In this update we focus on five commercial and residential topics where we may soon see changes to the law and we also highlight a number of statutory provisions that can trip up landlords of mixed use developments.

Dates and payment of rent as an expense of the administration

The law on payment of rent as an expense of the administration may soon develop further, as permission to appeal was given at a recent hearing in the Game group administration. In Re Games Station Ltd and others [2013] ChD, the question once again was whether rent and service charge payable in advance that fell due before the administration were an expense of the administration. Landlords had welcomed the decision in the Goldacre case in 2009, which established that administrators were obliged to pay rent as an expense of the administration if all or part of the premises were being used for the benefit of creditors. However, this only applies to rent that falls due during the course of the administration. Consequently, if an administration appointment takes effect shortly after a quarter day, and rent is payable on the usual quarterly in advance basis, there will effectively be almost a quarter of rent free occupation. So far, all attempts to challenge this, notably in the Luminar case last year, have failed, and there has been a spate of judiciously timed administration appointments.

In the Game administration, administrators were appointed on the day after the March 2012 quarter day, with the result that substantial rent payments were avoided. At a recent hearing, following Goldacre and Luminar, the court held that pre-administration rent could not rank as an expense, but gave permission for an appeal to the Court of Appeal, commenting that this question was one of concern to landlords and administrators generally. The next step in this case will be awaited with interest by the property industry and insolvency practitioners alike.

Commercial Rent Arrears Recovery

The expected implementation date for the Commercial Rent Arrears Recovery (“CRAR”) regime has been pushed back again, with April 2014 now looking likely. The proposals have been revised but the key features remain, notably the requirement notice to be given which, landlords fear may make CRAR ineffective:

  1. A landlord can only recover for rent paid for “possession and use” of the premises and for VAT and interest paid on that rent, meaning that service charges, insurance and other sums are excluded even if they are reserved as rent.
  2. Notice must be served on the tenant before seizing the goods but notice must actually be given by the enforcement officer, not by the landlord. It is now proposed that the notice period be seven clear days not including Sundays, Bank holidays or the day of service.
  3. CRAR only applies to commercial premises, as its name suggests.

New proposals put duty on landlords to check tenants’ immigration status

On 3 July 2013 the Home Office published a consultation document proposing to require landlords to check the immigration status of new tenants. Under the proposed rules, landlords will be under a responsibility to ascertain the immigration status of every adult who is going to be living in their accommodation before the rental arrangement starts. It will also be possible for letting agents to assume this responsibility, and the attendant liability, on behalf of landlords, provided this is agreed in writing.

The Home Office has been keen to stress that these proposals do not require landlords and tenants to become experts in immigration matters and has provided a list of documents capable of establishing the right to reside in this country.

The proposed fines for non-compliance range from £1,000 to £3,000 in respect of each adult illegal migrant. Certain statutory defences are proposed, including where forged documents are presented and where sub-tenancies have been entered into without the landlord’s knowledge.

The consultation period is open until 21 August 2013. Please click here for a link to the survey.

The draft Consumer Rights Bill: implications for residential lettings

On 12 June 2013 the Government published the draft Consumer Rights Bill, part of which deals with unfair terms in contracts. Currently, this area of law is dealt with under the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).

Whilst UCTA does not generally apply to property contracts, UTCCR apply to residential lettings where the landlord is acting in the course of his business but the tenant is a natural person.

The draft Bill proposes a number of significant amendments to the law on unfair terms. UCTA is to be consolidated and UTCCR revoked. Therefore, practitioners dealing with property documents that incorporate standard contract terms in line with UTCCR will need to be aware of the new provisions.

Points of note include:

  1. Non-contractual notices are also to be governed by the new regime whereas previously only actual contracts were covered.
  2. All consumer contracts and notices should be in plain and intelligible language (or “transparent” as described in the Bill).
  3. There is a new test for whether price and subject terms can be exempt from the “fairness” test. To be exempt, such terms need to be “transparent” and “prominent”. The more unusual and onerous the term, the more “prominent” it has to be.
  4. The Bill restates the exclusion of any terms that seek to restrict liability for personal injury or death due to negligence.

It is particularly important to note that the Bill expressly requires the court to consider the application of the unfair terms rules in disputes even where a party has not raised this as an issue.

Although the Bill has not yet been formally introduced to Parliament, it is expected to be implemented by mid-June 2014. Whether this short timescale allows full account to be taken of feedback received during consultation remains to be seen. In any event, practitioners would be well advised to start considering what amendments, if any, might be required to their current standard terms for ASTs and other residential letting agreements.

Service charges in mixed use developments in England and Wales

Mixed use developments, typically with commercial units on the lower floors and residential units above, are becoming increasingly common. These developments present particular challenges for landlords and their managing agents, especially in the area of service charges, where failure to follow statutory procedures can severely restrict financial recovery.

The statutory regime applicable to service charges for residential property is well known. It is not always recognised, however, that the regime can extend to mixed use developments. Where there is a lease, whether headlease or underlease, of premises that include separate dwellings within the demise, the residential statutory regime must be followed. Thus, the regime can apply to both the superior and the intermediate landlord.

Four particular points to note are as follows:

Notices

The landlord should comply with the residential consultation regime to minimise the risk of a recovery shortfall. Failure to comply can result in non-recovery of anything above the statutory threshold of £250.

The statutory consultation regime applies where the landlord is proposing to carry out any major works that will exceed the current statutory limit of £250 or in respect of certain long term contracts entered into by the landlord. The tenants must be served with a series of notices containing prescribed information and the landlord then has a duty to have regard to any observations the tenants make in response.

A landlord can apply to the tribunal formerly known as the Leasehold Valuation Tribunal (“LVT”), but which since 1 July 2013 forms part of the First-tier Tribunal (“Property Chamber”) to be allowed to dispense with the consultation requirement. Dispensation will only be granted if the tribunal considers it reasonable to do so.

Landlords have found some comfort from the Supreme Court’s recent decision in Daejan Investments Ltd v Benson and others [2013] UKSC14, which overturned by a 3:2 majority the decisions of the LVT, Upper Tribunal and Court of Appeal.

In Daejan, the landlord of a mixed use development had failed to comply fully with the statutory consultation regime and had applied to the LVT for dispensation. The LVT had refused to grant dispensation and had reduced the residential tenants’ contributions to £250 each. The Supreme Court, however, found that the residential tenants had not actually suffered much, if any, prejudice, despite breaches by the landlord of some of the consultation requirements, and granted dispensation. Deadline

The landlord only has eighteen months from the date on which it incurs costs to demand payment or notify the tenant of the amounts due. It is therefore important to maintain momentum and diarise key dates.

Challenge

A tenant can challenge the service charge by applying to the Property Chamber to determine whether the service charge is payable and if so what amount is reasonable. Thus, the head landlord might face an application by a sub tenant directly against it to determine these issues.

Information

A service charge demand must be accompanied by a summary of the tenant’s rights and obligations. If the prescribed statutory information is omitted the tenant is entitled to withhold payment of the sum demanded. It is therefore imperative to ensure that all demands comply with the relevant regulations.