Property litigation weekly update – 15 July 2022

This week's update includes the first ever arbitration awards being granted under the Commercial Rent (Coronavirus) Act 2022 and reporting on a recent High Court case which looked at whether Heads of Terms are binding. 

First arbitration decisions under Commercial Rent (Coronavirus) Act 2022

This week saw the publication of the first two arbitration awards under the Commercial Rent (Coronavirus) Act 2022.

The first was a win for landlords in a reference made by tenant, Signet Trading Ltd, for rent arrears relief in the sum of £450,000 payable in respect of its office headquarters in Hertfordshire. Signet operates around 300 retail stores under the H Samuel and Ernest Jones brands. It claimed its offices were adversely affected by the Covid-19 closure requirement of its retail stores, as the office was ancillary to and supported its retail business, and that, as such, it should be entitled to relief in the rent payable for its offices.

In an award published by the Falcon Chambers Arbitration service (1 of 7 approved bodies under the Covid arrears arbitration scheme), the arbitrator disagreed. It was held that the business that had been carried on by the tenant at its office premises was not subject to a closure requirement, this being the key question, and therefore it was not adversely affected by Covid-19 for the purposes of the 2022 Act. As such, the rent payable in respect of the offices was not protected debt that fell to be determined under the scheme and Signet was provisionally ordered to pay the landlord's costs of the arbitration. For further details of the scheme click here.

The second decision, also made under the Falcon Chambers Arbitration Service, considered a procedural question about the requirements for a formal proposal made in accordance with the arbitration scheme process and whether that formal proposal could be amended. The scheme sets out a process for each party to make initial proposals and then revised proposals (under section 11 of the 2022 Act) in relation to the protected rent debt. The arbitrator must then assess whether the proposals comply with the relevant principles and, if they do, choose the one that best complies.

The landlord wished to correct an arithmetical error in its initial formal proposal but was concerned to ensure this would not be treated as its revised proposal. The tenant did not want the landlord to have get 3 bites of the cherry instead of 2 as provided for in the 2022 Act. Both parties agreed that a simple arithmetical correction would not preclude a later submission of a revised proposal in accordance with the scheme and the arbitrator's procedural order made clear that only this change could be made and that changing the proposal to find the contested values by a different method would not be permitted.

Nevertheless, the landlord subsequently made changes to the methodology, rather than simple arithmetical corrections. The question was therefore whether this disputed proposal should be viewed as a permitted amendment to the initial proposal, the revised proposal, or neither.

The arbitrator held that, as the landlord had only been given a limited permission to amend and had not complied with the conditions of the procedural order, the disputed proposal was not a permitted amendment to the initial proposal. However, as the disputed proposal did not state that it was made pursuant to section 11 of the 2022 Act, it could not constitute the revised proposal either. As such, the initial proposal stood (unamended) but it was still open to the landlord to submit a revised proposal. The arbitrator declined to make a costs order, citing insufficient information before her to do so. However, the possibility was left open for a future application by the tenant for its costs.

Arbitral awards issued under the statutory arbitration scheme under the 2022 Act are final and binding, with limited scope for appeal in accordance with the Arbitration Act 1996 (as amended by the 2022 Act). These decisions provide useful clarification on the applicability of the scheme and the procedural requirements. However, we await an award clarifying how or if relief will be granted on protected arrears. With only a month or so to go to start the arbitration process in order to carry out the steps required before the deadline for the scheme of 23 September 2022, it remains to be seen how many of the estimated 7,500 unresolved protected arrears cases will proceed to arbitration.

Are Heads of Terms binding?

This question has recently been considered by the High Court in the case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd. Pretoria made a claim for breach of contract. It contended that the heads of terms entered into by the parties in November 2013 were binding and Blankney had therefore agreed to grant Pretoria a 25-year lease of a site.

In 2013, the heads of terms were signed and agreed. The heads of terms were titled 'subject to full planning approval and appropriate consents and easements' and contained exclusivity provisions which prevented the parties from entering into negotiations with third parties.

Pretoria subsequently secured planning permission to build an Anaerobic Digestion Plant in June 2014. Blankney started to demolish the former factory on the site but works were halted by the local authority. On 19 August 2014, a director of Blankney emailed Pretoria to confirm that the exclusivity period in the heads of terms had ended but the intention was to replace it with new heads of terms. By mid-September, due to Blankney's concerns about the project and about Pretoria, it notified Pretoria that it was no longer willing to offer exclusivity. Negotiations broke down and proceedings were commenced by Pretoria in September 2020.

Pretoria's claim was rejected after an analysis of the intention of the heads of terms. There were four central reasons for this: 1) the court held that it would be incompatible for the heads to be a binding contract to provide a lease to Pretoria if, after the end of the exclusivity period, Blankney were completely free to negotiate with third parties, 2) earlier drafts required the parties to observe the conditions of the heads of terms until the final agreement was accepted and signed. This was removed in subsequent drafts, 3) the lease was to be contracted out of the 1954 Act. The court explained that this showed there was no intention of entering into a binding contract until the necessary processes (to contract out) had been completed and 4) there were essential terms that had not yet been agreed by the parties.

Whilst it would be unusual for heads of terms to be binding, this is not impossible. This case highlights the need for clear drafting when heads of terms are being proposed.

Insights from around the firm

Positive news

  • Cubes of lard, cod liver oil and whipped cream were used to help move two young polar bears to their new bachelor pad at Yorkshire Wildlife Park.
  • Ahead of its 74th birthday, the NHS announced it will trial using drones to deliver chemotherapy drugs from Portsmouth to the Isle of Wight.
  • Two runners got engaged at a Manchester parkrun and plan to do an ultra-marathon in Scotland to celebrate.

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