Property litigation weekly update – 30 April 2020
Introducing the property litigation team's sixth weekly bulletin, with legal updates and positive news. We look forward to hearing your news and remain on hand to assist with property-related legal matters.
Yielding up during Covid-19 - a landlord and tenant guide
Due to the current lockdown many tenants, whose leases are coming to an end, are having difficulty yielding up their premises in accordance with their obligations under the lease. This is particularly important if they are exercising a break right, as many break clauses are conditional on the premises being left in a prescribed state; such as with vacant possession or, as a minimum, free from chattels and third party interests. If break conditions are not complied with then, unless they are waived by the landlord, the break will not be effective and the lease will continue, with the tenant being tied in for the remainder of the term or until any further break right. Landlords' break rights are less commonly subject to conditions. When they are, it is normally to restrict breaks to where the landlord intends to carry out some form of redevelopment requiring possession. We explore below some key areas for consideration.
The first point of call will be to closely review the lease to check that notice periods can still be met and then to identify any break conditions or requirements on yielding up at lease expiry. For example, the yielding up provisions may contain an automatic obligation on the tenant to reinstate the property to its condition at the start of the lease, removing alterations and delivering up the premises with vacant possession. An obligation to deliver vacant possession can take considerable care to be met (such as where a tenant has installed significant cabling), and if this forms part of a break condition could threaten the efficacy of any break served. In addition, the tenant may be obliged to decorate the premises prior to lease expiry. Licences for alterations should also be reviewed to check for additional reinstatement obligations, as, depending on the wording, it is possible that these will be caught by the break conditions.
Whether you are a landlord or a tenant, if you are intending to exercise a break right, pay special attention to how such notices are to be served. For example, if the notices have to be hand delivered; are you able to do so and how much extra time is required to effect this?
Once you know the rights and obligations, what are your options?
- Comply with the obligations - If you are aware of an impending break date or the lease is about to end imminently, you need to check whether logistically you can meet your obligations. This includes establishing whether you have or can resource the necessary people, if required; removers, contractors, IT support and surveyors. A larger time frame than normal should be given so that any works can be carried out safely within social distancing guidelines. If you are a landlord and your right to break is conditional upon some form of redevelopment or intention to redevelop, you will need to check this carefully to ensure that you meet the criteria at the point of service and thereafter. As the law on exercising these sorts of break rights is potentially closely intertwined with principles deriving from redevelopment under the Landlord and Tenant Act 1954 it can be particularly important to take specialist advice.
- Negotiate with your landlord/tenant – If necessary, you could try to negotiate a relaxation of the break conditions. The current circumstances might mean that a landlord or a tenant's plans have changed, and either might be open to a variation: you won't know unless you ask! A lease created by deed would need to be varied by deed, either to extend the break date or remove break conditions. Either party may be prepared to confirm that it will waive a particular break condition in the current circumstances. Waivers should ideally be documented by deed, but if this is not possible the parties might safely be able to rely upon written assurances obtained on an open basis and in advance of the break date. You should note that it may not be legally possible to vary a break date once a break notice has been served. There can be some complexity in the technicalities, so if you can do so, leave time to allow you to take advice and get these properly resolved.
- Non-compliance with yielding up provisions at lease expiry - If the lease term has come to an end and the tenant has failed to yield up the property in accordance with its obligations then the landlord may serve a dilapidations schedule claiming damages for its costs of repairing, reinstating and redecorating the property in accordance with the lease provisions. There are many legal and procedural rules that govern and limit these sorts of claims. Further, many commercial leases contain clauses regarding what happens to items left by the tenant following lease expiry, in some cases permitting the landlord to sell or dispose of items which are left at the property. If, as a tenant, you have left items which you are willing to part with then this may be acceptable, however, be aware of any confidential material or work products which should be safely removed from the premises. If there is no such clause then the landlord becomes an ‘involuntary bailee’ and may serve a Torts notice on the tenant, giving it an opportunity to collect items from the premises within a prescribed time frame failing which the landlord might sell the items.
Whether exercising a break right or yielding up on lease expiry the key, particularly in the current climate, is to prepare as early as possible. If you require advice on your obligations under a lease, the service of a break notice or other property related matters please do contact us.
Delayed completions in the wake of the Covid-19 outbreak
The UK property market is experiencing the effects of the Covid-19 pandemic, with property website Zoopla estimating that £82bn worth of property transactions have been put on hold after the government announced its lockdown measures in the fight against the virus.
The current government guidance urges buyers and sellers of property in the UK market to adapt and be flexible to alter their usual processes in these unprecedented times, which is a view shared by the Law Society such that we would expect solicitors to be adopting a cooperative stance in progressing property transactions. The message is clear that those involved in the buying and selling of property – which would apply equally both in the residential and commercial markets - need not pull out of existing transactions where the parties are committed to the transaction, but caution must be exercised to ensure compliance with government guidance and lockdown restrictions, including in relation to social distancing and self-isolating.
Unless the parties agree otherwise, the mechanics for completion will be governed by the terms of the contract. If a buyer is unable to complete in accordance with the contract due to Covid-19, the buyer is likely to be in default entitling the seller to serve notice to complete. Caution should be exercised before a notice to complete is issued in the current climate as the serving party will need to ensure it is ready, able and willing to complete at all times following service, which could well prove difficult. If the buyer is still unable to complete, the seller will be entitled to retain the deposit paid by the buyer and to remarket the property. If the seller's losses exceed the deposit (including any reduction in value, legal costs and any other reasonably foreseeable losses) then the seller will be able to bring a claim in damages for its additional losses.
There are a number of possible avenues to consider for a buyer and seller in the wake of the Covid-19 pandemic depending on the approach taken by either party towards completion and the reasons for any delay, including
- Varying the contract: If a delay is likely, the preferred option is for the parties to liaise early to agree a variation of the contract, by deed, allowing a later date for completion, and including bespoke Covid-19 wording which could account for further delays connected to Covid-19 or an ability to bring completion forward in defined circumstances if appropriate. If agreement is reached on a variation of the contract, the parties should ensure any other preconditions of completion, for example relating to matters of planning, are also properly addressed. This is an area of particular focus in the current climate, and we would be happy to assist with any of your Covid-19 bespoke wording requirements.
- Force majeure: The parties should consider whether the contract includes a force majeure provision, which often appear in new-build contracts and may cover circumstances pertaining to the Covid-19 pandemic to excuse the defaulting party from a delay in completing.
- Frustration: This would involve a party seeking to argue that the outbreak of Covid-19 is an event which has made performance of the contract impossible. The likelihood of raising this successfully in the context of a conveyancing transaction is questionable.
- The seller forfeits the deposit: If the seller forfeits the deposit paid under the contract following the buyer's failure to complete, section 49(2) of the Law of Property Act 1925 may assist which gives the Court a discretionary power to order the return of a forfeited deposit where justice requires it.
Enfranchisement case update
The recent High Court case of Freehold Properties 250 Ltd v Beverley Ann Field & 18 Ors  EWHC 792 (Ch) clarified a point of qualification for leaseholders claiming the right to acquire the freehold of their house under the Leasehold Reform Act 1967. The case involved enfranchisement claims for houses where the leases in question did not demise the entire house; the loadbearing walls, foundations and roof being excluded from the demise.
It has long been considered in enfranchisement texts that the demise of the entire house is required to qualify for an enfranchisement claim and the High Court confirmed this as being the correct interpretation of the legislation. The argument that a "less than whole" demise bypasses anti-avoidance provisions did not hold water, as not only do the provisions prevent the Court from re-writing the terms of the lease, but there are legitimate reasons for a landlord to retain parts of a house. In addition, it cannot have been the intention of the legislation to create flying freeholds.
The position on qualification will likely change given the Law Commissions proposals for reform of enfranchisement, with the intention to amalgamate rights currently separate for flats and houses to newly defined 'residential units'.
Insights from across the firm
- Two recent cases provide some much needed clarity on the interrelation of Coronavirus Job Retention Scheme and the requirements of insolvency legislation
- Tax implications of lease renegotiations and considerations for landlords and tenants
- Borrowers in financial difficulties: concerns and some practical tips for borrowers
- CVAs and pre-pack administrations: recent developments and how landlords should remain vigilant and take proactive steps to preserve their position
- Thoughts on how the pandemic may affect residential real estate transactions
- The black bee, which was once assumed to be extinct in the UK, is reappearing thanks in part to two refugee-run beekeeping projects and a generous £10,000 donation from Hammersmith and Fulham Council
- Carrie Symonds and Boris Johnson announce the birth of their son
- The UK has set a new record for going without coal-fired power for more than 18 days, the longest stretch since the industrial revolution. It is thought this is due to the UK's recent warm weather combined with a fall in demand for electricity caused by the lockdown