Sherrards help client Global Infusion Limited with dilapidations claim

At the end of the Lease the Landlord served a substantial dilapidations claim. Mike and the team used arguments involving a section 18 valuation to significantly reduce the Tenant’s liability. 

The team worked closely with Brasier Freeth one of the leading surveyors in Hertfordshire to help resolve this matter for our client.

Sherrards’ Real Estate Litigation team advise property client obtain vacant possession from Rent Act Tenant

One property in the portfolio had a Rent Act tenant, but it was suspected that the Rent Act tenant no longer resided at the property.  A claim was issued on the basis of abandonment.  However, papers were served suggesting the tenant was returning from working abroad

Michael Lewis and the team issued proceedings and the matter went to the High Court. In the days before trial the team managed to agree a successful settlement for our client.

 

Landlords or Retailers? Nobody’s a winner. Mike Lewis in ‘The Retailer’.

It’s no surprise the COVID-19 pandemic has had a significant impact on retailers and the sector as a whole. As many retailers were forced to close during both lockdowns, they have been unable to keep up with their rental payments, and as customers continue to self-isolate and stay at home footfall has been significantly lower.

On the flip side, landlords have struggled too with some not receiving payments from tenants, and the loss of protection following the implementation of the Coronavirus Act 2020 (the CA 2020) means they are unable to rely on contractual rights to forfeit commercial leases by peaceable entry, or by issuing court proceedings.

Click here for the full article in The Retailer (page 42) for an overview of the changes applied to the law due to Covid-19.

The Coronavirus Act 2020- The Cat and mouse for Retailers and Rent Payments

The Coronavirus Act 2020 came into force on 26 March 2020 to provide protection to many aspects of society. One such group are retail tenants on the High Street . One of the key features of the Coronavirus Act 2020 (“the Act”) legislation, in relation to landlords and tenants are a moratorium on wind ups, bailiffs and forfeiture. As a recap, forfeiture is when a landlord takes back possession of the premises. Provided there is a forfeiture provision in the lease, a landlord does not need a court order and can simply change the locks.

The Coronavirus Act 2020 provides a moratorium on forfeiture of commercial leases for non-payment of rent. Rent is defined to include any amount payable under the lease. Thus, this applies to all payments required to be made by a tenant including service charge, insurance payments, utilities etc.

The forfeiture moratorium applies as from 26 March 2020 and, after a series of extensions, has now been extended until 25 March 2022, or such later date as may be specified. This means that, whilst the moratorium is in place, a landlord will not be able to evict a tenant for non-payment of rent. Many commentators have shown surprise at the length of this extension and no doubt landlords are dismayed.

A landlord also has lost other recovery methods such as sending in the bailiffs to seize goods to the value of the debt. The Commercial Rent Arrears Recovery (CRAR) can only be used where tenants owe at least 544 days’ principal rent.

A landlord continues to not have the option of threatening Insolvency. There will be an additional three month extension (from 30 June 2021 until 30 September 2021) on the blanket prohibition on statutory demands and the restriction on winding up petitions based on a company’s inability to pay its debts (unless the creditor has reasonable grounds for believing that either COVID-19 has not had a financial effect on the company or that the circumstances forming the basis of the winding up petition would have occurred even if COVID-19 had not had a financial effect on the company).  Arguing that COVID-19 has not had a financial impact on your tenants finances is not an attractive or straightforward argument for landlords.

The inability to forfeit, send bailiffs in, or commence the insolvency process portrays a picture of tenants being in the driving seat and landlords being in an extremely weak and vulnerable position. However, landlords do have one weapon in their armoury.

A less known fact is that there is not protecton in place from stopping a landlord simply suing the tenant for rental arrears.

Recent Westfield Case

The courts have been prepared to follow this principle as reinforced by a case brought by Westfield against a tenant earlier in the year.

Many Retailers will be concerned after the High Court ordered a tenant to pay Westfield £160,000 in unpaid rent and service charges that accrued during the pandemic. The retailer had not paid any rent since April 2020.  Westfield sought payment for rent amounting to £166,884 and interest at the contractual rate.

The High Court granted Summary Judgment in its claim against the retail tenant without the need for a full trial; signalling in no uncertain terms the Court’s approach and that it is prepared to enforce the terms of leases. The Code of Practice in place for landlords and tenants to settle the position regarding rental payments was deemed to be merely guidance.

Helen Dickinson, CEO at the BRC, said: “This case highlights the weakness of the Code of Practice in that it doesn’t change the legal liabilities of the tenant with regards to rent. Thousands of retailers were legally forced to close by Government restrictions during the pandemic, and thus had little or no income with which to pay rents.  While the rent enforcement moratorium has been welcome, it has left the County Court Judgment loophole open that landlords can exploit. The Government must tackle the issue of rent arrears in a way that is equitable to all parties, and doesn’t ignore the loss of trade to shops who have been closed for most of the last 12 months. Unless a more imaginative approach is found, many otherwise viable businesses will be forced into administration, closing shops, costing jobs, and jeopardising future tax revenue for the Chancellor.”

What next after the Moratorium?

The government has made clear, and indeed the recent case referred to above that, tenants cannot view this “break” as an indefinite silver bullet.

The extension to the moratorium on commercial evictions is to allow time for negotiations to take place but the government has also confirmed that where parties cannot agree a mutually beneficial outcome in respect of COVID-19 arrears, new legislation will step in and compel the parties to a binding arbitration process. There is little further information about this and whether arbitrators can provide for payment plans/variations to leases.

Landlords and tenants will be watching carefully what proposals are set out, in the meantime, there will inevitably be further cases where landlords issue court proceedings for rental arrears.

This article has also been published in the British Retail Consortium’s Magazine. The Retailer, on pages 28-29. Click here for the full copy of the Summer 2021 edition.

Pre-pack administration for the retail sector

With the recent collapse of a few retailers, including House of Fraser, and retail parks and shopping centres changing their business structure and appearance with the rise of online shopping, it is time to remind ourselves of what a ‘pre-pack’ can offer to retailers when things go wrong.

What is a pre-pack?

The term “pre-pack” refers to an agreement to sell all or part of an insolvent company’s business and/or assets to a buyer (usually a new company) negotiated before an administration commences, with the administrators then effecting the sale to the buyer immediately after their appointment.

Pre-packs have received a mixed review from the media over the years but have nonetheless been used with success particularly in the retail sector.

Why are pre-packs so criticised?

Historically, the bad press surrounding pre-pack administrations arose from the suspicions of unsecured creditors who saw the management team stripping away valuable assets from a company, carrying on the same business in another company, but freed from their debts, whilst leaving onerous liabilities and debts behind in the old structure.

However, directors of an insolvent business cannot arrange a pre-pack without careful consideration of certain legal issues such as:

  • their duties to provide the administrator with detailed information about the business, specifically to enable the administrator to make a proper assessment of its value (and so sale price);
  • their risk of incurring personal liability for “wrongful trading”, where they cause a company to trade beyond the point at which there is no reasonable prospect of avoiding an insolvent liquidation. This potential liability cannot be extinguished by a pre-pack and therefore this risk must be carefully assessed and timed;
  • their other obligations as directors of a company under the Companies Act 2006 (including non-profiting, care of creditors and other stakeholders of the business).

Transparency guidelines

Since 2009, insolvency practitioners are also required to comply with transparency guidelines applicable to pre-pack administrations.  These are called “Statement of Insolvency Practice 16” or SIP 16.

Under those guidelines, insolvency practitioners should disclose to creditors certain details of the deal, such as the name of the purchaser, the price paid and any connection the purchaser had with the former directors and shareholders, any valuations of the business or assets being transferred, the consideration for the sale and the terms of payment.

Administrators may face regulatory or disciplinary actions if they have failed to comply with SIP 16.

Right to challenge a pre-pack deal

Where a pre-pack is implemented by an administrator appointed out of court, often a sale will be completed before the unsecured creditors are aware of the pre-pack and have an opportunity to object. If the administrator is court appointed, the proposed pre-pack will need to be considered by the court and so creditors can make their objections to the court.

It remains however that a challenge to a pre-pack is extremely difficult, with the court generally placing reliance on the experience and judgment of the administrator if he favours a pre-pack.

Creditors also have a right to bring an action against an administrator if the administrator’s conduct has unfairly prejudiced the interests of the creditors, or where an administrator is not performing his functions quickly and efficiently. Again however, these are difficult tests to meet.

A quicker and cheaper way of challenging a pre-pack is to contact the Insolvency Service’s Pre-Pack Complaints Hotline. This may be used where creditors consider that they have been unduly disadvantaged by an administration (or any other corporate insolvency process).

What does pre-pack administration mean to a retail supplier?

Pre-pack administrations are not a perfect answer to everyone’s problem when a company is experiencing severe financial difficulties, but it is another tool available to owners or managers of a struggling business.

Overall, it is generally thought that pre-packs are a relatively quick and efficient way of transferring the business and/or assets of an insolvent company. They have a lesser impact on the costs involved compared with an administration. They can result in a better return for creditors, minimise disruption, save more jobs and limit the loss of goodwill with suppliers, customers and others. The latter is key for retailers who are heavily reliant on consumer confidence in their brands and assets.

Retail CVA: Do they ‘unfairly prejudice’ landlords?

With consumers reducing their spending on non-essential items, retailers are experiencing a tough trading environment on the high street. Many retailers are entering into Company Voluntary Arrangements (CVA) to give them some respite. Since 2017, CVA’s have been used by large retailers such as Carpetright, Homebase, and Mothercare to close down a total of 954 stores.

CVAs were introduced to allow a company to continue trading and make an agreement with its creditors to pay back any debts owed over a set period of time. In order for a CVA to be approved, creditors representing 75% of the debt must agree to the proposed terms. Creditors can include employees, trade creditors and also landlord.

However, a vast majority of Landlords have limited options when faced with a CVA, and the recent Debenhams case Discover (Northampton) Limited and others v Debenhams Retail Limited and others [2019] evidences this. The High Court in this case held that “landlords should receive at least the market value of the property he is providing. He should not subsidise other creditors but nor should they be compelled to overcompensate him.”

On 9th May 2019, the Debenhams CVA was approved by 95% of its creditors. The effect of this CVA for landlord’s was store closures, a reduction in the rent, and a release of liability for Debenhams under any dilapidations claims. The CVA also prevented the landlords from exercising any forfeiture rights triggered by the CVA.

A group of landlords opposed to the CVA on five grounds. One of these grounds was that landlords are ‘unfairly prejudiced’ when the rent payable under a lease a lease is reduced. They argued that if Debenhams are in occupation of the property, they should be paying the full amount of rent under the lease, and the reduction of rent would be an expense to the landlord.

The Court rejected this argument on the basis that a few creditors may be “one-off” contracts which reflect the market price. Contrastingly, landlords may have fixed rents in a lease at a historic high figure, or the rent in the lease may increase automatically to exceed the true market rent. It was therefore held that it is not prejudicial to landlords to reduce rents under a CVA. These rents may properly reflect the market price even though the amounts may deviate from the rent in the lease.

Can you Extinguish a Right of Way Through an Informal Agreement?

This is the third of several case studies that partner Mike Lewis & Associate Ben Walters covered in their recent talk at Heathrow Airport for 80 surveyors as part of their CPD training. The recent case of Pezaro v Bourne highlights the fact that landowners need to ensure that informal agreements between them need to be documented.

Summary

The case related to three terraced houses in Hampshire. The Claimants are the joint beneficial owners of numbers 149 and 151, and the Defendants are the joint owners of number 147.

The owner of 147 had a right of way over number 149 and 151. The Claimants saw an opportunity to obtain planning permission and develop a block of flats at the rear of all three properties.

An informal agreement was entered into between the Claimants and the previous owner of number 147, to remove the right of way. Neither of the parties took any steps to formally remove the right of way from any of the titles to the properties.

The land at the rear of the gardens was subsequently purchased by a developer on 18 October 2006 and given a new title at the Land Registry. When the previous owner of 147 was contacted to arrange the formalities to remove the right of way, it transpired that he had sold the property to the Defendants.

The Claimants argued that the verbal agreement between them and the previous owner should be enforceable against the new owners of 147 on the grounds of proprietary estoppel.

It was held in court that the right of way was still in existence and was properly registered against the titles of all three properties, as no steps were taken to remove it. The right of way was therefore enforceable.

The Claimants in this case were unable to rely on the informal agreement entered into between themselves and the previous owner of number 147. This case therefore emphasises the importance of making sure that all steps are taken to register any changes, when where the agreement is informal in nature.

Furthermore, all informal agreements should be confirmed in writing and signed by both parties at the earliest opportunity. It may also be useful to include a provision requiring one party to take the necessary steps to make any required changes.

The Supreme Court rules on the need for variations to be agreed in writing

In a decision last week (16 May 2018), the Supreme Court held that a variation clause (also known as a no oral modification (NOM) clause) is legally effective, restoring the order of the County Court which had been overruled by the Court of Appeal.

Variation or NOM clauses are commonplace in contracts for various reasons and restrict variations of an agreement to those agreed in writing. There are no formal requirements for the validity of a contract at common law, and, by association, no formal requirements for varying a contract. This flexibility can give rise to uncertainty so, principally, NOM clauses add certainty to the mechanism by which contractual variations can be agreed. As well as adding certainty, NOM clauses also operate, in theory, to avert misunderstandings and disputes as to what was orally agreed, as well as the prospect of informal variations undermining written agreements.

In the case in question, Rock v MWB, MWB, as operator of offices in London, granted Rock a contractual licence to occupy office space for a term of 12 months. The licence contained a NOM clause stating: “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” Rock had accumulated arrears of a few months’ worth of licence fees and proposed a revised payment schedule, deferring certain payments.

A dispute arose as to whether MWB had accepted Rock’s proposal orally, thereby effectively varying the payment terms under the licence. MWB considered the schedule simply as a proposal and locked Rock out of the premises for failure to pay the arrears. They then terminated the licence and sued for the arrears. Rock counterclaimed for damages for wrongful exclusion from the premises.

In the county court, the judge found that Rock and MWB had agreed orally to adopt the revised schedule, but as it was not in writing, it did not satisfy the variation requirements of the NOM clause. The judge ruled that MWB could claim the arrears.

Rock appealed to the Court of Appeal successfully. It was held that the oral variation had also amounted to an agreement to dispense with the NOM clause, meaning that MWB was bound by the oral variation.

MWB appealed to the Supreme Court where the appeal was unanimously allowed; the NOM clause precluded the agreed oral variation.

NOM clauses therefore operate to provide certainty to contracting parties. Where oral variations are arguably unclear and the interpretation of what was agreed by the individuals involved can be misunderstood, NOM clauses ensure that, by recording any variation, the parties can know exactly what the variation was intended to be. They stop the hinging of an intended variation, in the event of any future dispute, on the recollection of individuals, where mistakes can certainly be made.

Whilst the judgment could be perceived as limiting the freedom of contract, a NOM clause does not invalidate oral variations, it simply forbids them in accordance with the parties’ own intentions at the outset  of their contractual relationship.

The judgment also spells good news for the courts insofar as avoiding unnecessarily escalating litigation costs by parties alleging oral variations, where a NOM clause exists, as a defence. Likewise grounds for summary judgments will rise in such circumstances, bringing down the length and costs of litigation.

Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 (Rock and MWB respectively) – appeal from [2016] EWCA Civ 553

 

Breaking Up Is Never Easy

Break clause can greatly assist with a tenant’s portfolio management. It is a potential opportunity for the tenant to relocate to cheaper premises or renegotiate new terms and can be a valuable provision, particularly in this volatile market.

However, it is not an entirely straightforward process and there can be various conditions attached to break clauses which can be difficult to satisfy.

Ideally, you will only want one condition, that is, a condition of service of notice to break – this is often 6 months’ notice but sometimes it can be 12.

A condition with any uncertainty such as vacant possession should be avoided at all costs – every property lawyer knows the sack of coal story (more on this in a future article!)

Notice

Most break provisions do not specify a certain form of notice but some do and the tenant must comply with the terms. If no specific form of notice is mentioned, notice must be clear regarding who it is directed to, which provision it relates to and what it is intended to do.

It must be served by the date specified in the break clause and served on the right party at the correct address. The party is usually the landlord but for the avoidance of any doubt, it is usually advisable to serve a copy of the notice on the landlord’s agents and solicitors to cover all bases.

All other terms of the break must be fully complied with (e.g. paying outstanding rent by the break date) in order to have a realistic chance of breaking. The break clause should specify whether the conditions must be satisfied at the date of service of the break notice or at the break date, or both.

If there is a condition, for example, that all rents are paid, it is important to determine how the lease defines rent. If the lease provides for default interest on late rent payments, and the tenant had sometimes paid rent late, although the landlord had never demanded this interest during the tenancy, the landlord can resist the break clause by highlighting the interest “technically” due.

Seeking advice from us early on is essential to manage the process successfully, making sure the notice is properly drafted and served and that the tenant fully understands their obligations. Where there is an obligation to deal with dilapidations, an independent surveyor should also sign off works as being compliant before the break date.

When advising tenants, we always push hard to get written confirmation from the landlord that the break has been waived.

Contact Mike for more information.

A ‘growing’ problem- Compensation claims for Japanese Knotweed

In recent years, there has been a surge in articles produced on Japanese Knotweed, a highly invasive and fast growing bamboo-like plant which seems to be haunting many gardens in Britain. It was introduced to the UK in the 1820s for its ornamental qualities but has since proved to be a hot topic as it is extremley costly for landowners and developers, causing structural damage, growing between concrete and blocking drainage systems. It is nearly impossible to eradicate and requires professional Japanese Knotweed contractors who have access to very powerful weed killers.

It has now reached the point where those affected by Knotweed are applying to the courts for compensation. The latest position adopted by the courts is to provide compensation in circumstances where there has been a loss of amenity but not where homeowners claim diminution in value.

This position follows a case that has been widely circulated in the news – Williams & Waistell v Network Rail Infrastructure Ltd. In 2017, two adjoining bungalow owners brought a claim against Network Rail for allowing knotweed to spread from the railway land up to the boundary and under their properties. The knotweed had not caused any physical damage to the bungalows so there was no basis for a claim in that sense. However, the bungalow owners alleged it had caused the properties to suffer a diminution in value and had stigmatised them. Mortgage lenders are very careful and are hesitant to lend on such properties.

The pair claimed that the presence of the knotweed had encroached on their properties, interfering with their quiet enjoyment and causing a loss of amenity by reducing market value. The judge found that Network Rail’s breach of duty and failure to properly manage the situation once they had become aware of the risks, had led to damage and continuing nuisance. The court awarded each claimant £10,000 for diminution of value and £4,320 for treating the knotweed to prevent further ingress.

Network Rail sought to challenge this decision at the Court of Appeal. The original judgment was upheld but it is important to highlight that the Court of Appeal based their decisions on different reasons to those given by the judge last year. The court determined that the parties affected could not succeed in a claim solely for private nuisance as a result of diminution in value. They could, however, be successful in a claim for nuisance caused by encroachment of the knotweed because of a reduced ability to enjoy the amenity of their respective properties.