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Real Estate IHL Series – Wait, what?

As we emerge from lockdown, the pace of change in the real estate world is increasing once again.  Michael Callaghan looks at what the legal landscape looks like in the coming months.

Climate change

The Government is planning significant changes to the Minimum Energy Efficiency Standards (MEES) and the provisions that apply to Energy Performance Certificates (EPCs) to drive down carbon emissions from buildings.

  • Currently letting property with an EPC rating below E breaches MEES unless an exemption applies. From 2030 this will apply to lettings with a rating below B.
  • There will be a new obligation on property owners to renew EPCs when they reach the end of their ten-year lifespan so that there is always a valid EPC for a property.
  • Two-yearly compliance windows for MEES will be introduced with all exemptions from MEES being reviewed at the end of each compliance period.
  • On shell and core lettings, the tenant’s works can have a major impact on the EPC rating. Therefore, tenants should bear some of the responsibilities for complying with MEES.
  • It will be easier to apply of an exemption where works are not cost-effective. The obligation to obtain three quotes for the works will be removed and there will be a new payback calculator to determine whether the exemption is met.

For property owners, these proposals are inevitably going to increase compliance costs. Landlords will have to review their portfolios to determine if they will be adversely affected by the new proposals and look to schedule improvements to bring buildings up to an EPC B rating. Whether or not some of those costs can be passed on to the tenants will depend on the terms of any existing lease where the property is already let.

New leases will need to be negotiated in light of the proposed changes. Landlords might argue that the tenant should pay for any future energy efficiency improvements as they will reap the benefit of lower energy bills. Tenants will argue that the landlord should bear the cost as it will enjoy a greater benefit through increase in the capital value of and the continued ability to let the property.

Annual Energy Usage

An EPC measures only anticipated energy usage and efficiency. To show actual energy usage, the Government is proposing new procedure to monitor actual energy use commercial property over 1000 m2. This will be introduced for office buildings initially but will be extended to other types of property is due course.

  • Qualifying properties will need to register in 2022/2023
  • Metered energy use data (and other relevant information) will need to be submitted annually to a ratings administrator
  • The ratings administrator will issue a rating based on the building’s annual energy and carbon performance;
  • The rating will need to be disclosed, publicly, both in the building and online.

Protections for commercial tenants

Further changes have been announced to protect tenants affected by the coronavirus pandemic.

  • The moratorium on landlords forfeiting leases for non-payment of rent (and that includes any sums due under the lease) has been extended to 25 March 2022 (30 September 2021 in Wales);
  • As a consequence of this extension, the current restrictions on exercising rights under the commercial rent arrears recovery procedures will be extended to the same dates but the number days’ rent that must be outstanding will remain at 554 days.
  • The restrictions on serving statutory demands and commencing winding-up proceedings has been extended to 30 September 2021; and
  • The Government is going to introduce legislation requiring landlord and tenants to negotiate Covid-19 rent-relief packages and, if they have not done so by a backstop date, there will be a binding arbitration procedure that will be put in place with both the landlord and the tenant bound by the outcome of that arbitration.

Use Classes Order

Rights: Community Action commenced judicial review proceedings challenging the validity last year’s changes to the Use Classes Order. The Court of Appeal hear an application for leave to appeal against the High Court’s decision upholding the validity of the Order, and if leave is given, the appeal itself, in a combined hearing. The date has not been set for this hearing. Until the matter is disposed of, we recommend that clients refer to the Use Classes (Order) 1987 as in force on 1 August 2020 and the old use classes to avoid the complications that would arise if the Court of Appeal quashed the changes to the order.

Rates avoidance schemes

Property owners can create Special Purchase Vehicle (SPV)companies and let their empty premises to them. If the SPVs are then placed into liquidation the liquidators can obtain full rates relief. If they are dissolved, liabilities (including for business rates pass) to the Crown bona vacantia. In Hurstwood Properties (A) Ltd v Rossendale BC, the Supreme Court held that it was arguable that the SPVs were not capable of occupying and using the properties so liability for business rates remained with the property owner. The Supreme Court has remitted the case back to the High Court to determine the issue.

Recovery of rent under leases

In two recent High Court cases the judges have held that tenants remain contractually liable for rent, insurance rent and service charge under their leases during the coronavirus lockdown periods in 2020/2021 notwithstanding that they could not open their premises to the general public. There were no grounds for implying a rent suspension provision in the leases for pandemic closures or extending insurance provisions to cover losses arising from the pandemic.

CVAs and restructuring

Tenants will be happier with the outcome of three recent cases on Company Voluntary Arrangements (CVAs) and company restructurings where landlords (as a class of creditor of the failing company) can have significant changes to the terms of their leases imposed by the CVA or restructuring plan including moving to a turnover rent basis or effectively reducing the rent that they receive to zero. These changes were said to be fair where the landlord was given the option of terminating the lease it is was unhappy with the changed terms.

Restructuring plans under Part 26A Companies Act 2006 have to be fair but this does not prevent some landlord being treated more favourably whilst others might not receive any money or a much-reduced amount. As long as the company has good commercial justification for its proposals, it is likely to be seen as fair by the court. The purpose of the process is to rescue the company. The court can impose the restructuring plan on dissenting creditors where it is right to do so.

CVAs can substantially re-write the bargain between the landlord and the tenant under the terms of a lease where the tenant is in financial difficulties. The takeaway message for landlords is that the courts will favour rescuing the company over preserving the bargain between the landlord and the failing tenant. Landlords faced with tenants entering into a restructuring plan or CVA need to get early legal advice on what the plans entail and to ensure that that they are being imposed fairly.

Conclusion

The pandemic may have slowed down changes in the property world for a period but we are now seeing a plethora of developments across all sectors for which legal advisers need to be prepared.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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