms of the contract and the degree of contractual control retained by the owner was also relevant. Lines of authorities had considered the position of service occupiers in occupation for the performance of their duties and of caretakers in occupation, concluding that their occupation was not enough to amount to rateable occupation. To quote Lord Justice Lewison: “The position of a guardian under the sort of arrangement with which this case is concerned, has analogies with both these types of occupation as well as with the position of a lodger….LHL had engaged [the guardian agency] for the specific purpose of providing property guardian services; and the guardians were the very means by which those services were provided. They could not have performed those services without living in the building.”

The whole building was therefore to be treated as a single non-domestic unit in the occupation of its owner and subject to business rates.

Will the owner appeal to the Supreme Court? We shall see, but in the meantime we await the Supreme Court’s judgment in another case where a rates mitigation scheme is under attack. In Hurstwood Properties (A) Ltd and others v Rossendale Borough Council UKSC 2019/007 the Supreme Court has to decide whether the respondents should be liable to pay non-domestic rates for periods when they leased their unoccupied properties to special purpose vehicle companies, on the basis that: (1) the leases were prearranged tax avoidance schemes and the relevant statute should be interpreted accordingly; or (2) the special purpose vehicle companies can be disregarded by a piercing of the corporate veil.

Apparently over 50 cases have been waiting in the wings for the Supreme Court decision, such is the prevalence of rates mitigation schemes at the moment.