Landlords will have to provide a good reason to evict residential tenants from now on, the government announced on 15 April, in a proposed major reform of the private rental market.
It says it will abolish so called “section 21 evictions”, which currently allow landlords to bring to an end residential tenancies without an underlying reason on 2 months’ notice once their contractual term has ended. Instead, landlords will have to rely on a specific reason, such as the tenant’s failure to pay the rent or the landlord wishing to occupy the property itself.
The effect of this will be to change what are currently fixed term tenancies into open ended, rolling tenancies.
The intention is to protect vulnerable tenants from being evicted from their homes at short notice. According to the government, this is one of the major causes of family homelessness.
Theresa May said: “this important step will not only protect tenants from unethical behaviour, but also give them the long-term certainty and the peace of mind they deserve”.
Communities Secretary, James Brokenshire MP called it “the biggest change to the private rental sector in a generation”.
The government’s plans to abolish section 21 of the Housing Act 1988, leaving landlords to rely on the grounds set out in section 8 and a court order to take back possession of a property, will have far reaching consequences, even taking into account the additional grounds for possession under section 8 (where the landlord wishes to sell or occupy the property themselves), which the government plans to introduce as part of its reforms along with an expedited procedure.
Housing charities, such as Shelter, have applauded the change. Polly Neate, Shelter’s CEO said:
“One in four families now privately rent their home, as do hundreds of thousands of older people. And yet, we frequently hear from people with contracts shorter than your average gym membership, who live in constant fear of being thrown out at the drop of a hat. Ending Section 21 evictions will transform these renters’ lives – giving them room to breathe and put down roots in a place they can finally call home.”
On the other hand, some landlords are more sceptical. The National Landlords Association says that section 8 is an ineffective and expensive means of terminating a tenancy. It says the change has created “a new system of indefinite tenancies by the back door” and predicted chaos in the courts amid a rush of section 8 applications.
Any changes to the law which are implemented should balance the need to address this issue against the government’s stated need to increase the number of available rental homes (which in turn means not putting off investors from investing in new housing stock).
There is also the much wider question: is this just the first step in the changes for fixed term assured shorthold tenancies? Facing tenants with an open ended tenancy, landlords may well look to grant longer leases with rent review provisions where they have previously offered short, fixed rent leases. What would the government make of a significant change in market practice? Can we expect to see further rent controls during the term of the lease? This looks to be only the first chapter in a new story for assured shorthold tenancies and the government’s proposed consultation on its package of reforms will be an important second paragraph.
Hogan Lovells recently represented the landlords in SHB Realisations Limited and GB Europe Management Services Limited v Cribbs Mall Nominee (1) Limited and Cribbs Mall Nominee (2) Limited, a case confirming that it is possible in certain circumstances to forfeit a long lease granted for a substantial premium.
Leases invariably include a right for landlords to bring a lease to an end before lease expiry if a tenant is in breach (known as a right to forfeit or right of re-entry).
A tenant can apply for relief from forfeiture and, when exercising its discretion as to whether to grant relief, one of the central factors a court will consider is the value of the tenant’s lease.
As a result, there is a widely held belief that a tenant will invariably get relief against forfeiture of a long lease because the courts do not like to see tenants losing a valuable asset and, by corollary, landlords obtaining a windfall.
Background to the case
Shop premises previously occupied by BHS (now in liquidation) were let in 1998 for a 125 year term at a premium of £7 million and a peppercorn rent.
The landlords had a right to forfeit the lease for any breach by BHS of its covenants, including a “keep open” covenant to maintain trade at the store.
BHS ceased to trade from the premises in 2016. As a result, the landlords took steps to forfeit the lease for BHS’s breach of the keep open covenant. BHS issued proceedings for relief from forfeiture. In response, the landlords counterclaimed for possession which had the effect of forfeiting the lease.
According to BHS, the lease was valuable because they could sell it to another retailer for a significant premium, and thereby remedy the breach. However, by the date of trial in early 2019, BHS had failed for over two years to find a buyer. The landlords argued that there was, therefore, no market for the lease and so no value that BHS would lose if relief was refused.
The court’s decision
The judge at trial considered that if the lease had had no value then any windfall to the landlords was irrelevant when considering whether to grant relief.
However, whilst “there can be no doubt that the value of the lease has depreciated considerably given the new retail world and its terms“, the judge concluded that there was some interest from a third party in taking an assignment of the lease. He said that there was “an extremely weak market and there is no evidence… to suggest that the market is likely to get any stronger“.
Having decided that the lease had some value, the judge acknowledged that the windfall to the landlords was relevant but did not give it great weight. In reaching this conclusion, he took into account the conduct of the parties and the fact that the appreciation in value for the landlords was nothing like the amounts suggested by BHS.
The judge concluded that relief should be granted, but on condition that BHS completed an assignment of the lease within three months, thereby remedying the breach. If it failed to do so then the lease would remain forfeit for all purposes.
This case shows that landlords should not dismiss forfeiture as an option simply because the tenant has a long lease granted for a significant premium.
Earlier this year, we blogged on the High Court decision of Mears Limited v Costplan Services. This case concerned whether an agreement for lease for the development of two blocks of student accommodation could be terminated by the intended tenant, Mears, because a number of rooms had been built outside the agreed size tolerances.
The agreement for lease (“AFL”) stated that the landlord, Plymouth, could not vary the development so as to materially affect the size of any “distinct area” of the development. The parties had agreed in the AFL that a reduction in size of more than 3 per cent of any distinct area would be deemed to be material.
Unfortunately, when the building was built, 56 rooms within the blocks were in excess of 3 per cent smaller than set out in the original plans.
Mears sought a number of declarations from the High Court including that any breach of the agreed tolerances was a “material and substantial breach” of the AFL entitling Mears to terminate the AFL. However, the High Court disagreed concluding that a material variance in size of a distinct area of the development did not necessarily mean that there had been a material and substantial breach of contract allowing Mears to terminate.
Mears appealed to the Court of Appeal. In dismissing the appeal, the Court of Appeal concluded that:
although the reduction of more than 3% in the size of any room was to be deemed a material reduction in size, this didn’t mean the resulting breach of contract itself was “material”; and
the 56 separate failures to achieve the 3 per cent tolerance amounted to 56 separate breaches of contract; however, “whether or not those breaches, either singularly or taken together, were material or substantial such as to justify rescission, is a matter of fact and degree, not a matter of construction of the AFL”.
The Court of Appeal did point out that “the parties to contracts of this sort are entitled to agree, in advance, that a breach of a particular clause amounted to a material or substantial breach of contract“; however, this had not happened here. If Mears’ “absolutist argument” was accepted, “a failure to meet the 3% tolerance in relation to the bin store on the ground floor, even if that failure was trivial, would be said to be a material breach of contract” which would allow Mears to walk away. That construction had to be wrong “as a matter of commercial reality”.
This decision serves as an important reminder to parties entering into contracts that they should think carefully about what remedies they want to have available to them for particular breaches of contract. In particular, when dealing with student accommodation, size tolerances are extremely important because a relatively small reduction in size may result in the accommodation being too small to function as student accommodation. In such cases, a party is likely to want to have the option to terminate for breach, rather than relying on other avenues for recourse, such as a claim in damages. It will help to avoid arguments later down the line if, when contracts are being negotiated, the parties expressly state which breaches will give rise to a right to terminate.
Mears Limited v Costplan Services (South East) Limited, Plymouth (Notte Street) Limited, J.R. Pickstock Limited  EWCA Civ 502
There has recently been a great deal of public concern over the putting up of nets in trees and hedgerows on development sites. Some developers do this to prevent birds nesting in trees and hedges they plan to cut down as part of the development.
Under the Wildlife and Countryside Act 1981, it is an offence for a person to intentionally take, damage or destroy the nest of any wild bird while that nest is in use or being built. To avoid breaching the Act, some developers put up nets around trees and hedgerows on development sites during nesting season (which occurs from February until August). There are currently no laws in place to prevent the installation of netting at any time of the year. The practice of putting up netting is becoming more commonplace and there have been calls from the public and various wildlife charities for stricter controls to be implemented by the government to regulate it.
An e-petition to make “netting” hedgerows a criminal offence has now collected over 300,000 signatures. The e-petition argues that this practice facilitates the uprooting of hedgerows, which aid biodiversity and provide the only remaining nesting sites for birds, many of whose numbers are in sharp decline.
The RSPB have asked the government to review the current law and to ask planners to consider whether it is necessary to remove trees and hedgerows. If it is necessary to remove trees and hedgerows as part of the development, the RSPB have recommended that they are removed outside of nesting season and for developers to replace what they take away.
Communities Secretary James Brokenshire commented on 8 April that developers must take more care to protect the habitats of wildlife during building work and to avoid unnecessary loss of habitats. He noted that netting trees and hedgerows is only likely to be appropriate where it is genuinely needed to protect birds from harm during development.
Andrew Whitaker, planning director at the Home Builders Federation has said:
“Netting trees aligns with the relevant environmental requirements in instances where it has been agreed with the local authority that a tree has to be replaced. The industry is engaging with the RSPB to consider how we develop requirements that increase protections for wildlife whilst ensuring desperately needed homes are built without delay.”
As well as considering the laws and regulations around removal of trees and hedgerows as part of development, developers may also have to take into account public opinion and the overall impact on local habitats to minimise any negative effects on the environment. If there are other options to removing trees and hedgerows during nesting season then they may be easier and less newsworthy.
More people each year are turning to specialist retirement homes. Typically, a resident will purchase a long lease for a capital sum but these long leases can also require the owner to pay “event fees” when certain events occur. These events will typically include sales, lettings and changes in occupancy of the home and are usually paid after the homeowner leaves the property.
These fees can come as a surprise to leaseholders and in March 2017, following consultation, the Law Commission published a report on event fees in retirement homes. Now, over two years later, the government has confirmed that it intends to implement most of the Law Commission’s recommendations. The two recommendations which the government wishes to explore further are: how best to establish an online database to provide information to prospective buyers; and succession rights for spouses and live-in carers to stay at a property, without payment of an event fee.
The Law Commission’s recommendations
In brief, the recommendations included:
Limiting the circumstances in which fees can be charged to sales, subletting, and change of occupancy where the resident has died or the property is no longer the resident’s only or principle home. A resident’s partner or carer moving in would not trigger an event fee although on this point, the government has announced it wants to first consider the implications for both consumers and new supply.
Capping the fees for subletting or changing occupancy. The cap would be no higher than 10% of the total event fee payable on the sale of a property.
Requiring guidance to be issued by landlords at the beginning of a purchase to indicate the likely amount of the fee, how it is calculated, who receives it and what the resident will receive in exchange.
What does this mean for landlords?
Standardised, transparent information should remove the lack of clarity surrounding event fees. Maintaining the use of event fees, rather than banning them, will continue to allow the resident to defer payment and would preserve an essential part of the landlord’s economic model.
A further review of whether event fees should be triggered by spouses and carers moving in is welcome as it recognises the possibility that landlords might suffer losses by not being able to charge for items such as increased service and maintenance costs. This may put pressure on the communal services and facilities. Also, the prescribed cap may not reflect the landlord’s actual costs.
Hopefully, the government will complete its further review of the two outstanding issues within 2019 although a further consultation could delay any final legislation. Whatever the timescale, it is to be hoped that the new regime will be an important step in encouraging growth within this market.
We previously blogged about the Government’s public consultation on proposals to amend the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “MEES Regulations“).
Following the consultation, the Government has published its final policy decisions and the MEES Regulations have been amended by the Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2019.
Will this affect me?
The amended MEES Regulations mean that a residential landlord cannot let a sub-standard residential property to a new tenant, or renew or extend an existing tenancy agreement with an existing tenant, unless it has either:
1. made all the relevant energy efficiency improvements that can be made to the property (or there are none that can be made) and the property’s energy performance indicator is still below an EPC E, and it has registered this exemption; or
2. no improvements have been made but a valid exemption applies which has been registered.
From 1 April 2020, residential landlords must not continue to let sub-standard domestic property, even to existing tenants, unless they can rely on either of the above.
So what exactly has changed?
There are six key changes to the MEES Regulations that will take effect from 1 April 2019:
1. Removing the “at no cost to the landlord” principle
The original MEES Regulations allowed residential landlords to register an exemption on the PRS Exemptions Register (the “Register“) where they were unable to make improvements to sub-standard premises with EPC ratings of F or G “at no cost” to themselves. Once registered, these exemptions were valid for five years.
However, as expected, the “at no cost to the landlord” principle is no longer available and residential landlords will be expected to pay towards the improvement of their sub-standard F and G-rated properties.
All existing exemptions obtained under the “at no cost to the landlord” principle will cease to have effect on 1 April 2020, and the Register will be updated so all such exemptions are automatically cancelled on 31 March 2020. Following this date residential landlords will be expected to do the necessary improvement works (up to the value of the cap discussed below) unless they can rely on another valid exemption.
2. Introducing a landlord financial contribution amendment capped at £3,500
Residential landlords will have to contribute up to £3,500 per property to improve sub-standard premises where third party funding is unavailable or insufficient to cover the improvements. This could be through self-funding, or through loans or other finance.
Whilst the Government has always believed any landlord contributions should be subject to a cap, the level of the cap has increased from the initial proposal of £2,500 to £3,500. However, Government analysis indicates that the average cost of improving a residential property with an EPC rating of F or G to band E is only £1,200. Crucially, the costs cap is not a spending requirement – if a residential landlord can improve its property to at least an E for less than £3,500, it will have met its obligations.
The cap includes VAT – notably, under the non-domestic regulations, improvement measures are costed exclusive of VAT but landlords of non-domestic properties can usually reclaim their VAT from HMRC, unlike typical domestic sector landlords.
3. Improvement costs incurred on or after 1 October 2017 can be included within the £3,500 cap
A landlord of an F or G-rated residential property who has made energy efficiency improvements to it on or after 1 October 2017 can count the costs of those improvements towards the cap for that property, including where funding was obtained through a third party. The landlord can subtract the cost of these previous energy efficiency improvements from the £3,500 cap to determine the value of the remaining energy efficiency improvements it must make.
Any costs incurred before 1 October 2017, however, cannot be counted towards the cap.
4. Available third-party funding can be counted within the £3,500 cap
This costs cap will apply to the overall cost of improving a residential property, rather than the cost of individual measures. This means a residential landlord need only invest a total sum up to the cap in improving the property, rather than investing multiple sums which are each individually subject to the cap.
Green Deal finance and other available third-party funding can be included within the £3,500 cap. Where partial funding is available, landlords will only be obliged to contribute the shortfall.
5. A new “high cost” exemption
There will be a new “high cost” exemption available where a sub-standard residential property cannot be improved to an EPC rating of E for £3,500 or less.
Residential landlords will need to install all measures which can be installed up to the cap, and then register an exemption on the basis that “all relevant improvements have been installed and the property remains below E”.
If a landlord intends to rely on this, it will need to upload to the Register copies of three quotations from different installers. Each of these quotes must show that the cost of the cheapest recommended improvement (inclusive of VAT) exceeds £3,500 in order for the exemption to be effective. The landlord will also need to submit confirmation that it is satisfied the measures exceed the cost cap. This means that, if a landlord receives a quote for less than £3,500 from an installer that it does not wish to use, it may have no option (if all the other quotes are for more than £3,500) but to use that installer or to pay more than the cap to use an alternative.
Once registered, a high cost exemption will be valid for five years. The landlord must then make efforts to improve its property to meet the minimum energy efficiency standard.
6. Removal of the “tenant confirmation” consent exemption
Prior to 1 April 2019, a landlord could register a consent exemption if they planned to use Green Deal funding and its tenant refused to confirm that the landlord may enter the Green Deal financing agreement.
Now, where a residential landlord has secured Green Deal finance but a residential tenant withholds its consent, the landlord will be unable to rely on this as the basis for an exemption and will have to seek alternative funding – or contribute out of its own pocket subject to the cap.
An important distinction is that Landlords of non-domestic properties will still be able to rely on the “tenant confirmation” exemption.
Are you a landlord or a tenant? Think you’ve heard something about new laws to protect your money when held by an agent? If you want to know more, read on…
New regulations mean that by 1 April 2019 all private rented residential property agents that handle client money in England will have to sign up to a government-approved scheme to protect landlords’ and tenants’ money, or they will face fines of up to £30,000. Currently membership of such schemes is voluntary.
Under the new regime, an estimated £2.7 billion of client money held by property agents in England will be protected.
Client money protection schemes enable landlords and tenants to be compensated if all or part of their money being held by property agents (such as rental payments) is not repaid. Causes of non-repayment include misappropriation of funds by the agent and the agent becoming insolvent. The regulations stipulate that membership of a scheme must allow for a level of compensation at least as high as the amount of client money held by the agent. The changes bring the property sector in line with the legal and travel operator sectors, where there are already stringent rules regarding the handling of client money.
Under existing laws, anyone can operate as a property agent without any qualifications or professional oversight. Membership of professional bodies, which usually require their members to participate in a client money protection scheme, is currently voluntary. Around 60% of agents are already members of schemes, which usually charge agents between £300 and £500 a year for membership.
The new law is intended to boost consumer confidence and ensure that the same minimum level of protection is enjoyed by all landlords and tenants in England, regardless of who their property agent is. It follows the introduction of equivalent regulations in Wales and Scotland. Property agents will have to join an approved scheme and, under transparency rules, display in its premises a certificate of the scheme joined and publish the certificate on its website. Agents will also have to inform all their clients of their membership. These new rules will be policed by local weights and measures authorities, who can fine agents £30,000 for not joining an approved scheme and £5,000 for breaching the transparency requirements. As of now, five schemes have been approved.
The new rules will not apply to tenancy security deposits, which are already subject to legislation requiring them to be held in a government-approved tenancy deposit scheme.
We blogged on 26 July 2018 about the government’s plans to publish a register of beneficial ownership of UK registered land. The government proposes that the register will be maintained by Companies House and will show the owners and controllers of overseas entities that own registered land in the UK. It will catch all registered land interests (freehold and leases above seven years in England and Wales, 20 years in Scotland and 21 in Northern Ireland).
The government issued a consultation document last year. A number of organisations including the Investment Property Forum, the British Property Forum and the City of London Law Society submitted responses.
The government is now in the process of taking evidence from various parties on the drafting of the bill and the key issues that it raises.
On behalf of the Investment Property Forum Regulation and Legislation Group, I was invited to give evidence at a joint select committee of parliament, chaired by Lord Faulks QC and attended by four MPs and four law lords.
I gave evidence alongside Tom Keatinge, Director, Centre for Financial Crime and Security Studies at the Royal United Services Institute and Professor Jonathan Fisher QC, Bright Line Law.
Details of the transcript will be available through the parliament.uk website in due course.
One of the key messages from the witnesses was the importance of the legislation not hindering transactions unduly. In particular, all witnesses were keen to stress the need for Companies House to be appropriately resourced and mandated to deal with applications and provision of information promptly.
However, we were also keen to stress that transparency of ownership of land is a good thing for many reasons, including reducing the use of UK real estate for money laundering.
The committee will be taking evidence from further interested parties over the next few weeks. The government’s aim is for the register to be operational by 2021.
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MIPIM celebrated its 30th Birthday this week. There are a hardy few who will tell you that they have attended every one. I can’t claim that, but I did first attend in 1996 and have witnessed its teenage excesses and more recent sobering into maturity.
Back in 1996 the Palais was about half its current size. All the stands were in the basement exhibition space, earning it the nickname “The Bunker”. There were no extra tents or pavilions along the harbour or the Croisette. There were boats, but not so many and not so big. The event seemed to be dominated by the Brits. Bar Roma was overflowing with a cheery crowd of “suits” more normally seen around Hanover Square and the Martinez Bar was the place to be seen (so some things don’t change….)
Over the years the attendance number went up and up and the crowd became much more international. Before the global financial crisis struck, it seemed as though everyone was competing to have the biggest boat or to hold the most lavish and talked about party. The tents on the beach arrived with late night concerts, rock bands and partying into the night. Even as the GFC started to bite there was one last hurrah, like the band playing on the deck of the Titanic, and then….austerity. Suddenly the flash parties were cancelled and people had to start to justify their attendance. It all became a much more sober affair with full schedules of meetings during the day and working dinners in the evening. Let’s not be too puritanical though, there were still plenty of lunches, dinners and cocktail parties to allow for some relaxed networking.
At 30 MIPIM has achieved a balance between its more serious side of pre-arranged meetings and a more fun social networking side. The conference agenda is improved with numerous panel discussions and talks on current topics. Don’t forget this is a trade fair too with hundreds of exhibitors and stands to visit. Visitors to the Hogan Lovells stand this year were able to view the video launching our new global thought leadership product, Real Estate Horizons, pick up our publications and take home a Hogan Lovells duck – pearl this year for the 30th Anniversary.
But there is one issue that has been there from the start and is still there: diversity. The faces you see when you walk around are largely white and middle class and predominantly male. The gender balance is starting to improve and over the last few years the number of ladies events has multiplied. Like the real estate industry more generally, it still has a long way to go though to achieve a wider diversity balance. At the London First dinner celebrating Women in Property we debated the role that reputation plays in our view of different aspects of the industry and it is true that MIPIM has a reputation which deters some women from wanting to attend, but until more women do attend, it is not going to get better. I really encourage any woman in the real estate industry to attend if they get the chance.
Apart from diversity, the other main theme of the week was Brexit and the damage that the continued lack of certainty is doing to the investment market. Most of the people I spoke to said that they and other international investors would not do a transaction in the UK at the moment, but would wait until there was clarity on the UK’s position (whenever that may be). The UK and London in particular is still seen in the longer term as a top investment location though. I spoke on a panel at the invitation of Estates Gazette on The Power of Big Brands in Big Cities and the London brand combined with the brand of the different developments and geographic areas in it and their occupiers is still compelling.
Perhaps the weather in Cannes this week was the best indicator of what is to come: Sunny but with cold blustery winds?
The procedure for tenants to take control of the management of their buildings is on the radar for reform as the Law Commission launches a consultation which closes on 30 April. To find out more about that right to manage (the “RTM”) click here and to understand the areas under examination read on!
Exercise of the RTM sees limited take-up and the Law Commission is asking why, putting forward proposals which include:
extending the RTM to buildings with more than 25% non-residential space and to leasehold houses;
allowing shared ownership tenants to qualify for the RTM, whether or not they have acquired 100% of the shares in their leases;
a flexible model allowing multiple buildings to be managed under one RTM company where those buildings contribute to a common service charge and/or share the use of the same common parts;
giving the Upper Tribunal Lands Chamber a discretion to waive any requirement, or allow a notice to be fixed after an error (which can all too easily be made) , as well as reducing the grounds upon which a notice can be challenged;
abolishing the rule that once a RTM company has been established for one set of premises, there can be no other RTM company for that premises (this prevents “sham” RTM companies being set up by landlords and managing agents to prevent tenants from acquiring the RTM); and
encouraging prospective directors of RTM companies to undertake free training on the procedure and their obligations (as there is currently concern about the lack of knowledge some RTM directors have).The Law Commission is also keen to hear views as to whether the RTM company should continue to make contributions to the landlord’s costs for disputes and how this could be limited to make it fairer than the current process.
Interestingly, at the same time, the Ministry of Housing, Communities and Local Government is looking at setting professional standards for managing agents. The Law Commission is seeking views on whether RTM companies should be required to use a managing agent that meets this standard.
The Law Commission is also keen to hear views as to whether the RTM company should continue to make contributions to the landlord’s costs for disputes and how this could be limited to make it fairer than the current process.
Whilst the Law Commission is clearly looking to increase take-up of the RTM, the consultation acknowledges the concerns of landlords and managing agents as well as tenants about the RTM regime more generally. However, the frustrations of the current letting process continue to make the news and efforts to make the sector more tenant-friendly are unlikely to die down any time soon. More information about the consultation and how to respond can be found here.