Breaking up: current issues surrounding lease break clauses

By Katherine A. Campbell on 21 April 2020 Posted in Real Estate (UK)

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

By Olivia May and Katherine A. Campbell on 1 April 2020 Posted in Real Estate (UK)

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?

By Nav Sahota on 12 December 2019 Posted in Real Estate (UK)

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

By James A. Holt, Jeffrey Wilhelm, Rachel O'Neill and Colin Wrabley on 19 July 2019 Posted in Real Estate (U.S.)

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

By Daniel Kadar and Laetitia Gaillard on 20 June 2019 Posted in Real Estate (UK), Real Estate France, Real Estate Germany

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?

By Katherine A. Campbell on 20 March 2019 Posted in Real Estate (UK)

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?

By Katherine A. Campbell on 21 February 2019 Posted in Corporate Real Estate, Real Estate (UK)

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.

Commercial service charges – a case for transparency

By Katherine A. Campbell on 20 February 2019 Posted in Real Estate (UK), Real Estate Management

The RICS Professional Statement on Service Charges in Commercial Property (the Professional Statement) comes into force for service charge periods commencing on or after 1 April 2019. What is it and why should we take notice?

Unlike previous codes of practice on service charges, this one has been published as a professional statement, meaning it contains mandatory requirements or rules that a member or firm is expected to adhere to. Only if there is a justifiable good reason for not following it can it be avoided, and in that case the surveyor’s clients must be specifically informed in writing. As such it is hoped that it will have the teeth that previous codes have perhaps lacked, in order to tackle the lack of transparency that still plagues this area of commercial property practice. It aims to promote best practice, uniformity and fairness and to improve professional standards.

Service charges are designed to cover the maintenance, repair and replacement costs of fabric and services within a property. They should never encompass improvement costs or fees relating to the owner’s investment interest, such as asset management fees and rent collection costs.

The Professional Statement contains nine mandatory requirements (or core principles), which are supported by best practice principles focussing on matters such as:

the transparency of service costs;
timeliness in issuing budgets and statement of actual expenditure;
the fair and reasonable apportionment of costs between occupiers; and
ensuring the cost of works represents value for money and is not profit-making.

As with previous codes, the Professional Statement cannot override the terms of a lease, but specific reference to code compliance in leases and in heads of terms is becoming increasingly common. For many years management contracts have demanded that managing agents comply with the RICS codes of practice. With the application of professional sanctions if the Professional Statement is ignored, this requirement will now be more meaningful than ever.

An issue that has been highlighted by Peter Forrester, chairman of the RICS Commercial Service Charge Professional Group, is the move in recent years towards shorter lease lengths, which makes it more difficult to manage and recover the costs of long-term major repairs and replacements. The tenant under a five-year lease is not going to accept liability for the replacement of a boiler or re-covering of a roof with a 25-year life span. This, Peter points out, could be readily addressed by the proper use of sinking and reserve funds in leases. These funds are strangely misunderstood, or not understood at all, by both the surveying and legal professions, but essentially can be described in the following way:

A sinking fund is intended to provide for the one-off cost of replacement of a wasting asset, usually plant and equipment, the life cycle of which would ordinarily run beyond the term of the lease. A reserve fund in contrast is intended to meet the cost of future maintenance and upkeep of the fabric and equipment, such as periodic redecoration during the term of the lease, in order to smooth out any variations in the amount of service charge payable each year. Tenants do not like surprises and planning for expenditure in this way at the outset of the lease would help to avoid disputes arising further down the line.

So, who holds the money in these funds and what happens at lease expiry?

Sinking funds should specifically be held on trust for the owner and occupiers from time to time, such that they effectively belong to the building and can be transferred with the building on sale if necessary. There is therefore no requirement for any part of the fund to be repaid to a tenant upon lease expiry, as it exists for the benefit of the building. Conversely, as a reserve fund relates to those costs that are reasonably incurred during the term of the individual lease, it is to be regarded as belonging to the tenant. If the fund has not been exhausted by expiry of the lease, the tenant is entitled to repayment of any monies it has contributed to the fund.

This article was originally published by CoStar News.

The Telecoms Code – A New Human Right?

By Claire Vermeulen and Jess Hartley on 7 November 2018 Posted in Real Estate (UK)

The first substantive decision under the new Electronic Communications Code (the ‘Code’) was given by the Upper Tribunal on 30 October 2018 and it’s not good news for landowners. This judgment confirms that any ambiguity in the Code’s wording will be resolved firmly in favour of operators delivering electronic communications.

We now live in an age where it is assumed that it is in the public interest to have a choice of high quality electronic communications services – amusingly referred to by the claimant’s counsel as the ‘human right of mobile telephony’.

The case was a stark warning for landowners that Code agreements don’t only come about between willing parties – the Tribunal may impose agreements by which unwilling landowners may be compelled to grant Code rights to operators.

Here, the winning operator was Cornerstone Telecommunications Infrastructure Limited (‘Cornerstone’). At this stage, all Cornerstone wanted to do was have a look to see if the University of London (‘University’) building would be a good place to install new telecommunications apparatus. However, the University was loath even to let Cornerstone get its foot in the door.

Cornerstone applied to the Tribunal to compel the University to grant it interim rights of access under the Code.

The Upper Tribunal clarified that the Code does indeed confer power on it to compel a landowner to grant interim rights to an operator for preliminary investigations. The only bit of good news is that interim rights do not carry any right of statutory continuation.

Cornerstone needed only to demonstrate ‘a good arguable case’ (i.e. a lower standard than for permanent Code agreements) that it could satisfy the two-limbed test under the Code for the imposition of interim rights of access. The two limbs are:

can the prejudice that Cornerstone’s access causes to the University be compensated adequately by money; and
was there a public benefit likely to result in the making of the order.

In applying the first limb, the Tribunal held that allowing Cornerstone access to the University’s building to carry out non-intrusive surveys could clearly be compensated by money.

It follows that as there is only a minor prejudice being caused, the level of public benefit required to satisfy the second limb needed only to be relatively modest to succeed. Loss of capacity and coverage on a neighbouring site was held to be sufficient to discharge this limb.

Developers should note that the Tribunal may not impose such an agreement if the landowner intends to develop the land to which the Code right would relate, but the level of intention required has yet to be tested. It is not yet known whether the tests generated from years of case law under Landlord and Tenant Act 1954 will apply in the same way here.

Leaving would-be developers aside, it is hard to conceive of a situation in which the first limb of the test would not be met – if redevelopment is removed from the equation, perhaps all other inconveniences can be compensated by money. If access to electronic communications is to be viewed as akin to a ‘human right’, the interests of landowners may very rarely outweigh this public benefit and landowners may be better off working with operators to secure agreements mutually beneficial for themselves, the operators and the rest of us.

Getting One Step Ahead Of The Trespassers

By Katherine A. Campbell on 26 October 2018 Posted in Real Estate (UK)

The recent case of Vastint Leeds BV v Persons Unknown is a welcome decision for developers, who are concerned about the possibility of trespassers on large development sites.

Vastint Leeds BV’s (Claimant) development site on the site of the old Tetley Brewery and adjacent land in Leeds has suffered in the past from trespassers. Due to the phased nature of the Claimant’s development plans, large parts of the site were and are likely to be vacant for a considerable period. Several of the buildings on the site are in an unsafe state and contain hazardous material, including asbestos. Despite having taken sensible precautions to secure the site with substantial fencing and security patrols, trespassers still managed to enter the site. Apart from travelers, nearby sites have also suffered from illegal raves and instances of fly-tipping, (the illegal dumping of waste products and materials).

Knowing of these potential trespassers, yet without any current ones, the Claimant succeeded in obtaining an interim injunction from the court against “persons unknown” either attempting to establish occupation on the site or organizing raves, thus preventing trespassers from entering or remaining on the site without the Claimant’s consent.

When deciding whether the injunction should be made final, the Court confirmed that it is possible to obtain an order against persons unknown in three instances:

1. Where the name of a specific defendant is simply not known;

2. Where there is a specific group or class of Defendants, some of whom are unknown; and

3. Where the Defendants are defined by reference to their future act of infringement

The court looked at whether there was a strong possibility that if not restrained the persons unknown would act in breach of the Claimant’s rights. The court also considered if having acted in breach of those rights, the resulting harm would be so grave and irreparable that even the grant of an injunction at the time of the breach or an award of damages would not be an adequate remedy.

While troubled by the lack of evidence as to the specific identity of persons likely to trespass, the Court was swayed by the potential for serious harm that could occur to trespassers entering the site to whom the Claimant owed the usual limited duty of care. There was also concern about potential harm to employees/contractors/agents of the Claimant (to whom it owed a much more significant duty of care) as a result of any infringement of the Claimant’s rights. The court also took into account the significant steps that the Claimant had taken to secure the site which had not prevented trespass in the past and which had resulted in significant loss to the Claimant.

This case will be helpful for problem sites, as having an injunction in place before any actual trespass occurs will accelerate the eviction process in terms of both civil and criminal enforcement action. What comes out of the case is the importance for any applicant to take all practical and commercial steps possible to protect the property beforehand. Property owners should also identify specific risks both from and to specific classes of people in the area. The decision indicates that if evidence supports action the courts are willing to act.