Property litigation weekly update – 15 October 2020
This week we report on the government's proposal to introduce legislation to require independent scrutiny of pre-pack administration sales, the proposed abolition of section 21 and "no fault" notices and a recent case considering the disputed termination of a sale and purchase agreement. Insight from our colleagues around the firm, positive news and a quiz are also included.
Pre-pack sales to face mandatory independent scrutiny
The government announced last week that it plans to introduce new legislation which will require mandatory independent scrutiny of pre-pack administration sales where connected parties (such as the insolvent company’s existing directors or shareholders) are involved in the purchase of a distressed company's assets.
Pre-pack administrations involve arrangements to sell part or the whole of a company’s business or assets prior to the company entering into administration. The sale is completed on or shortly after the appointment of an administrator and the speed of the transaction aims to preserve the value of the business and save jobs.
The government has acknowledged that pre-packs are widely considered to be a valuable rescue tool but they have listened to ongoing concerns that they may not always be in the best interests of creditors, considering this in detail in their recent review and acknowledging that the issue was highlighted during the Parliamentary debates on the Corporate Insolvency and Governance Act. Creditors have criticised pre-packs on the basis that the valuable or profit-generating parts of the business are "cherry-picked" by a purchaser, leaving the shell of an existing company with liabilities and a limited prospect of recovery for creditors.
The government says that the new legislation will aim to improve confidence and transparency in pre-pack administration sales and give the general public and creditors reassurance that their interests are being protected alongside that of the distressed business.
Minister for Corporate Responsibility, Lord Callanan, has recognised that "as we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process". This is a timely announcement in the current climate which has already seen some high profile pre-packs this year.
The Corporate Insolvency and Governance Act revived the power for the government to regulate or ban sales in administration to connected persons (including via a pre-pack sale) provided it is exercised before the end of June 2021 and the government is expected to bring forward regulations as soon as Parliamentary time allows within that period.
Government affirms commitment to abolish section 21 of the Housing Act 1988 and "no fault" notices
Section 21 of the Housing Act 1988 (the Act) can currently be used by landlords as a no fault / notice only ground for regaining possession of a property let under an assured shorthold tenancy. However, on 19 December 2019, the Queen's Speech announced that the grounds for possession were to be reformed under a Renters' Reform Bill and that 'no fault' evictions under section 21 were to be abolished. Many clients have asked us if those changes are still going ahead.
The government has recently affirmed its commitment to abolishing Section 21 in its recent response to the Housing, Communities and Local Government Select Committee report on the Long-term Delivery of Social and Affordable Rented Housing (the Report).
In the Report, the government states it is, "committed to introducing a package of reforms to enhance renters’ security and improve protections for short-term tenants. This includes repealing Section 21 of the Housing Act 1988 to abolish so-called ‘no fault’ evictions.
It was expected that such reform to Section 21 and the grounds of possession were to be enacted this year with new possession grounds being introduced to Schedule 2 of the Act such as the right for a landlord to seek possession if he intends to sell the property. The additional grounds will require some careful drafting and there has been a delay in bringing forward the reform due to the current Covid-19 pandemic taking up the majority of Parliamentary time.
We will report further as soon as there are any developments. It will be interesting to see how the additional grounds under Schedule 2 of the Act are drafted, because without Section 21 there is arguably little difference between assured shorthold tenancies and fully assured tenancies.
Lodha Developers 1 GSQ Limited v 1 GSQ Limited
In this case the High Court considered a summary judgment application from a claimant developer for a declaration that a sale and purchase agreement had been validly terminated and a request for the removal of unilateral notices on the claimant's title which had been entered by the defendant in respect of the agreement. At the centre of the case was the question of whether the court's equitable jurisdiction to grant relief from forfeiture of a contract was applicable, as distinct from the equitable jurisdiction to grant relief from the forfeiture of a deposit. The hearing did not consider the treatment of the deposits that had been paid under the agreement.
The claimant was a developer of luxury residences and the defendants are special purpose vehicles ultimately controlled by Mr Kostyantin Zhevago, a citizen of the Ukraine. The defendant agreed to purchase various apartments from the claimant for £106 million. A deposit was payable followed by two stage payments the last of which, due on 2 December 2019, was delayed. By April 2020, as no payment had been made, the claimant served notice terminating the contract.
The claimant, citing Steedman v Drinkle  and Union Eagle Ltd v Golden Achievement Ltd , argued that it is settled law that equitable relief from forfeiture is not available to grant relief from the termination of a contract for the sale of land, other than in the case of mortgage contracts and landlord and tenant cases.
The defendant relied on political and tax reasons, as well as difficulties faced from Covid-19, for its delay in making the final payment. Relying on the facts of Starside Properties v Mustapha  where equity intervened to aid a buyer, the defendant argued that as it was not an express provision of the contract that time is of the essence, the issue of whether or not relief from forfeiture should be granted was a triable issue.
The Master disagreed. Although not expressly stipulated in the clauses providing for the stage payments, the Master found time to be of the essence in relation to the defendant's obligation to pay. Furthermore, the claimant's right to discharge the contract for non-payment was noted at both clauses 3 and 25. A breach of this contractual right could not be remedied through equity.
The case makes clear that the extent of the equitable jurisdiction to grant relief from forfeiture of a contract is highly restricted and confined in case law to limited exceptions.It also highlights that the Court did not allow the impact of Covid-19 to have any bearing on the contractual rights and obligations of the parties. If a formal variation of the agreement by deed could have been agreed and documented, this would have provided some leeway for the purchaser and protected them from the consequences of failing to comply with the existing deadline for payment.
Insight from our colleagues around the firm
- Webinar: Affordable housing pressures; innovations and impacts: Value- led procurement
- Building safety – Resident rights and responsibilities
- Working arrangements fit for the Future of Work
Good news stories
- Front-line workers and volunteers who contributed to the response to Covid-19 take centre stage in the postponed Queen's Birthday Honours this year. Footballer Marcus Rashford and fitness coach Joe Wicks have been recognised for their efforts during the pandemic, and the cooking legend that is Mary Berry has been made a dame.
- Prince William and Sir David Attenborough have joined forces to launch what they hope will become the "Nobel Prize for environmentalism" in the form of the Earthshot Prize. The "Earthshots" are intended as universal goals to repair our planet by 2030 and will go to the best and most innovative ideas to help in various environmental categories. With £50m to be awarded over a decade, this is the biggest environmental prize ever.
- Good news for those in our Exeter office at least (!) the Exeter Chiefs remain on course for a domestic and European double. They booked their fifth consecutive trip to Twickenham by beating Bath at Sandy Park last weekend with a Champions Cup final to look forward to this weekend.