Building better

A property litigator’s workload tends to follow the peaks and troughs of the market. In a downturn, service charge disputes, dilapidations claims brought at the end of a lease for damage or deterioration to a property, and insolvency work all tend to increase, as both parties to the lease scrutinise costs more closely. By contrast, while a booming property market generates greater development activity, it also brings with it claims from neighbouring properties for potential breach of rights to light and nuisance.

Lease renewals under the Landlord and Tenant Act 1954, as ever, provide a constant flow of instructions.

As inflation and interest rates have risen, the UK’s commercial property market has faced a reckoning. For property litigators, this has inevitably meant that the type of work they are instructed on has changed, with some reporting a more cautious approach by developers. Others note an increase in insolvency-related instructions – in the retail sector in particular.

‘We’ve been pretty busy, it’s just the nature of [the work] that has changed,’ notes Chris Marsden, property litigation partner at Moore Barlow in Southampton, a firm which has a dedicated land development team. ‘It’s a tough market out there. Transaction activity has dropped, and while there hasn’t been a complete downing of tools by our clients, there is more selectivity around appraisal of sites to make sure that they are comfortable with what they are going to proceed on.

‘For those transactions that are still happening, we are feeding in on the due diligence side, for example on issues with rights of way or restrictive covenants.’

‘What is keeping us busy is “crowded London law”,’ says Paul Greatholder, partner, property litigation at Russell-Cooke. ‘There is no easy property to repurpose or develop now, which just causes problems.’

Greatholder references the recent decision involving Marks & Spencer’s flagship store in Oxford Street. The government initially blocked a redevelopment due to its environmental impact, but the decision was found to be unlawful on appeal. ‘The Marks & Spencer case is symptomatic of the difficulties of carrying out any work to property now,’ adds Greatholder. ‘Going “up and out” means affecting neighbours. Whether that’s rights of light, restrictive covenants, or party walls.’

Greener leases

The built environment is responsible for around 30% of global carbon emissions. Efforts to ‘green’ the sector have also had an impact on legal practice. Green leases are becoming increasingly common and practitioners are having to familiarise themselves with their intricacies. Lease provisions include obligations for both parties to undertake specific responsibilities to minimise carbon emissions.

One of the biggest drivers for the inclusion of green clauses in leases came from the Minimum Energy Efficiency Standards (MEES) Regulations. Since April 2018, these regulations have stipulated that a property with an energy performance certificate (EPC) of F or G is considered sub-standard, and that the grant, extension or renewal of a lease on such a property is unlawful. From April 2023, this was extended to include the continuation of any existing lease or tenancy.

Westminster’s 2020 white paper ‘Powering our net zero future’ proposed a staged increase in the requisite EPC rating, with C being the initial milestone for 2027, and B being required by 2030. To date this has not been turned into law.

Alison Hardy, head of real estate dispute resolution at Ashurst, observes: ‘Agents are tasked by big corporates with finding BREAAM-excellent [Building Research Establishment Environmental Assessment Method], EPC A-rated buildings, in a good location, with good amenities. It used to be the case that the energy efficiency rating was very low down on the list of requirements. They were nice to have, whereas now they are the first things on people’s list, and there just isn’t the supply.

‘There is a real dearth of green buildings that people want to occupy as offices,’ she says. ‘The problem is that if you have a building that has an EPC rating of C, it’s OK, you can let it, but it’s not a long-term gig. Because in 2027 or maybe after that, you’re not going to be able to let that building.

‘Uncertainty about the change in energy requirement is a real problem. The white paper [Powering our net zero future] hasn’t resulted in law yet, and the dates are probably going to be pushed out. If you’re granting a new five-year lease now, the likelihood is that it will take you over the period that these new regulations come in. It’s a problem even if these deadlines get extended, because if you get your building back in 2029, and it’s not the right standard to let it going forward, as a landlord you’ve got [an issue].’

There is a big capital cost involved in bringing a property up to the right standard, Hardy stresses.

‘It’s not in the tenant’s repairing obligation, so how are you going to fund that?’ she says. ‘The market is looking for these good-quality buildings to invest in, so even if the white paper doesn’t become law, you won’t be able to see or refinance [them].

‘Banks don’t want them on their books, and no one wants to buy them unless they’ve got the money to retrofit and improve the energy efficiency.’

Clients are coming to property litigation teams to find out not only how they can grant a lease, but also how they can go in and carry out works.

‘Ordinarily, as a landlord you grant a lease and give a tenant exclusive possession of a property, and [don’t] go in and interrupt them,’ says Hardy. ‘But if you need to go in and change the cladding, or the windows or the lighting, or all of the air conditioning, the tenant could claim breach of quiet enjoyment and terminate the lease. So landlords want to know how they can do those works without triggering the possibility of a tenant bringing those claims, and whether they can recover those costs through the service charge. At the moment, we are providing strategic advice to avoid disputes in the future, more than actual disputes.’

Ripe for reform?

The Landlord and Tenant Act 1954 (LTA) is a piece of legislation with which property litigators are very familiar. It provides a means for contracting out of the ‘security of tenure’ the act itself created – namely the right for business tenants to stay in premises after the expiry of the lease.

Landlords can oppose the granting of a new lease if they are able to satisfy one of seven grounds set out in the act or if the lease was ‘contracted out’ of the act when first signed.

The legislation is well overdue for reform, according to critics. Last year the Law Commission was tasked with carrying out a review as part of plans to revitalise high streets and town centres. As an article for Falcon Chambers put it: ‘The key questions for the Law Commission [are] whether the LTA 1954 strikes an appropriate balance between landlords and tenants in today’s market, and whether the existing scheme could be simplified to be more practical and user-friendly.’

'Removing security of tenure would remove the confidence of smaller business tenants to invest in their physical space'

Helena Davies, Brabners

Of course, the commercial leasehold market has changed considerably since the 1950s. Most leases are contracted out of the LTA and parties to leases are free to negotiate appropriate terms.

Nevertheless, some lawyers note that the act still provides important protections. ‘We use the 1954 act all the time – it’s our bread and butter,’ says Helena Davies, partner, real estate litigation and head of retail at Brabners. ‘I think it is still needed. You couldn’t just rip it up – it’s too significant. Admittedly, the 1950s were a different environment, but the main thing the act achieves is that occupiers can invest in their spaces. That’s important, especially with the short terms you have now on leases.

‘If you are a retailer and you want a nice fit-out, the act is needed,’ she adds. ‘Removing security of tenure would remove the confidence of smaller business tenants to invest in their physical space.’

Lauren O’Sullivan, a senior consultant at Ignition Law, observes: ‘Our clients tend to be agile. They are not as fixed to a location. We act for start-ups and scale-ups. In the last few years, we have seen a general trend to flexible office spaces, which spiked in 2020/2021; namely longer-term leases but with flexibility and break clauses. We hold their hand to make sure they are doing this correctly.

‘Usually, our clients will opt out of the 1954 act, because they can then negotiate other terms. Proposed reforms will be interesting to see. There’s a trend to shorter leases. Many of our tenants are assessing the viability of a premises. By opting out, they can get better terms on something else – the immediate gains are more valuable to them. On the other hand, our retailer clients do like being opted in, because goodwill and location is more important.’

Contracting out under the spotlight

The process for contracting out of the security of tenure provisions was last updated in 2004. The method of obtaining a court order to exclude the act’s protections was replaced by a more streamlined process involving the service of a statutory notice by the landlord, followed by a declaration by the tenant.

‘The 1954 act is very antiquated – the process for opting out, in particular, adds extra time and money to the process,’ notes O’Sullivan.

Some argue that the process could be further streamlined, either by allowing for service of notices to be made by email, and for declarations to be signed electronically, or by simply doing away with the ‘contracting out’ of leases completely.

‘Rather than creating a whole set of documents which need to be signed, it would be useful to have a statement in the lease that the tenant is aware that he is contracting out of the 1954 act,’ says Greatholder. ‘I have been in forums where people have suggested that the act is so out of date and out of line with current market conditions that it needs to be dispensed with. However, there is no area of contract law that doesn’t have some statutory regulation, so it would be odd if there wasn’t something in place.’

If the parties are unable to agree the terms of a ‘renewal lease’ once the old lease has expired, the court is asked to determine the terms of a new lease. ‘The working assumption that the terms of the new lease will look like those in the old lease – that’s where you can run into problems with modernisation. There is definitely a tension there,’ notes Greatholder.

'These days turnover rents are very common, in retail for example, and sometimes in hospitality, and yet they are not making their way into Landlord and Tenant Act 1954 renewals'

Alison Hardy, Ashurst

Recent litigation has involved attempts by both parties to push the boundaries of acceptability. Rent in particular is coming under scrutiny, with some tenants pushing for a rent linked to the turnover a tenant generates.

‘These days turnover rents are very common, in retail for example, and sometimes in hospitality, and yet they are not making their way into 1954 act renewals,’ says Hardy. ‘There just isn’t a way of doing it. The act just provides for a market rent to be fixed. That does need to be looked at, especially as the act is meant to protect tenants such as retailers.’

Similarly, attempts at incorporating green lease clauses have been rejected. But is wholesale reform the answer?

Marsden argues that while the contracting out process could be made simpler, new legislation may not be the solution. ‘I don’t feel that strongly that there needs to be any great reform around it,’ he says.

‘The good thing is that, to a large extent, it’s quite well understood by practitioners. Complete reform will lead to a long period of uncertainty. The 1954 act is about giving certainty to tenants – if the whole idea behind the reforms is to try and bring back life to the high street, I think it’s a pretty essential bit of protection that tenants need.’

For now, it looks as if the act will endure for a while yet. The Law Commission’s report is not expected until later this year, and with an election looming, reform seems a long way off.

‘I’m not sure if it will happen,’ notes Greatholder. ‘Even if there is a report, what the political appetite is for doing something is difficult to assess right now.’

 

 

Maria Shahid is a freelance journalist