UK Government extends moratorium on commercial evictions to March 2022

In a move which has shocked the property industry, the government has extended the ban on commercial lease forfeiture again, this time for a further nine months to 25 March 2022. Commercial Rent Arrears Recovery is similarly deferred, with tenants having to have built up 554 days of unpaid rent before landlords are able to take bailiff action.

A new scheme has also been introduced to support businesses affected by Covid closures, intended to “ringfence” rent arrears built up during the periods of enforced closure due to the pandemic. Under the scheme, disputes between landlords and tenants will be subject to a binding arbitration process before taking the matter to court. This boat will largely have sailed by now, with many landlords and tenants having either made their own agreements or proceedings having been issued in line with current requirements.

Regulations are also set to be introduced extending restrictions on the issue of statutory demands and winding up petitions where debts relate to the pandemic for a further three months, until 30 September 2021. In reality, the ability to pursue insolvency action is more valuable to the majority of landlords than the ability to forfeit. Whether this deadline will be pushed out again is yet to be seen.

You can read the government’s full press release here: https://bit.ly/2SE3BZS

Regis CVA revoked on a technicality – Good news for landlords?

Hair salon chain Regis’s company voluntary arrangement (CVA) was revoked on 17 May in a hearing that considered several arguments put forward by a number of landlords. The judge found that one of the creditors had been incorrectly categorised by the nominees as critical, and that this treatment unfairly prejudiced the landlords. On that ground alone, the court revoked the CVA, but the court rejected all of the landlords’ other arguments, which were similar to those presented in the challenge to New Look’s CVA.

Property owners will be reassured to see that the courts are prepared to closely scrutinise the decisions taken by nominees. In truth however, this isn’t a victory for landlords as a class of creditor. The CVA deck remains firmly stacked against landlords, and this revocation represents a win on a technicality rather than the start of a shift in the balance of power.
It is interesting to see the courts revoke the CVA on the grounds of unfair prejudice, however, as this is one of the first times we’ve seen such a challenge succeed. This is more a reflection of the peculiarities of the Regis CVA, where one creditor had wrongly been treated as critical, than the start of a wave of successful challenges. Landlords should avoid getting too excited
The landlords made the usual arguments to challenge a CVA, including the lack of weighting given to their votes, but the court rejected them once again. Aside from the faintest glimmer of good news, it is unfortunately business as usual for landlords. When it comes to revoking CVAs, the floodgates look set to remain firmly shut.

Given the judgments we’ve seen over the past year, a win in the landlord column stands out in the sector, but does little to balance the scales. One ray of sunshine isn’t enough to pierce the storm clouds still hanging over the heads of UK commercial property owners.

Ending Some State- and City-Level Opportunity Zone Tax Benefits in New York

The federal opportunity zone program (26 U.S.C. Sec. 1400Z et seq., the “OZ Program”) provides tax benefits to encourage private investment in economically distressed areas.  More than 8,700 census tracts, located in every state, Washington, D.C., and five U.S. territories, were designated as opportunity zones.  Proponents hoped that investments in these communities would spur economic development and job creation in needy communities.  Many states and localities, including New York City and New York State, aligned their tax codes with the incentives provided under the OZ Program.

However, critics have noted that some projects have failed to generate the social benefits promised by the OZ Program.  Legislators in New York have removed some of the benefits of the OZ Program for residents of New York and some non-residents with gains from New York property.  This blog post gives a brief overview of the benefits provided through the OZ Program and how these benefits were incorporated into New York’s tax code, and then describes how new legislation will strip some of these benefits for purposes of New York State and New York City taxes, while retaining others.

OZ Program Tax Benefits

Broadly speaking, the OZ Program provides taxpayers who invest qualifying gains in an opportunity zone and hold their investment for at least ten years with three benefits.  First, under 26 U.S.C. Secs. 1400Z-2(a) and (b)(1), the recognition of the qualifying gains is deferred until December 31, 2026 (the “Deferral Benefit”).  Second, pursuant to 26 U.S.C. Secs. 1400Z-2(a) and (b)(2)(B), as of this year, the amount of gain subject to tax is reduced by 10% (the “Reduction Benefit”).  No Reduction Benefit is available for investments made after 2021.

Finally, any gain on investments in opportunity zones held for at least ten years is entirely excluded from gross income for tax purposes as a result of 26 U.S.C. Secs. 1400Z-2(a) and (c) (the “Exclusion Benefit”).  Generally, to take advantage of the OZ Program, investments are made in qualified opportunity zone funds (“QOFs”), which are established as corporations or partnerships to permit taxpayers to take advantage of the OZ Program benefits by investing in opportunity zones and following certain rules.

By way of example, if an individual sold stock held for at least one year in 2021 and thereby generated $1 million of gains, these gains would typically be subject to tax.  If the individual instead invested their gains in a QOF in 2021, did not sell the investment for at least ten years, and then sold the investment in 2031 for a further $3 million gain, the individual would (i) defer recognition their $1 million in capital gains until December 31, 2026 by applying the Deferral Benefit; (ii) be required to pay tax on only $900,000 (i.e., $1 million reduced by 10%) as a result of the Reduction Benefit; and (iii) not pay any tax on the subsequent $3 million gain by virtue of the Exclusion Benefit.

New York Conformity

Historically, New York automatically followed changes to the federal tax code through its use of federal adjusted gross income as the starting point for determining New York taxable income for personal income tax purposes, and federal taxable income for determining the New York corporate franchise business income base.  This “rolling conformity” normally simplifies filings for New York taxpayers and thus permits New York taxpayers to immediately apply taxpayer-favorable changes to their federal and New York taxes.  As a result, prior to passage of the new law, New York taxpayers could obtain the same benefits of deferral, reduction, and exclusion for New York tax purposes, because state income would be deferred, reduced, or excluded to the same extent as it would be under federal law.

However, New York can choose to diverge from its rolling conformity policy by selectively “decoupling” from federal tax provisions.  Such decoupling alters application of federal rules to taxes levied by New York.  By way of its authority to amend the New York City Administrative Code, the New York State Assembly can decouple the income definitions at both the state and city level.

Decoupling under New Legislation

New York’s FY 2022 budget (the “Budget”), signed into law on April 19, decouples from part of the OZ Program for purposes of New York State and New York City taxpayers.  This decoupling was achieved by changing the definitions of certain key provisions of the New York State Tax Law (the “NYSTL”) and the New York City Administrative Code (the “NYCAC”).

Sections 208(9), 612, and 1503 of the NYSTL define “entire net income” and “New York adjusted gross income” as generally equivalent to entire taxable income and adjusted gross income, respectively, as calculated under federal law, comporting with New York’s general rolling conformity policy.  Equivalent provisions are found in NYCAC Sections 11-602, 11-652, and 11-1712.  Nevertheless, each of these sections also provides for further New York State- or New York City-specific adjustments, thereby allowing New York State and/or New York City to decouple from federal tax law in particular areas.

The Budget amends each of these sections of the NYSTL and NYCAC to (1) add back to entire net income any amounts deferred or reduced with the Deferral Benefit or the Reduction Benefit for New York corporate franchise tax purposes, (2) add to New York adjusted gross income any income that otherwise would have qualified for the Deferral Benefit or the Reduction Benefit for New York State and New York City personal income tax purposes, and (3) require inclusion of any amounts deferred with the Deferral Benefit or reduced with the Reduction Benefit in the computation of entire net income for purposes of New York City business corporation tax.  Finally, the Budget makes clear that these changes apply to taxable years beginning on or after January 1, 2021.

Summary

The changes made by the Budget to the NYSTL and the NYCAC effectively decouple New York State and New York City tax policy from federal tax policy, at least as far as the Deferral Benefit and the Reduction Benefit are concerned.  Going forward, a resident of New York State and/or New York City will not be able to defer payment of New York State and/or New York City taxes on capital gains through the OZ Program, even if those funds are invested in a QOF in compliance with federal law.  Such resident would also not be able to use the OZ Program to reduce the amount of taxes on capital gains owed to New York State or New York City.

It also bears noting that these rules could even apply to a nonresident of New York State or New York City.  If the source of the gains that a nonresident individual sought to invest through the OZ Program resulted from the sale of New York real or tangible property or as the result of business conducted in New York.  The changes made by the Budget are wide-reaching in scope and application and even nonresidents of New York State or New York City should be aware of them.

Nevertheless, several important OZ Program benefits still remain even for residents of New York State or New York City.  First, the Exclusion Benefit is not altered by the Budget.  This means that a resident of New York State or New York City who invests qualifying gains in a QOF, holds the investment in the QOF for at least ten years, and follows all other applicable rules can still exclude from their future income, for purposes of New York State and/or New York City taxes, the capital gains on the sale of their investment in the QOF.  The Exclusion Benefit is arguably the most important benefit for investors using the OZ Program, as investments in opportunity zones by their nature provide the possibility for large returns upon exit, and these returns would be completely tax free at the federal, state, and local levels.  Second, even New York City residents who would stand to lose the most from the changes included in the Budget still benefit from the Deferral Benefit and the Reduction Benefit on their federal taxes.

As a taxpayer’s federal tax burden is often much larger than their state or local tax burden, this means that the bulk of the benefits of the OZ Program still remain available for residents of New York State or New York City.  However, such taxpayers should be aware that the decoupling caused by the Budget will likely increase the complexity of their tax filings, and should work with their tax advisors to ensure that city, state, and federal rules are properly followed.  Nevertheless, if Congress passes President Biden’s proposed tax increases, which among other items dramatically increase tax rates for capital gains and eliminate the step-up in basis upon death, the tax benefits provided by the OZ Program could become much more attractive even following the changes discussed in this post.

Die COVID-19 Gesetzgebung in Deutschland

Mietverträge werden dadurch bestimmt, dass der Vermieter dem Mieter den Mietgegenstand überlässt und der Mieter dafür Miete zahlt. Ist der Mieter mit der Zahlung der Miete im Rückstand in Höhe eines Betrages, der mindestens 2 Monatsmieten entspricht, ist der Vermieter zur Kündigung des Mietverhältnisses berechtigt (§ 543 Abs. 2 Nr. 3 BGB). Aber den Mietern fällt es schwer, im lock down Miete zu zahlen, wenn ihre Geschäfte und Praxen infolge COVID 19 bedingter Beschränkungen geschlossen sind. Der Gesetzgeber hat versucht, den Mietern zu helfen.

Das März-Gesetz

Am 25. März 2020 verabschiedete der Deutsche Bundestag das Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht (BT DruckS 19/18110). Das Gesetz mit dem komplizierten Namen schränkt das Recht der Vermieter zur Kündigung von Mietverhältnissen ein. Dies gilt sowohl für Wohn- als auch für Gewerberaum sowie Grundstücksmietverträge. Die Regelungen werden auch auf Pachtverhältnisse erstreckt. Wegen Mietschulden aus dem Zeitraum vom 1. April 2020 bis 30. Juni 2020 dürfen Vermieter das Mietverhältnis nicht kündigen (Neufassung von Art. 240 EGBGB), wenn Mieter glaubhaft machen, dass die Nichtzahlung der Miete auf der COVID-19-Pandemie beruht. Diese Regelung wird als ungenügend angesehen. Die Beschränkungen des Kündigungsrechts gelten nämlich für Mietrückstände nur aus den drei Monaten April, Mai und Juni 2020 und nur bis zum 30. Juni 2022 (Art. 240, § 2 Abs. 4 EBGB). Danach entsteht das Kündigungsrecht der Vermieter wieder. Dies bedeutet, dass wegen berechtigter Zahlungsrückstände aus der Zeit vom 1. April 2020 bis zum 30. Juni 2020 die Vermieter doch wieder kündigen dürfen, wenn die Rückstände nicht bis zum 30. Juni 2022 ausgeglichen sind. Die Miete wird also lediglich bis zum 30. Juni 2022 gestundet. Aber auch die Vermieter halten die Regelung für nicht praktikabel. Während Mieter gegenüber Vermietern die Miete einbehalten dürfen, haben die Vermieter nicht auch dasselbe Recht gegenüber ihren kreditfinanzierenden Banken, sondern sind womöglich gezwungen, ohne Mieteinnahmen weiterhin die Raten an die kreditfinanzierenden Banken zahlen zu müssen. Schließlich gab es Rechtsunsicherheiten darüber, unter welchen Voraussetzungen die Nichtzahlung der Miete auf der COVID-19-Pandemie beruht und auf welche Weise Mieter das glaubhaft machen können (weitere Ausführungen im link).

Originaler Reed Smith Beitrag: Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafrecht – Auswirkungen für die Immobilienwirtschaft

Das Dezember-Gesetz

Am 17. Dezember 2020 verabschiedete der Deutsche Bundestag das Gesetz zur weiteren Verkürzung des Restschuldbefreiungsverfahrens und zur Anpassung pandemiebedingter Vorschriften im Gesellschafts-, Genossenschafts-, Vereins- und Stiftungsrecht sowie im Miet- und Pachtrecht (BT-Drucks. 761/20). Eine der zentralen Regelungen dieses Gesetzes mit dem noch komplizierteren Namen ist Folgende: Sind vermietete Grundstücke oder vermietete Räume, die keine Wohnräume sind, infolge staatlicher Maßnahmen zur Bekämpfung der COVID-19-Pandemie für den Betrieb des Mieters nicht oder nur mit erheblicher Einschränkung verwendbar, so wird vermutet, dass sich insofern ein Umstand im Sinne des § 313 Abs. 1 des Bürgerlichen Gesetzbuchs (BGB), der zur Grundlage des Mietvertrags geworden ist, nach Vertragsschluss schwerwiegend verändert hat (Art 140, § 7 Abs. 1 EGBGB). Die Regelung ist auf Pachtverträge anwendbar. Die Vermutungsregelung soll auch auf vergangene Sachverhalte anwendbar sein und am 20. September 2022 außer Kraft treten. Mit dieser Regelung will der Gesetzgeber den gewerblichen Mietern und Pächtern helfen. Rechtsfolge des § 313 Abs. 1 BGB ist nämlich, dass bei Störung der Geschäftsgrundlage eines Vertrages die Anpassung des Vertrages verlangt, oder wenn dies nicht möglich ist, der Vertrag gekündigt werden kann. Der Umstand, dass COVID-19-bedingte Beschränkungen der Nutzung von Gewerbemieträumen die Geschäftsgrundlage stören (tatsächliches Element), wird jetzt gesetzlich vermutet. Damit sollen die gewerblichen Mieter und Pächter das Recht erhalten, aufgrund COVID-19-bedingter Nutzungs- und Umsatzeinbußen die Anpassung des Mietvertrages verlangen zu können. Das gelingt aber nicht automatisch. Die Anpassung des Vertrages nach § 313 Abs. 1 BGB setzt nämlich nicht nur die Störung der Geschäftsgrundlage (tatsächliches Element) voraus, sondern auch die Hypothese, dass bei Kenntnis dieser Veränderung die Vertragsparteien den Vertrag nicht oder nicht so geschlossen hätten (hypothetisches Element) und einer Partei unter Berücksichtigung aller Umstände des Einzelfalls, insbesondere der vertraglichen oder gesetzlichen Risikoverteilung das Festhalten am unveränderten Vertrag nicht zugemutet werden kann (normatives Element). Diese weiteren Tatbestandsmerkmale (hypothetisches und normatives Element) sind nicht Gegenstand des Gesetzes. Dafür bleiben die Mieter/Pächter beweisbelastet. Grundsätzlich trägt nämlich nach wie vor der Mieter das Risiko der Verwendbarkeit des Mietgegenstandes. Insofern wird es maßgeblich davon abhängen, wie stark sich die staatlichen Beschränkungen auf den Betrieb des Mieters auswirken, ob der Mieter Vorsorge getroffen hat, ob der Mieter Zuschüsse erhalten hat, ob Mieträume im Zusammenhang mit online Handel nutzbar sind (click and collect, klick and meet). Diese Umstände unterliegen naturgemäß der einzelfallbezogenen Bewertung. Ein Automatismus ist die Vertragsanpassung (etwa in Form der Mietminderung) nicht. Anzuraten ist, dass Vermieter und Mieter eine Vereinbarung über die Verteilung der Lasten treffen. Dafür gibt das Gesetz zumindest Anhaltspunkte (weitere Ausführungen im link).

Originaler Reed Smith Beitrag: Gesetz zur weiteren Verkürzung des Restschuldbefreiungsverfahrens und zur Anpassung pandemiebedingter Vorschriften im Gesellschafts-, Genossenschafts-, Vereins- und Stiftungsrecht sowie im Miet- und Pachtrecht*

COVID-19 Legislation in Germany

Tenancy agreements are determined by the landlord handing over the rented property to the tenant – and the tenant paying rent for it. If the tenant is in arrears with the equivalent to at least 2 months’ rent, the landlord is entitled to terminate the tenancy (section 543 para. 2 no. 3 of the German Civil Code (BGB)). The law is designed to help tenants who are having difficulty paying rent due to their shops and practices being closed under COVID-19 lockdowns.

The March Law

On March 25, 2020, the German parliament (Bundestag) passed the Law to Mitigate the Consequences of the COVID 19 Pandemic in Civil, Insolvency and Criminal Proceedings (BT DruckS 19/18110). The law with the complicated name restricts the landlords’ right to terminate tenancies. This applies to both residential and commercial tenancies as well as property leases. Accordingly, the regulations cover leases. Landlords may not terminate the tenancy due to rent arrears arising from the period April 1 to June 30, 2020 (revised version of Art. 240 of the Introductory Act to the German Civil Code (EGBGB) if tenants can credibly demonstrate that the non-payment of rent was caused by the COVID-19 pandemic. Some consider this provision to be inadequate. Indeed, restrictions on termination rights apply to rent arrears accrued in only three months: April, May and June 2020; and the grace period lasts only until June 30, 2022 (Art. 240, section 2 para. 4 EGBGB). After this period, landlords regain their termination rights. This means that landlords may terminate lease agreements for legitimate payment arrears from April 1, 2020 to June 30, 2020 if the arrears are not settled by June 30, 2022. The rent will therefore only be deferred until June 30, 2022.

Landlords have pointed to the regulation’s insufficiency. While tenants are allowed to withhold rent from landlords, landlords do not have the same right vis-à-vis their credit financing banks, but may be forced to continue paying instalments to the credit financing banks without rental income, they have argued. Finally, there was legal uncertainty about the conditions under which non-payment of rent is based on the COVID-19 pandemic and how tenants can credibly demonstrate these conditions (visit the link for further details).

Original Reed Smith publication: Law to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal law – implications for the real estate industry

The December Law

On Dec. 17, 2020, the German parliament (Bundestag) passed the Law on the Further Shortening of the Residual Debt Relief Procedure and on the Adjustment of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law as well as in Tenancy and Lease Law (BT-Drucks. 761/20). One of the central regulations of this law with the even more complicated name is the following: If, as a result of government measures to combat the COVID-19 pandemic, leased land or leased premises that are not residential premises cannot be used for the tenant’s business or can only be used with considerable restrictions, it is presumed that in this respect a circumstance within the meaning of section 313 para. 1 of the German Civil Code (BGB), which has become the basis of the lease, has significantly changed after the conclusion of the contract (Art. 140, section 7 para. 1 EGBGB). The regulation is applicable to lease agreements. The presumption rule shall also apply to past facts and shall expire on Sept. 20, 2022. With this provision, the legislator intends to help commercial tenants and leaseholders. The legal consequence of section 313 para. 1 BGB is that if the basis of a contract is disturbed, the adjustment of the contract can be demanded, or if this is not possible, the contract can be terminated. The fact that COVID-19-related restrictions on the use of commercial rental space disrupt the basis of the contract (factual element) is now legally presumed. This aims at giving commercial tenants and lessees the right to demand an adjustment of the tenancy due to COVID-19-related restrictions on use and turnover decrease. However, this does not occur automatically. The adjustment of the contract according to section 313 para. 1 BGB requires not only the disturbance of the basis of the contract (factual element), but also the hypothesis that if the parties had foreseen these changes they would not have concluded the contract or would not have concluded it with this content (hypothetical element) and that one party cannot reasonably be expected to adhere to the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or legal distribution of risk (normative element). These further elements (hypothetical and normative element) are not the subject of the law. The burden of proof remains on the tenant/lessee. In principle, the tenant still bears the risk of the usability of the leased property. In this respect, it will largely depend on the extent to which the state restrictions affect the tenant’s business, whether the tenant has taken precautions, whether the tenant has received subsidies, whether rented premises can be used in connection with online trade (click and collect, click and meet). These circumstances are naturally subject to case-by-case evaluation. Contractual adjustment (for example, in the form of rent reduction) is not automatic. It is advisable that landlord and tenant reach an agreement on the distribution of burdens. The law at least provides indications for this (visit the link for further details).

Original Reed Smith publication: Law on the Further Shortening of Residual Debt Relief Proceedings and on the Adjustment of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law and in Rental and Lease Law*

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.

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