Time Running Out for Commercial Landlords with Low EPC Ratings

Landlords with buildings rated F and G on their EPCs only have until 31 March 2023 to improve the EPC rating or register an exemption. Failure to do either of these things could land them a fine of up to £150,000 and the risk of being “named and shamed”.

An EPC is an energy performance certificate, issued by an assessor, which details the energy efficiency of the property and is valid for 10 years from registration on the EPC Register.

From 1 April 2023, it will be unlawful for a landlord to continue to let a sub-standard property, unless an exemption applies and has been validly registered on the PRS Exemptions Register.

“Sub-standard” property means one having an EPC rating of below E.

If you have a sub-standard building, you will need to carry out energy improvement works to improve the rating to at least E or register an exemption.

The improvement works

The energy improvement works must be listed as a “relevant energy efficiency improvement” in the relevant regulations and must also be identified as a recommended improvement for the building in a green deal report, a recommendation report, or a report prepared by a surveyor.

Exemptions

If the following exemptions apply, then you can continue to let a sub-standard property. If an exemption applies (save for the first one listed below) then it must be registered on the Private Rented Sector (PRS) Register.

 ·       Lease term - Commercial properties let for more than 99 years or for less than six months do not need to comply.

 ·       Consent exemption - Can you enter the property to do the works if it is let? This will depend on the terms of the lease, which are not overridden by statute. If there’s no right of entry and the tenant doesn’t consent, you may be able to register a “consent exemption”. This exemption would expire when the tenant leaves the property.

 ·       All improvements made exemption – where you have made all the possible relevant energy efficiency improvements and the property is still below the minimum rating, or there are no improvements that can be made

 ·       Devaluation exemption - You might qualify for a “devaluation exemption” if a report says the installation of specific energy efficiency measures would reduce the market value of the property, or the building of which it forms part, by more than 5%.

 ·       Economically efficient exemption – where the costs of carrying out the relevant improvements will not be recovered within seven years.

 ·       Temporary exemption - if you buy a property subject to tenancies that is rated below E (which is of course a risk), then from 1 April 2023 you will be able to register a temporary exemption which lasts 6 months, designed to give you time either to improve the property (although you would need to check the leases to ensure you have a right of entry or get tenants’ consents) or to register a longer-term exemption.

Exemptions are personal, and do not attach to the property. So, if you buy a property where the seller has an exemption, you will need to register your own exemption after the transfer of ownership, and of course that means you would need to be certain you could do so.

Other than temporary exemptions (and the rule about length of lease term), exemptions generally last for 5 years.

Also bear in mind that the minimum standard of E is likely to rise in the coming years. The government’s 2021 consultation proposed raising the minimum standard for non-domestic properties to C in 2027, followed by B in 2030.

The government has yet to publish a response to that consultation, but it makes sense that if improvement works are undertaken that the opportunity is used to significantly improve a building’s energy efficiency, rather than aim for the bare minimum.

Register of Overseas Entities

On 1 August 2022 the new Economic Crime (Transparency and Enforcement) Act 2022 came into force and with it a new Register of Overseas Entities was created.

New land registration requirements will also soon come into force on 5 September 2022.

The new law was introduced to address concerns regarding a lack of transparency around who ultimately owns land in the UK and will affect both existing owners of real estate in the UK and prospective buyers who are overseas entities.

Here are the key dates.

·       1 January 1999 – any overseas entity that became the registered proprietor of a qualifying estate in UK real property on or after this date will be captured by the provisions of the new law.

·       28 February 2022 – any overseas entity that has disposed of a qualifying estate in UK real property on or after this date, but prior to the expiry of the transitional period described below, will be required to disclose certain beneficial ownership information to the registrar.

·       1 August 2022 – a six-month transitional period began.

·       5 September 2022 – the new land registration requirements will come into force.

·       31 January 2023 – the transitional period will end – any overseas entity still owning a qualifying estate in UK real property on this date must have applied to be registered on the Register of Overseas Entities.

See this briefing from Freshfields Bruckhaus Deringer for a very good summary of the new law and how it will be applied.

Commercial Rent (Coronavirus) Act 2022 Now in Force

The Commercial Rent (Coronavirus) Act 2022 is now in force, and the general moratorium against forfeiture, re-entry and Commercial Rent Arrears Recovery (CRAR) is over.

Landlords may now be able to recover unprotected rent; enact forfeiture and CRAR; and petition to wind up a company in respect of unprotected rent that is in arrears.

Unprotected rent is basically rent that isn’t owed because of the Covid-related restrictions and closures that took place between March 2020 and July 2021.

Protected rent arrears are ring-fenced, so that if an agreement for repayment hasn’t been reached, there is now a 6-month period (ie until 24 September 2022) for landlords and tenants to refer the arrears to arbitration.

Only after 24 September 2022, if there is no arbitration or at the end of the process, might the landlord then be able to take further steps to recover the protected rent debt.

Either a landlord or tenant can apply unilaterally for arbitration. The arbitrators will look at the parties’ businesses and attempt to strike a balance between preserving the viability of the tenant’s business and preserving the landlord’s solvency. How this will work in practice remains to be seen.

Arbitrators may write off debts in full or in part, defer the debt for up to 24 months, or grant no concession at all.

The most important effect of the arbitration scheme might simply be to encourage landlords and tenants to strike a deal outside of the process, given the uncertainty of its outcome for either party.

The Act gives guidance on the arbitration bodies that can be approached and the timetable for arbitration.

Commercial Rent Arrears: With the Clock Ticking on the Moratorium, What Next?

With the government ending the last of the Covid-19 restrictions and the moratorium on enforcement expiring on 25 March 2022, where does that leave landlords and tenants of commercial property when it comes to settling the arrears of rent that have built up during the pandemic?

In November the government announced its detailed proposals on how commercial rent arrears accrued during the pandemic should be dealt with when it introduced in Parliament the Commercial Rent (Coronavirus) Bill, along with a new Code of practice for commercial property relationships following the Covid-19 pandemic.

The Bill, currently in the reporting stage in the House of Lords, is expected to become law soon and take effect from 25 March 2022.

The new law will only apply to commercial rent arrears that accrued while businesses were forced to close during the pandemic.

It ring-fences rent, service charge, insurance, interest on overdue amounts and rent deposit top-ups.

The ring-fenced sums are protected rents for a protected period beginning on 21 March 2020 and ending on the day when the premises were not subject to closure or restrictions regulating their use, for example limits on numbers or mandatory table service. For hospitality businesses in England, that date will be 18 July 2021; in Wales 7 August 2021. For non-essential retailers in England the relevant period ended sooner on 12 April 2021.

There will be a new statutory arbitration process for commercial landlords and tenants who have not already reached an agreement on how to deal with the arrears. Any agreements made voluntarily before the new law comes into force will not be affected.

The new arbitration scheme will last for 6 months from 25 March 2022, and during that period enforcement of protected rent arrears accrued during the protected period by court proceedings, CRAR, forfeiture or winding up will be prohibited.

The government has published draft statutory guidance on how arbitrators should exercise their functions under the new law.

To be eligible for arbitration, the tenant’s business must be viable, or would be viable if given relief. The draft guidance explains the concept of "viability of a tenant’s business" and details how arbitrators should make the viability assessment.

The “viability” test is likely to be very difficult for arbitrators to assess in practice, assuming there are even enough suitably qualified arbitrators to go round. This will undoubtedly be a controversial element in the process.

The new law will only apply to businesses legally required to close or cease trading during the ring-fenced period. It will not cover those businesses whose trade was affected in other ways.

Those businesses will have to rely on the Code, which provides guidance on how parties should approach negotiation regarding rent arrears that accrued during the pandemic.

The Code states that tenants must pay in full if they are able to, while maintaining the viability of their business. Where this isn’t possible, tenants are to negotiate with their landlords considering the behaviours, principles, affordability, and viability statements outlined within the Code.

This could be problematic for businesses that could have opened but chose not to as it was not considered to be in the best interests of their business.

What about tenants that elected not to participate in the “eat out to help out” super-spreading scheme? Will they be punished for failing to mitigate their losses?

There also does not appear to be any protection for loss of trade suffered during the Plan B restrictions over Christmas 2021, or closures due to staff sickness during the Omicron outbreak.

It’s possible these issues will never be addressed, in which case tenants will have to try and agree some sort of arrangement with their landlords to settle the arrears or spread out their payment.

For all other non-protected overdue rent, when the current moratorium ends on 25 March 2022 landlords will once again be able to enforce recovery by the usual methods such as forfeiture, CRAR, winding-up or drawing down on rent deposits.

 

COVID-19: New Proposals for Treatment of Pandemic-Related Commercial Rent Arrears Released

The government has finally announced its detailed proposals on how commercial rent arrears accrued during the pandemic should be dealt with.

The Commercial Rent (Coronavirus) Bill was introduced in Parliament on 9 November 2021, along with a new Code of practice for commercial property relationships following the COVID-19 pandemic.

The Bill will only apply to commercial rent arrears that accrued while businesses were forced to close during the pandemic.

It ring fences rent, service charge, insurance, interest on overdue amounts and rent deposit top-ups.

The ring-fenced sums are protected rents for a protected period beginning on 21 March 2020 and ending on the day when the premises were not subject to closure or restrictions regulating their use, for example limits on numbers or mandatory table service. For hospitality businesses in England, that date will be 18 July 2021.

The Bill provides for a new statutory arbitration process for commercial landlords and tenants who have not already reached an agreement on how to deal with the arrears. Any agreements made voluntarily before the Bill comes into force will not be affected.

It is proposed that the new arbitration scheme will last for 6 months from March 2022, and during that period enforcement of protected rent arrears accrued during the protected period by court proceedings, CRAR, forfeiture or winding up will be prohibited.

The Code replaces the earlier version first published in June 2020, and subsequently updated in April 2021, and provides guidance on how parties should approach negotiation regarding rent arrears that accrued during the pandemic.

It also includes guidance on the arbitration process, the evidence that will be considered and the principles the arbitrator will apply.

The government aims to pass the Bill by 25 March 2022, subject to parliamentary approval. The existing moratorium on forfeiture, CRAR and winding-up petitions will remain in place in the meantime.

Beware the Perils of Property Fraud

 

In a recent story reported across the mainstream media, a man described his shock at returning to his house and finding it stripped of all furnishings after it was sold without his knowledge.

His identity had been stolen and used to sell the house and bank the proceeds, and the new owner had been registered as proprietor at the Land Registry.

Although the facts in this case were stark, property fraud is on the increase.

The Land Registry paid out a total of £3.5m in compensation for fraud last year. It commented:

"We work with professional conveyancers, such as solicitors, and rely on them and the checks that they make to spot fraudulent attempts to impersonate property owners…Despite our efforts, every year we do register a very small number of fraudulent transactions”.

Some properties are more vulnerable to property fraud than others, especially those that are mortgage-free and unoccupied.

Is there anything you can do to protect yourself?

You can reduce the risk of becoming a victim to property fraud by doing the following:

1.     Make sure your address for service registered at the Land Registry is up to date. This is particularly important if you don’t live at the property and it will enable the Land Registry to contact you if it has concerns about a potentially fraudulent transaction.

2.     Sign up to the free fraud alert service operated by the Land Registry by email. Once they have your details, the Land Registry will email you if an official search or application is made against the property. You then have an opportunity to contact the Land Registry and provided you act quickly you may be able to stop a fraudulent transaction from taking place, or at least from being registered.

If a fraudulent transaction has taken place, then the question is which solicitor is responsible, the one acting for the purported seller, the one acting for the innocent buyer, or both?

This was the subject of litigation in 2018 resulting in the Dreamvar and P&P judgment handed down by the Court of Appeal.

In a complex judgment, the conclusion was that solicitors on both sides in a fraudulent transaction could be held liable for the loss. If the fraudulent seller’s solicitors fail to carry out sufficient checks on their clients, they must share in the responsibility for the loss – it cannot fall solely on the buyer’s solicitors.

However, many argued at the time (me included) that the liability should fall entirely on the solicitors acting for the fraudulent seller, rather than be shared between those acting for the fraudulent seller and those acting for the innocent buyer, and a powerful dissenting judgment given by Lady Justice Gloster in the Court of Appeal expressed that view.

The solicitor acting for the seller is after all in the best position to carry out the identity checks as part of the "know your client" and anti-money laundering processes undertaken when taking on a new client.

Buyers’ solicitors can try to protect themselves by asking for a warranty from the seller’s solicitors that they have carried out all appropriate identification checks.

 

COVID-19: High Court Grants Landlord Summary Judgment for Rent Arrears

 

The High Court* has granted a landlord summary judgment to recover rent and service charge arrears on premises that were closed during the pandemic.

The premises are a cinema in London’s Trocadero Centre.

The cinema had to close in March 2020 due to the pandemic and no rent has been paid since June 2020. The landlord brought proceedings for summary judgment for rent and service charge arrears of £2.9m.

The court rejected the tenant’s defences that there should be implied terms that they were not liable to pay for periods when the premises could not be used, and that there was a failure of basis.

The court found that the risk lay with the tenant, who could have taken out business interruption insurance (it was agreed that the pandemic was not an insured risk).

Judge Robin Vos stated there was “a long-standing principle that an inability of a tenant to use premises for the purpose intended at the time the lease was granted will not provide a defence to a claim for the payment of rent.”

The court had dismissed an application by the tenant to adjourn the summary judgment pending the introduction of the bindingarbitration scheme for pandemic rent arrears, which was a proposal announced by the government in June, but which has still not been enacted.

Until that arbitration scheme is up and running (which requires legislation), then regardless of the ongoing moratorium on forfeiture action, this case demonstrates that landlords are still able to sue tenants for non-payment even if the tenant was unable to trade during the pandemic.

*London Trocadero(2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch) (28September 2021) (Robin Vos sitting as Deputy Judge of the High Court)

UPDATE: Permission to appeal to the Court of Appeal has been granted in London Trocadero, together with a stay of execution of the judgment pending the appeal. It is also understood that the High Court has granted Cine-UK Ltd permission to appeal in Bank of New York Mellon, and granted its application that the appeal should be transferred from the High Court to the Court of Appeal.