Planning and construction in a post-COVID world: The Business and Planning Bill

As pressure continues to mount on the Government to ensure the survival of the British construction industry, the Housing Secretary has announced new measures to boost building activity in the UK and to make it easier to comply with new safe working requirements introduced last month. The Business and Planning Bill (“B&P Bill”) tabled in the House of Commons on the 25th of June 2020 makes clear that the new measures are not limited to just residential developments.

The regulations include some important changes to permitted development rights, including more temporary uses of land for the rest of 2020, and the introduction of new requirements for the provision of adequate natural light for changes of use to residential. However, the most controversial change is the introduction of the right to construct two residential storeys on top of detached purpose-built blocks of flats. The right is subject to prior approval and several restrictions, including a height limitation, and doesn’t apply to buildings constructed after 5 March 2018. The government is hoping this measure will go some way to boost housing supply.

On the project timeline end of things, the proposal will see (1) planning permission deadlines extended, (2) planning appeals sped up and (3) builders able to institute more flexible working hours following agreement with their local council.

The first of those three measures appears to be driven by new data released on 19 June 2020, showing that the planning permission for 24,000 homes would have expired at the end of this month, along with more permissions expiring soon thereafter. Section 17 of the B&P Bill, however, extends the time limit to 1 April 2021 for the implementation of all planning permissions expiring between the enactment of the new provisions and the end of the year. It also enables the retrospective revival of all consents which have expired since 23 March, subject to the local planning authority being satisfied that the environmental assessments are still valid.

The second of the three measures, now section 20 of the B&P Bill, will permanently enable the Planning Inspectorate (PINS) to use more than one procedure – written representations, hearings and inquiries – in combination when dealing with a planning appeal, which will give it much more flexibility and will hopefully speed up the appeal process. This follows a pilot programme that tested this approach and implemented recommendations of the Rosewell Review, which more than halved the time taken for appeal inquiries from 47 weeks to 23 weeks.

The third measure, now section 16 of the B&P Bill, allows builders to apply to the relevant local authority for a temporary variation of planning conditions, limiting construction hours to allow them to stagger work schedules and / or extend the times at which works may be conducted. Councils will be required to respond within 14 days, with approval deemed to have been granted if they fail to do so. This has become necessary since the announcement last month requiring construction sites to be managed in a way that reduces the risk of infection, which in practice acts to reduce the number of people that can be on site at any one time. This also ensures that contractors can follow public health guidance onsite. By staggering builders’ arrival times, public transport will be less busy and the risk of infection will be reduced.

This announcement builds on previous measures to support the economy and protect the capacity of the construction sector, including:

  • Increasing financial flexibility for those engaged in the sector via loans, guarantees and in having deferred self-assessment payments (to 2021);
  • Instituting mortgage holidays for households and landlords alike, which will prevent a flood of foreclosures; and
  • Including construction sites, estate agents, conveyancers and others in the earlier phases of the reopening, with guidelines on how to do so safely.

For more information on this topic, please get in touch with one of the authors, or your usual Reed Smith contact.

UK Real Estate and COVID 19: A new code for commercial landlords and tenants, and extended measures on forfeiture and CRAR

The government has today published a code of practice for commercial property relationships, seeking to codify what should be existing good practice between commercial landlords and their tenants during these extremely difficult times for businesses on both sides. It recognises that everyone is impacted and that businesses should operate reasonably and responsibly to provide support where it is needed.

At the same time the Government has announced:

  • an extended period prohibiting the use of forfeiture from 30th June to 30th September;
  • an increase in the period of any rent arrears before Commercial Rent Arrears Recovery can be used to 189 days of unpaid rent and this will apply until 30th September; and
  • an amendment to the Corporate Insolvency and Governance Bill extending the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to coronavirus until 30 September which the courts are anticipating by granting interim injunctions to stop winding up petitions already.

The new code

The code, with which compliance is voluntary, emphasises the partnership between landlords and tenants and provides that in all dealings with each other in relation to the code and the COVID-19 crisis, both will act reasonably, transparently and in good faith. It further provides that landlords and tenants will help and support each other in all dealings with other stakeholders, including governments, utility companies, banks and financial institutions, and help manage COVID-19’s economic and social consequences.

Interestingly, the point is made that any government support that has been given to a business has been given to help meet commitments including rent and other property costs such as insurance, utilities and service charges. As the duty to act reasonably and responsibly extends to tenants who are in a position to pay in full, they are expected to do so, whilst allowing tenants who are unable to pay in full to pay what they can. In this way landlord support can be directed to those who need it most, but development projects can continue, which will contribute to economic recovery. Similarly, if a landlord is able to provide support whilst having regard to their own financial commitments and fiduciary duties, they should do so.

As both parties should act in good faith, reasonably and flexibly, tenants seeking concessions should be prepared to justify their request. Landlords refusing concessions should be similarly transparent. In both cases this transparency should include:

  1. Providing financial information to the extent appropriate and relevant, which may differ from case to case.
  2. Agreeing and adhering to a formal written rent payment plan to protect against forfeiture for non-payment of rent under the previous lease terms (to the extent that the rent has been amended by the rent payment plan) after the Coronavirus Act 2020 moratorium on forfeiture is lifted or for leases not covered by the moratorium (e.g., in agriculture), for so long as the rent payment plan applies. Rental payment plans should bear in mind the extent of the impact on the tenant’s business during the lockdown period and may include (but will not be limited to) any one or more of the following options:
    1. a full or partial rent-free period for a set number of payment periods – for example, the period of forced closure of a retail unit – which may be in return for a number of measures such as a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, extension of the lease by a period longer than the closed period, or other concession to the landlord;
    2. a deferral of the whole or part of the rent for one or more payment periods;
    3. the payment of rent over shorter payment periods for a set time (e.g., monthly rather than quarterly), including provision for their payment in arrears;
    4. rental variations to reduce ongoing payments to a market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed;
    5. landlords drawing from rent deposits on the basis that the landlord will not then require that the deposits be ‘topped up’ by the tenant before it is realistic and reasonable to do so;
    6. reductions in rent, either in whole or in part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units;
    7. landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable;
    8. provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances;
    9. tenants and landlords agreeing to split the cost of the rent for the unoccupied period equally between them; or
    10. any of the above in return for other arrangements, e.g., a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease.

The code envisages that mediation might be appropriate where landlords and tenants have been unable to reach a specific agreement but both feel that a negotiated outcome could still be achieved. Courts are generally keen to encourage parties to mediate in any event and so this could effectively become an additional step to take in advance of any proceedings for rent arrears.

Service charge

As far as possible, any service or insurance charge payable under the lease should continue to be paid in full. Tenants should prioritise payment of service and insurance charges ahead of payments of rent, to ensure that buildings can continue to be insured and safely maintained so that they are ready to support the economy’s recovery after the COVID-19 crisis.

Service charges should be reduced accordingly where the lack of use of a property has lowered the service charge costs incurred. Conversely, in some cases additional service costs may be incurred, e.g., in order to operate a building which complies with health and safety requirements in the context of COVID-19, or recommissioning where buildings are reopened. Landlords should ensure that service charge costs are reduced where reasonably possible and the frequency of payment should be spread over shorter periods. Where there is a known net reduction in the overall service charge of a property due to its lack of use (taking into account any additional COVID-19-related costs), this reduction should be passed on to tenants ahead of the end-of-year reconciliation. Management fees should reflect any reduced levels of expenditure.

In conclusion

The published code is very much aligned with what responsible commercial landlords and tenants have already been doing during the pandemic so far. Continuing to move forward with a spirit of collaboration and co-operation is vital as we approach the June quarter day, both to keep businesses moving and, as the economy starts to open back up, ensure the recovery is mutual.

The temporary changes to permitted development rights: key takeaways

In a remarkably swift response to the current crisis, the government brought in an amendment to the permitted development regulations a day after lockdown was imposed, allowing pubs and restaurants (A4 and A3 uses) to be used for the sale of takeaway food. These measures introduced a new Class DA: “Restaurants and cafes, drinking establishments and drinking establishments with expanded food provision to temporarily provide takeaway food”. Initially a temporary right up until 23 March 2021, it requires no prior approval as such, rather a duty to inform the local planning authority when the new use starts and ends.

However, if your planning consent contains a condition restricting permitted development rights or takeaway use, that would prevent reliance on this right. Local planning authorities may take the view that it is not expedient to enforce such conditions in the circumstances. For example, earlier in March the environment secretary had already relaxed restrictions on deliveries to food retailers, to ensure they could maintain stocks in the midst of the surge in grocery shopping. It is possible that the same approach would be taken by planning authorities to restrictive conditions in the current crisis.

It is important to note that there may be leasehold restrictions on permitted uses, which would need to be waived or varied. This should be properly documented, with any future ramifications for rent review being taken into account, together with the eventual return to the previous use. Other than the immediate likely benefit to landlords with regards to more certain rental income, landlords are likely to consider the impact on the reversionary value in their property and the overall tenant mix in the area before consenting to any changes of use. Other considerations, such as consents to alterations, changes to turnover rent provisions, building insurance notifications, changes to occupiers’ liability insurance, and, most importantly, employee safety, will also need to be taken into account.

There are likely to be further measures to come as the government and operators get to grips with the new challenges which are presenting themselves, with all areas of industry looking to adapt their ways of working to respond to the needs arising in this constantly evolving situation.

Breaking up: current issues surrounding lease break clauses

Will landlords be able to keep tenants on the hook and will leases continue even when tenants try to exercise a break right? In the current state of COVID-19 lockdown it could be more difficult for tenants to effectively break the term of a lease. Can a break right be validly exercised when a tenant cannot access the property to remove its goods and carry out any works necessary to reinstate the space by the break date?

Some break clauses will allow a tenant to walk away as long as they have paid all rents due up to the date of the break. This is within the tenant’s control, if it has the funds to pay, so those breaks will remain effective.

Some break clauses expressly provide that they will only operate if the tenant gives up occupation and terminates any underleases they may have granted. Giving up occupation may at first suggest that it is only people who need to have vacated the property, but it’s not quite that simple and the wording of the clause still needs to be considered carefully. A detailed look at the clause and understanding of the premises will help make it clear whether giving up of occupation relates only to people. A building that the tenant has adapted to fill with masses of bespoke machinery or apparatus might still be said to be occupied, and so there’s a chance that the break won’t be effective if that cannot be removed.

We know there are many break clauses that state that vacant possession has to be given as a condition of the break right. This goes a step further and means that the property must be free of people and possessions. A minimal amount of possessions – the odd piece of furniture, etc – will not prevent this sort of break. The test is: can the landlord possess the property on the break date? That’s why heavily kitted-out and equipped premises may fail the test.

What argument does the tenant have?

Because of previous case law we know that a tenant break right is a form of option and so is interpreted strictly against the tenant exercising it, to the extent that if the clause specifies a notice on blue paper and one is given on pink paper, the break will not have been validly exercised.

There’s a lot of discussion taking place around the concepts of force majeure and frustration of contracts as they might apply to the coronavirus pandemic. Leases in England and Wales rarely, if ever, contain force majeure clauses and so no comfort is to be found there. Frustration is similarly rare in real estate and leases. For frustration to end a contract, the event must be totally unforeseen, and the circumstances must have changed so dramatically since the contract was entered into that it can no longer be performed. The key is that the whole contract must be incapable of performance, not just a specific term and, in the case of a break clause in a lease, there is a very strong argument that the lease can still be performed – it is simply that the obligations under a specific clause cannot be performed. It is hard to see any argument that the break right was the overwhelmingly most important term of the lease so we don’t think that will help tenants.

Landlords are discussing rent payments with their tenants (many of whom are not paying, or not paying in full, now), so they may discuss any upcoming breaks too. Ultimately, if a court is asked to decide whether a break clause was properly operated, the case will be judged on its own merits. While a judge may have more sympathy with a small tenant company than a large corporate enterprise, the legal arguments will be challenging in every case.

Hold that thought – CRAR and Forfeiture

Where a landlord is owed rent, the first instinct may be to reach for the bailiffs to carry out Commercial Rent Arrears Recovery (CRAR) and remove the tenant’s goods.

The case of Thirunavukkrasu v. Brar and another reminds us of the dangers of exercising CRAR in situations where a landlord may also look to forfeit the lease for non payment of rent.

The facts                 

The tenant had missed a rent payment. The landlord instructed enforcement agents, who attended the property and took control of the tenant’s goods.

The landlord then took action to forfeit the lease by way of peaceable re-entry 12 days later and went on to recover £8,270 from the proceeds of sale of the tenant’s property.

The tenant initiated proceedings against the landlord for damages on the grounds that the landlord no longer had the right to forfeit the lease because it waived it by removing the tenant’s goods using CRAR.

Judgments

At the first hearing, the judge ruled in favour of the tenant using the analogy of distress, the common law remedy that preceded CRAR.

The landlord fared no better in  the Court of Appeal and the appeal was dismissed on several grounds, one of which being:

  • the exercise of CRAR amounts to an unequivocal act confirming a landlord’s decision to treat a lease as continuing. As such, it will waive the right to forfeit for that event of default just as it always did for distress.

Points to note

Landlords must keep in mind the danger of waiving the right to forfeit by inadvertently acknowledging the lease as continuing.  This can happen where bailiffs are instructed to exercise CRAR or even just by corresponding with the tenant about its arrears.  If forfeiture is the main aim, then the best plan is for the landlord and agent to cease all correspondence and even phone calls with the tenant until forfeiture occurs and that can be difficult particularly if you have to wait 14 or even 21 days from defaulting on the rent payment to the point at which a landlord can forfeit.

CRAR is still available to a landlord after a lease has ended, but not if it is ended by forfeiture.

Flexible offices: the way forward for landlords?

Flexible offices are no longer seen as the letting of last resort or a stop gap solution for start-up businesses. They increasingly appeal to a wide range of organisations attracted by flexibility, quality of buildings and unique collaborative working environments. However, as the recent WeWork cancelled initial public offering (IPO) highlights, in this fast-evolving industry which many landlords are keen to be involved in, there are potential risks that need to be considered and managed when exploring the many opportunities that flexible offices can provide.

For landlords wishing to enter the market directly, a robust strategy is needed to ensure that after considerable initial expenditure on the building and brand, and the laborious direct marketing and management of short-term tenancies, their venture will be profitable. Safeguards such as requesting deposits and/or guarantors from tenants will help mitigate risk. Requesting up front rental payments for an agreed period may be considered and, if the landlord is operating the business as a subscription-based membership club, fees paid up front for the relevant period will be expected and help mitigate risk. The landlord approval and legal process will need to be speedy to be attractive but the process needs to be robust. Standardised tenancy and membership agreements will assist, but the landlord needs vigorous internal measures to undertake financial checks and references, to mitigate potential financial loss.

The most straightforward way to enter the market with limited up-front costs, is to sublet the whole of a building to a serviced office provider. Traditional safeguards such as obtaining a rent deposit and/or guarantee, and enforcing lease covenants directly, are available. This helps mitigate potential risk but, as the recent WeWork situation has shown, well established operators may also face financial uncertainty. Before letting a building on a long-term basis to a single operator, the landlord should undertake detailed due diligence on its proposed tenant and consider requesting a more robust security package. To safeguard the landlord’s reversionary interest and avoid potentially inheriting unwanted occupiers, alienation provisions in the lease should prohibit security of tenure to be granted to any occupiers, and the form of tenancy agreement should be pre-approved by the landlord. Before considering either of the above, if the landlord has a leasehold property, headlease restrictions on such forms of underletting and sub-letting should be checked.

If the landlord decides to enter into the market as a joint venture (JV) with a serviced office operator, the most critical safeguard is finding a partner with an aligned vision and business model. Significant due diligence on any proposed partner(s) is needed, and then adequate safeguards need to be put in place in the JV agreement to protect the landlord’s income fee split on the agreed profit share arrangement, which should take into account the capital expenditure input made. Safeguards should include ratchet clauses so that the percentages of equity in the JV alter based on the performance of the business, and contain change of control and assignment restrictions, so that the landlord retains control on who it is in partnership with.

Flexible offices provide landlords with a great opportunity to diversify their offerings from traditional leases to serviced offices, incentivising them to modernise buildings in more fringe locations and re-position their own brand, either directly or via collaboration, to meet market needs. There are a number of options open to landlords and a number of legal safeguards available to help mitigate potential risks. However the secret to long-term success lies in landlords ensuring that they only enter into collaborations with entities that they have properly considered, and which have a vision that is line with their own.

This article was originally published by CoStar News on 11 December 2019.

If you’d like to read on this topic in more detail, see our previous article, entitled “Flexible working: sub-brand, sub-let or JV” originally published by Estates Gazette on 25 October 2019.

Pittsburgh employers: It’s wise to review your policies concerning the new Paid Sick Days Act

In 2015, the City of Pittsburgh enacted the Paid Sick Days Act (the “Act”). The Act requires all private employers within the City of Pittsburgh to provide paid sick leave benefits to all full or part-time employees under the following guidelines:

• Employers with 15 or more employees must provide workers with up to 40 hours of paid sick time per year.
• Employers with fewer than 15 employees must provide workers with up to 24 hours of sick time per year. This requirement may be unpaid for the first year after the Act becomes effective. The sick time must be paid time after the first year.

There are exclusions:
• State and federal employees
• Independent contractors
• Construction union members covered by a collective bargaining agreement
• Seasonal employees (those working 16 weeks or less who are told their start and end dates when that are first hired.)

The act was supposed to take effect in 2016. However, a series of court challenges initially invalidated the Act and ultimately the validity of the Act was brought to the attention of the PA Supreme Court.

On July 17, 2019, the PA Supreme Court reinstated the Act.

What does this mean for Pittsburgh employers?

Employers should consider the Act as being in effect. Prior to the lower court rulings, the City posted notice and promulgated rules, meeting the requirements for the effectiveness of the Act. While retroactive application is unlikely, employers should consider the Act reinstated and in effective now.

Given the recent developments impacting the Pittsburgh Paid Sick Days Act, it is critical that employers with Pittsburgh-based employees immediately review their policies and practices for compliance with their obligations under the Act. There are also additional provisions to consider beyond the general paid sick time requirements.

For additional details, please see the blog entry posted by Reed Smith’s Employment and Law Practice attorneys.

Keep in mind that the Act establish minimums. Any employer whose existing paid leave policy provides the functional equivalent or greater benefits or protections will be in compliance with the Act.

The Act will impact employers in ways large and small. We again urge all employers with Pittsburgh-based employees to immediately review their policies and practices to ensure they are in compliance.

French CNIL data protection authority hits property management firm with large GDPR violation penalty

In a blog entry posted on Reed Smith’s Technology Law Dispatch Blog, authors Daniel Kadar and Laetitia Gaillard review the first large fine imposed under GDPR regulations. The company, French property management firm Sergic, failed to comply with its obligation to limit the storage of personal data and its security. The fine, €400,000, represents close to 1% of the company’s yearly turnover.

Property owners, managers and developers who operate in GDPR signatory countries should review their data security measures and  comply with the regulations to avoid significant penalties.

The complete blog post can be found here.

 

Telecoms Code – the price is right. Or is it?

Landowners have historically put unproductive parts of their land to use by allowing telecoms operators to site apparatus on them and charging the operators market rents. Increasingly, digital communication is perceived as a basic need, similar to gas, electricity and water, therefore demand for suitable sites to provide the infrastructure will only increase, particularly with the projected introduction of 5G technology.

In anticipation of this, the new Electronic Communications Code (the Code), introduced in 2018, changed the basis on which the valuation of such potential sites is calculated. It was felt by government that the value of agreements between landowners and telecoms operators should closer reflect the price that utilities companies pay landowners for wayleaves. While a landowner and operator would usually agree the terms of a deal, the Code provides a mechanism for an imposed settlement which produces a result much less generous to the landowner. Essentially, the value of the site to the telecoms operator must be ignored and instead only  the bare value of the site to the landowner is assessed.

The recent case of EE Limited and Hutchison 3G UK Limited v. The Mayor and Burgess of the London Borough of Islington concerned the use of roof space on a 10-storey block of council flats and offers the first example of the difference in valuing land use under the Code. Beyond its primary architectural purpose, the roof space was deemed to have negligible value to the landowner. The telecoms operator had offered the London Borough of Islington an annual rent of just over £2,000 for a 10-year lease, which the local authority had rejected.

During the course of the trial, after hearing expert evidence which differed greatly, offering rental values ranging from £1 to £13,250 per annum, the tribunal concluded that the roof space had nominal value only and found that an annual rent of £50 was appropriate. However, as well as any rent-like payment, the Code requires the tribunal to make an assessment of any loss or damage a landowner might suffer from the equipment being sited on its roof. For this, the tribunal must take into account the actual situation.

In this case the tribunal concluded that the actual loss to the landlord was also nominal, but felt that it was appropriate that the operator should contribute towards the cost of maintaining the building. The tribunal assessed this cost by reference to the actual service charge paid by the residential leaseholders in the building. On average, this was about £1,300, which the tribunal discounted for the services that the operator would not actually use, arriving at a sum of £1,000 per annum. A further compensation claim by the landlord, to try to take the sum back to pre-Code calculations was refused.

Economically, this is a very significant decision for both telecoms operators and landowners, as it sets the new criteria on the basis of which parties will be able to negotiate. Operators and landowners will of course seek to avoid litigation and come to an agreement wherever possible, but the line has now been drawn in the sand, so all parties should be aware of just how much the machinery of the Code could affect their deals.

How frustrating is Brexit?

In a painstaking judgment handed down yesterday morning, Marcus Smith J held that in the event that the United Kingdom does leave the European Union, as it is set to do on 29 March, this action does not operate to frustrate a lease entered into by the European Medicines Agency (EMA).

The EMA is an agency of the European Union, and holds a 25-year lease in Canary Wharf, which was granted in 2014. After the referendum in June 2016, the EMA decided that, under European law, it had to move its headquarters to a location still within the European Union. It found alternative premises in Holland, and sought a declaration from the court that it would be relieved of its tenancy obligations under the doctrine of frustration.

The doctrine of frustration, where contracts can be set aside if an unforeseen event either renders contractual obligations impossible, or radically changes a party’s principal purpose for entering into the contract, can apply in relation to leases. Case law, however, suggests that only something as extreme as the physical destruction of the subject matter of the lease will do. The courts have given examples, such as the upper floors of a block of flats being destroyed or the loss of a building to the sea.

A central plank of the EMA’s case was that, under European law, it was not allowed to sublet its premises. The judge rejected this argument for reasons that are beyond the scope of this blog, and concluded that subletting was not outside its powers. However, he then went on to hold that in any event the situation was not so unexpected that the lease could be held to have been frustrated. Indeed, he pointed out that the landlord had made elaborate provision in the lease to protect its position should the EMA wish to assign or sublet its lease.

This ruling will be a relief for landlords, who otherwise feared that any tenant badly affected by Brexit would be able to argue that their lease was frustrated. However, this is unlikely to be the end of the matter for the EMA given its particular circumstances. It remains to be seen whether the EMA will apply to the European Court of Justice for a declaration under European law on the EMA’s power to sublet, or whether it will seek leave to appeal to a higher court. However, the scope of the doctrine of frustration is unlikely to be extended to cover substantial political events, such as Brexit.

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