Property litigation weekly update – 2 July 2021
In this week's bulletin the team discuss interim rent in 1954 Act lease renewals and the impact of Covid-19 on the market, the Minister v Hathaway & Hathaway  case, measures to accommodate first time buyers and the introduction of a new tenure. All this along with insight from across the firm and some positive news.
Interim rent and the impact of Covid-19 on the market - S Franses Ltd v The Cavendish Hotel (London) Ltd
We reported on the Supreme Court case of S Franses back in January 2019 and our article is available here. In that case the Supreme Court provided guidance on the operation of ground (f) of s.30(1) of the Landlord and Tenant Act 1954 (the 1954 Act) and in particular, a landlord's ability to oppose the grant of a new business lease to its tenant on grounds that the landlord intends to redevelop the premises. The Court found for the tenant and determined that it should be granted a new tenancy.
Judgment has now been handed down in the second part of the case which dealt primarily with the level of rent payable under the new lease and the amount of interim rent. The Covid-19 pandemic also introduced some added complexity to the valuation exercise as there was an absence of comparable evidence and a very significant drop in rents.
The passing rent had been set at £220,000 per annum following a rent review in 2011. Each parties' expert recognised there would be a reduction on that figure - the tenant's expert's valuation was £96,500 per annum and the landlord's was £174,750 per annum.
The Court criticised both experts' methodology, indicating that the tenant's expert relied too heavily on a comparable which was only his "gut feeling" and not an actual market transaction, whereas the landlord's expert, it said, had "landlord-tinted spectacles". HHJ Parfitt ultimately determined the rental valuation to be £102,000 per annum based on the traditional zoning methodology and chose not to apply any specific percentage reduction based on Covid-19..
The question of the interim rent was unusual given it had to be assessed over a 5 year period (from 2016 to 2021) and part of that period involved a significant shift in the market stemming from the Covid-19 pandemic.
In an un-opposed renewal, interim rent is typically set at the same level as the rent under the renewal lease. However with this opposed renewal the Court had to assess "a rent which it is reasonable for the tenant to pay" under section 24D of the 1954 Act.
A three stage process was involved:
- Using a valuation date at the start of the interim rent period, identifying the open market rent for a tenancy from year to year;
- Considering whether any adjustments may be required; and
- Ensuring that the rent is reasonable given the benefit to the tenant under the tenancy.
HHJ Parfitt ultimately accepted the tenant's valuation of the open market rent during the interim rent period at £140,650 per annum but noted that adjustments were required to reflect the disparity between the passing rent under the previous lease and that figure. The interim rent was therefore determined at £160,000 per annum which the court said balanced the interests of both the landlord and tenant.
The case will be of particular interest to valuers and others looking to understand how courts will determine matters of rent and interim rent under the 1954 Act and particularly the effect of the Covid-19 pandemic on some areas of the market.
Minister v Hathaway & Hathaway  EWCA Civ 936: Requirement to provide Energy Performance Certificates only applies to Assured Shorthold Tenancies granted on or after 1 October 2015
The Court of Appeal considered the validity of a Section 21 notice (the Notice) served on the Appellant (the Tenant) by the Respondents (the Landlords) to terminate his assured shorthold tenancy. The Landlords' possession claim was initially dismissed by the County Court in 2019 on the basis that, because no energy performance certificate (EPC) had been served by the Landlords prior to the service of the Notice, the Notice itself was invalid. The Landlords' appeal to the High Court was successful. The Tenant then appealed to the Court of Appeal.
s.21A(2)(c) Housing Act 1988 allows for an enactment to impose requirements on landlords to provide information relating to energy performance of dwelling-houses. Consequently, the requirement to provide an EPC exists by virtue of Regulation 2 of the Assured Shorthold Tenancy Notices and Prescribed Requirements (England) Regulations 2015 (the 2015 Regulations).
Regulation 1(3) states that the 2015 Regulations are applicable to tenancies granted on or after 1 October 2015. The Landlords argued that, because the Tenant's tenancy was not granted "on or after 1 October 2015", the requirement to provide an EPC did not apply.
On the contrary, the Tenant argued that the requirement did apply because his tenancy was assured shorthold tenancy in existence on 1 October 2018. The s.21A wording had been inserted into the Housing Act 1988 by s.38 of the Deregulation Act 2015 (the 2015 Act). The 2015 Act came into force on 1 October 2015, and s.38 would be applicable to any assured shorthold tenancy of a dwelling-house in England in existence on the third anniversary of the 2015 Act coming into force (s.41(3) of the 2015 Act).
The Court held that s.21A(2) does not oblige the Secretary of State to prescribe any requirements at all. From 1 October 2018, the Secretary of State had the power to extend the requirements of Regulation 2 of the 2015 Regulations to any assured shorthold tenancy in existence on that date. The Secretary of State had not exercised this power. The Tenant's appeal was dismissed.
Accommodating first time buyers: Introduction of a new tenure: the First Home
On 28 June 2021, a new affordable housing product called the 'First Home' was introduced into the market. This new form of tenure is comprised of discounted market rent sale units and has been brought in as part of the government's planning reforms to help first time buyers onto the property ladder.
Notable features of First Homes are as follows:
- When they are first sold, First Homes must be discounted by a minimum of 30% against the market value. Once the discount has been applied for the first sale, the sale price will be capped at £250,000 (or £420,000 in Greater London);
- Local planning authorities have discretion to increase the discount up to 50% or impose a lower cap if they are able to demonstrate that this is justifiable;
- These properties can only be sold to a person who meets the First Homes eligibility criteria; and
- The discount will apply to future sales of the property, having been secured by a section 106 agreement detailing the restrictions on the sale and use of the property and a Land Registry restriction registered on the title on the first sale of the First Home;
In order to meet the First Homes eligibility criteria, purchasers must be first-time buyers and have a combined annual household income not exceeding £80,000 (or £90,000 in Greater London) in the tax year immediately preceding the year of purchase. First Home purchasers must have a mortgage to fund a minimum of 50% of the discounted purchase price, which is intended to act as a deterrent to investors or potential buyers looking to purchase a First Home for commercial gain.
The Government has said that in England, First Homes should account for a minimum of 25% of all affordable housing units delivered through planning obligations and has confirmed that First Homes are its new preferred discounted market tenure. On that basis, developers will need to familiarise themselves with the requirements of First Homes so as to accommodate them in new schemes.
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