Property litigation weekly update - 23 September 2021
This week, ahead of the September quarter day, we cover a commercial rent update, as well as an Upper Tribunal case concerning adverse possession and the application of the "without prejudice" rule, plus our usual links to insights from around the firm and positive news.
September Quarter Day – more frustration for landlords?
29 September will mark the 2021 Q3 rent date for many commercial tenants across all sectors. As both commercial landlords and tenants continue to grapple with the financial implications and ongoing effects of the UK Government's Coronavirus Act 2020 and other measures, we look at how the real estate industry has attempted to weather the storm.
The moratorium on landlord action for commercial rent arrears is scheduled to end on 25 March 2022. The restrictions primarily focus on preventing landlords from taking action against tenants in respect of rent arrears, by prohibiting the use of forfeiture and limiting the availability of the Commercial Rent Arrears Recovery procedure to a current minimum net unpaid rent of 554 days. Similar restrictions have also been put in place restricting the use of winding-up petitions. Landlords can still bring claims for rent arrears falling due before, during and after the relevant period, but enforcement of judgments is problematic.
As a result, many landlords and tenants have spent the Coronavirus pandemic exploring routes to settle rent disputes outside of Court.
Rent deposits and former tenant guarantors
In many cases, rent deposits are likely to have been depleted by now. However, former tenant guarantors can still be pursued, provided that the landlord has served a prescribed section 17 notice on the former tenant within six months of the sum becoming due.
The voluntary Code of Practice
The UK Government's voluntary Code of Practice for commercial property relationships during the COVID-19 pandemic encourages landlords and tenants to act transparently and collaboratively, setting out guiding principles and examples of good practice where rent concessions are to be negotiated. There have been successful examples throughout the pandemic of landlord and tenants agreeing to commercial variations in terms which assist the tenant's cashflow, sometimes with a corresponding commercial benefit to landlords (aside from preservation of their tenant) and sometimes not. Equally, there have been examples of parties on both sides whose positions have been less reasonable.
The overall thrust of the Code of Practice is to encourage an open and transparent exchange of information, seeking to avoid the issues that can arise when one party takes a hardened position or is ambiguous about any concession demands, or is slow to back up a claim that such concessions are necessary for the survival of the business. Tenants also need to be mindful of the need to avoid trading whilst insolvent and to communicate financial difficulties with landlords and other creditors at the earliest possible opportunity. It is generally the case that both the landlord and tenant wish to avoid the insolvency of the tenant and the ensuing vacant unit, but as ever, how matters play out is strongly influenced by how effective they are at communicating with each other. Indeed, as dispute resolution lawyers, our role is often to provide another voice in the discussion, which can often unlock what might have seemed an intractable position.
Formalising variations to lease payment terms
Temporary changes to lease terms such as rent concessions or payment arrangements are usually achieved by means of a side letter.
Permanent changes to lease terms such as reduced rents or converting to a turnover based rent model are usually documented by means of a deed of variation.
The Government has announced that it intends to legislate for binding arbitration as between landlords and tenants, in order to resolve the question of liability for commercial rent arrears arising during a ring-fenced period from March 2020. The Government's policy intention is that landlords should share the financial burden with tenants where they are able to do so and give tenants breathing space to agree new terms, but also that tenants who can pay, should pay. As per our previous bulletins, the scope and powers of any arbitrator remain unspecified.
Details of the forthcoming legislation and arbitration scheme are awaited.
Windmill Holdings SPV Ltd v Adams & Another  - Upper Tribunal provides helpful reminder of the application of the "without prejudice" rule
When applications for adverse possession of land are made, it is often the case that the parties enter negotiations for an agreed sale of the land. In this case, the Upper Tribunal considered whether such negotiations were held on a "without prejudice" basis, even though not expressly labelled as such. This was relevant since, if they were "without prejudice", they could not be put in evidence in a hearing to determine an application for adverse possession of that land.
In the First-tier Tribunal (FTT), Mr and Mrs Adams's adverse possession application was successful on the basis that they had been in possession of the land for at least ten years, that they genuinely believed the land was theirs and had spent substantial sums on the land in that belief. Windmill Holdings appealed the decision to the Upper Tribunal on the basis that the FTT had wrongly excluded evidence of negotiations that took place prior to the adverse possession application – including evidence of alleged comments made by Mr Adams that he knew that the relevant land was not in his ownership – when reaching its decision.
Dismissing the appeal, the Upper Tribunal noted that without prejudice material need not be labelled as such, and it is not necessary for the parties to already be engaged in litigation for correspondence to be classed as being without prejudice. The crucial issue was whether during the course of the early negotiations, the parties had contemplated or might reasonably have contemplated litigation if they could not agree. The Upper Tribunal ruled that the FTT had correctly excluded the evidence as being "without prejudice", because the potential for litigation must have been obvious during those early conversations, as it was the Adams' "encroachment" of the land which was the background to the basis of the negotiations and the reason that the Adams were so keen to purchase the parcels of land.
The Upper Tribunal's decision is a reminder that if negotiations are taking place in circumstances where litigation might reasonably be contemplated if matters cannot be agreed, and there is a real dispute that is capable of being compromised and settled, it is likely to fall within the without prejudice rule. It is generally better for such correspondence to be clearly labelled as "without prejudice" to ensure there is no disagreement as to whether it can be relied upon in the event of a dispute. The flip side of this is that if one wants to make an "open" offer of settlement, this should probably be made explicit, and certainly crafted with care, as it could well otherwise prove to be inadmissible in any future dispute.
Positive News Stories
- The UK Government has announced a relaxation of travel restrictions, increasing the ability to travel abroad before the end of the summer season.
- Forbes the cat, who went missing in Aberdeen 10 years ago, has been found and returned to his owners, after the Scottish SPCA scanned his microchip and identified the owners.
- Italy continues to protect its oldest trees with the Law of the monumental trees of Italy. Since 2013, 3,000 new entries have joined the list, protecting the countries oldest trees for future generations of citizens and visitors to the country.
Insights from across the firm