On March 31, 2023, the United States District Court for the Southern District of New York declared New York City’s Guaranty Bill unconstitutional, finding it violates the United States Constitution’s Contracts Clause. New York City landlords may now be able to seek previously unenforceable arrears from commercial lease guarantors owed from March 7, 2020 through June 30, 2021. See the linked decision for further details.
The emergence of the COVID-19 pandemic in 2020 transformed the global hospitality industry as governments imposed lockdowns in an attempt to stop the virus’s spread, which halted global travel and inhibited the vast majority of in-person events. This was an unprecedented challenge for the industry, which was required to quickly adapt and innovate in order to survive.
The industry has bounced back and proven to be hugely resilient and innovative, coming through the worst of the pandemic and discovering new ways to provide services to clients. However, the hospitality industry is now facing several other factors that are driving significant change and providing fresh challenges and opportunities.
In an effort to support the industry in preparing for the future, lawyers from across Reed Smith’s global real estate team have contributed to this report to provide an A–Z guide on what tomorrow’s hospitality world could look like and how to navigate the legal and regulatory challenges and opportunities that the shifting landscape presents. Themes considered include finance, sustainability, tech and marketing, new trends, data and employment. We hope you enjoy reading the report and as always, we welcome your feedback and questions.
Retail took a big hit in 2022 with 17,145 shops closing, a 50% increase on 2021. Large and small names alike were effected: Joules, M&Co and T M Lewin were hit hard, totalling 6,055 shop closures and 151,500 jobs lost. 1/3 of these closures were due to insolvency and the rest because of need to cut cost or rationalisation. 2023 will see these trends continue as retailers continue to struggle to with their operating costs.
The Product Security and Telecommunications Infrastructure Act 2022 received Royal Assent on 6th December 2022. This means greater balance towards landowners and telecoms operators along with supporting 5G and fibre network rollouts. However, there still needs to be more regulations to be passed for the provisions to become effective in 2023.
By Phillip H. Babich and Sara M. Eddy
Less parking and more housing, or just less parking?
Figuring out parking configurations for development projects in California will get a little easier for developers starting January 1, 2023. The state legislature has adopted Assembly Bill 2097 (AB 2097), and Governor Gavin Newsom (D) signed it into law on September 22, 2022.
AB 2097 prohibits public agencies from imposing or enforcing minimum automobile parking requirements for residential, commercial, or other development projects if the project is one-half mile walking distance of a “high-quality transit corridor” or a “major transit stop.” A high-quality transit corridor is a corridor with fixed-route bus service with service intervals no longer than 15 minutes during peak commute hours. A major transit stop is a site containing an existing rail or bus rapid transit station, a ferry terminal served by bus or rail, or the intersection of two or more major bus routes with a frequency of 15 minutes or less during peak commute periods.
That means a developer with a qualifying project can devote more real estate to floor space and units, and less to parking spaces. AB 2097 may help reduce housing costs and greenhouse gas emissions while increasing the number of available housing units, according to the bill’s legislative findings.
There are a number of exceptions to the rule. For example, a public agency may require minimum parking for a project, if doing so is necessary to avoid a substantial negative impact on the city or county’s ability to meet regional housing needs for the low-income, disabled or elderly, or on existing parking within one-half mile of the proposed project.
In addition, AB 2097 does not apply if it would conflict with a public agency’s contract executed before January 1, 2023, provided that any commercial parking required under that contract is shared with the public. The bill also excludes projects where any portion is designated for use as a hotel, motel, bed and breakfast inn, or other transient lodging. However, projects with a portion designated for use as a residential hotel containing six or more guestrooms used as a primary residence mostly by transient guests do fall under AB 2097.
Other exemptions include housing projects that dedicate a minimum of 20 percent of their housing units to low- or moderate-income households or students, the elderly, or persons with disabilities, and projects containing fewer than 20 units or those subject to parking reductions based on other laws are also exempt.
Public agencies can still enforce existing requirements for new multifamily residential or nonresidential developments within one-half mile of public transit to provide parking spaces with electric vehicle supply equipment or parking spaces that are accessible to persons with disabilities.
According to the California Daily News, some of the bill’s opponents say that AB 2097 could weaken local efforts already underway to increase affordable housing production near transit centers. One possible scenario is that a local agency may offer reductions in parking requirements if the developer adds affordable housing units to its project. With AB 2097, the developer does not need the local incentives; it can rely on AB 2097 for parking reductions and not add affordable units. The state, according to the governor’s signing message, will be watching for “earnestly unintended consequences.” The Department of Housing and Community Development will closely monitor the effects of AB 2097, which, according to the Daily News, is the first bill of its kind in the United States.
Brad Trerise has written a client alert on the recent appeal case made by several large cinema chains over the the payment of outstanding rent for periods of the Coronavirus pandemic, during which they were forced to close.
- Cine UK, Cineworld and various other cinema firms appealed on the basis of a novel argument – that the premises were rendered “unfit for use”, under the terms of the leases, due to the government lockdown legislation. In previous cases, this clause has explicitly referred to the physical state of the premises only.
- The Court of Appeal rejected this nuanced interpretation, ruling that when drafting the lease documents, a condition to the like of a pandemic, cannot be expected to have been considered as a potential source of rendering the premises unusable.
- The Court of Appeal also concluded that whilst the cinema firms had suffered financial damage over the pandemic, this was not in anyway related to the damage of the actual premises.
- The cinema tenants had hoped for the final judgement to be more favourable. However, the Commercial Rent (Coronavirus) Act 2022, could present Cine UK and Cineworld a final opportunity to appeal the granted summary judgement for the repayment of their arrears, as it allows for parties to apply for arbitration on coronavirus arrears disputes.
Read the full article here
Continuing on from our previous commentary on the Economic Crime (Transparency and Enforcement) Act (the ‘Act’), the new Register of Overseas Entities introduced by the Act (the ‘Register’) is now expected to be brought into effect on 1 August 2022. We must all be prepared for this new regime.
From the 1st August, overseas entities that own or wish to acquire land in the UK will have to register information about that overseas entity with Companies House, including disclosing information about the ultimate beneficial owners of that entity. Failure to comply with the registration requirements will not only adversely affect Real Estate transactions, but may even result in both criminal and financial penalties.
To learn more about the launch of the register, the verification process and next steps read the full article at reedsmith.com.
We have recently seen what may be the first award made under the arbitration scheme established under the Commercial Rent (Coronavirus) Act 2022. Ernest Jones and H Samuel, jewellery retailers, has been ordered to pay £450,000 in unpaid office rent, where it had been argued that the offices, its headquarters, served purely to support its retail business and were in effect ancillary to that business.
The Act provides relief for tenants in respect of the payment of “protected rent debt” for a period of six months from 25 March 2022. Protected rent is rent that was due from a tenant during any period where the tenant’s premises were subject to enforced closure or other government coronavirus sanctions, broadly between March 2020 and July 2021. It was designed to apply to the retail and leisure sector, who businesses were hard hit by closures and restricted trading.
Under the Act, either the landlord or the tenant is able to refer the matter of a protected rent debt to arbitration within the six month period from 25 March 2022. Until either the six months has passed without any reference to arbitration or an award has been made in the arbitration, the landlord is prevented from pursuing the debt by court action, insolvency, forfeiture or Commercial Rent Arrears Recovery.
In the Ernest Jones case, the arbitrator said that the business carried on from the particular premises was offices (whether or not the main business of the tenant was retail) and as the premises were therefore not subject to closure requirements, there could not be any protected rent debt. On this the Act is clear.
Arbitrations so far have been rarer than hens’ teeth. As expected, most landlords and tenants have already come to an agreement over rent arrears or, unfortunately, struggling tenants have succumbed to insolvency – the figures for company voluntary liquidations are up well over 100% year on year. Those tenants that do still have unpaid protected rent and have deep enough pockets may well be waiting until August to go to arbitration, in order to buy themselves even more time to pay while the arbitration process is ongoing beyond September.
Tucked away in Part 8 of the Levelling-Up and Regeneration Bill is a provision that may alarm commercial landlords. This provides for local authorities to intervene in the normal commercial landlord and tenant relationship and agree lettings of vacant high-street premises through auction.
The Bill gives the local authority the right to act where high street premises have been unoccupied for an entire year, or at least 366 days in the past two years, and where it deems the occupation of the premises for a suitable high-street use would be beneficial to the local economy, society or environment. “High-street use” is widely defined in the Bill and includes shops, offices, restaurants, bars, cafés, communal halls or meeting-places and even manufacturing processes.
If premises qualify, the Local Authority can serve notice on the landlord, valid for 10 weeks, during which the landlord will not be able to let the property without the Local Authority’s consent and then only if the letting begins within 8 weeks, lasts for at least a year and will have people regularly present at the property.
If no tenancy has been agreed within 8 weeks, the Local Authority can serve a final notice. At this point, the landlord can serve counter notice and, if necessary, appeal. Grounds for appeal include where the landlord intends to carry out development works and needs possession, or the landlord intends to occupy the premises himself. Other grounds are the premises are not vacant, they are not suitable for high street use or will not be of local benefit.
If the landlord doesn’t appeal or is unsuccessful, the property can be taken to auction, where the Local Authority can contract in its own name with a prospective tenant and can bind the landlord to that agreement. If the landlord does not agree to grant a tenancy of its own accord, the Local Authority can then grant the tenancy, with deemed consent from any superior landlord or mortgagee.
Is this merely a publicity stunt by the government? It seems to be based on the premise that landlords are allowing high street premises to remain empty rather than taking all possible steps to let them. Is the assumption that greedy landlords are simply holding out for higher rents than people are prepared to pay? How does that make any sense when the landlord’s business is in letting? The truth is that many landlords in this position are letting to tenants for low or no rent, particularly to charities. This is of course not entirely an altruistic move on the landlord’s part, but relates to a major issue, completely ignored in the Bill – rates.
Whilst business premises remain empty, without any lease in place, the burden of paying business rates falls to the landlord. Landlords are reluctant to terminate existing leases even where the tenant is not paying rent and is not in occupation because the rates liability rests with the tenant. Prospective tenants looking to bag a high street property at a local authority auction may well not be so keen on the rates liability, and nothing in the Bill suggests there will be any rates mitigation schemes for the lucky auction winners. That would definitely help the high street.
Issues around the process of getting interested parties to sign up where commercial landlords have failed aside, will local authorities seriously have the time, money or inclination for this? There are also question marks over the legality of authorities assuming the role of landlord at auction, and compelling landlords to complete new leases. This will no doubt attract much debate but it’s hard to see this provision seeing the light of day. This looks like a gimmick, not a plan.
It was less than five years ago that the Electronic Communications Code (the Code) came into force, but plans for reform are already making headway, with the Product Security and Telecommunications Infrastructure Bill 2021-2022 set to become law later this year.
Some of the key changes to the Code introduced by the Bill include:
- Enabling operators to automatically upgrade and share apparatus which was installed prior to 2017 (pre-Code), whereas under the current Code, a new agreement would have to be put in place
- A new procedure to allow operators to have temporary rights of access to land where a landowner is unresponsive
- Streamlining the renewal of expired telecoms agreements
- Streamlining the timescale for court/tribunal proceedings
- Active encouragement for alternative dispute resolution
The amendments to the Code greatly facilitate upgrades to telecoms apparatus and, in theory, these upgrades should speed up the process of finalising new telecoms agreements, a burden to both landowners and operators. It remains to be seen whether this will be true in practice and, indeed, whether it will significantly reduce the current amount of litigation. With the possible exception of less disruption caused by operators seeking to carry out upgrades to apparatus, unfortunately, the amendments offer little benefit to landowners who are already neglected under the Code. This comes with the caveat that operators are likely to upscale their operations in the coming years. There is little that can be done to oppose this, with the landowners’ sometimes useful ‘last resort’ tactic of ignoring requests from operators for site visits and new agreements in the hope that they do not want to make an application to the Tribunal, nullified by the Bill.
Crucially, the Bill does not address the prevailing issue of landowners being fairly compensated in terms of rent. Unless this changes, landowners will likely not be as excited as operators will be about the Bill, with private property rights being disregarded and rooftops filled at the expense of the fast-paced roll-out of digital infrastructure.