A REAL ESTATE DISPUTES GUIDE TO LIKELY TRENDS IN 2023 AND BEYOND
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Forearmed Quick Read
A real estate disputes guide to likely trends in 2023 and beyond
"Herbert Smith Freehills has an impressive property litigation practice with an emphasis on major commercial real estate" (Chambers and Partners, 2023).
In fact, our Real Estate Dispute Resolution team has experience going back to the early 1990s. We have guided our clients through several cycles of the economy which equips us with the ability to make accurate predictions of risks and potential disputes on the horizon which every real estate developer, investor or occupier should know about, and suggestions to avert them. After all, forewarned is forearmed…
Matthew Bonye Head of Real Estate Dispute Resolution, London T +44 20 7466 2162 [email protected]
Here is a summary of our predictions, with a link in each case to our detailed view and our roadmap to preparing for the coming months.
1. An upturn in commercial and residential tenant activism, including service charge challenges due to the deployment of the Building Safety Act 2022
With increased pressure on cashflow, tenants will be looking at all available means of saving costs, and professional organisations looking to capitalise on group claims are likely to become more active. The coming into force of the Building Safety Act 2022 is a significant aspect of this. Landlords may no longer be able to claim the costs of cladding remediation through the service charge, and recovery of other fire safety costs is restricted and subject to a cap. Developers will risk prohibition on further development work if safety issues are identified.
We therefore expect to see an upsurge in withholding of, and challenges to, service charges throughout 2023. Landlords of large buildings and mixed used schemes seeking recovery of arrears are likely to see defences based on the Building Safety Act where work has been carried out on fire safety aspects of the building. Fire safety issues should therefore be even more at the forefront of both landlords' and developers' minds.
2. There will be continued political momentum for further residential leasehold reform in 2023 and beyond
In June 2022, the Leasehold Reform (Ground Rent) Act 2022 came into force limiting the ground rent chargeable on almost all new long residential leases to one peppercorn a year, effectively restricting new ground rents to zero financial value.
The Government has said that this was just one of the ways in which it was going to introduce changes to the residential leasehold system, something which commentators (and the Law Commission) have been saying for years has needed wholesale change.
We expect that wider changes to the leasehold system will be introduced over the course of 2023 and beyond, including a new supposedly "fairer, cheaper and more transparent" process for residential leaseholders to extend their leases. Whether the valuation methodology will be fair to landlords of long leasehold tenants remains to be seen.
3. Green lease provisions will become much wider and more common in scope, as the focus on ESG continues to take centre stage
Green lease provisions are already often seen, particularly in relation to energy efficiency and preserving and improving a building's Energy Performance Certificate ("EPC") rating. As regulatory requirements for energy performance get stricter, such provisions will become even more widespread to ensure landlords retain the ability to comply.
Beyond just energy efficiency, a wider range of green lease provisions on a variety of topics will gain prominence in new and renewal leases, as landlords and tenants respond to an increasingly prominent ESG agenda. Such provisions will often be agreed between the parties, but courts will likely become more willing to order their inclusion in business lease renewals under the Landlord and Tenant Act 1954 (the "1954 Act") as time goes on.
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4. The Private Rented Sector (PRS) may become less attractive as an investment class, although quality of housing stock should improve
There has been a lot of focus on levelling the playing field in the private rented sector in recent years and this trend is set to continue.
The Government has recently reaffirmed its commitment to end so called "no-fault evictions" for tenants in the private rented sector with a manifesto pledge which now looks set to go ahead despite recent suggestions of a U-turn. The sense is that residential tenants may shortly be in a much stronger position to assert rights against their landlords in terms of the quality of their property and their security to remain in occupation of it. This in turn may mean it could become harder for landlords (both individual and institutional) and investors to manage what may prove to be competing interests in PRS or mixed-use developments. In a time when we have a severe housing shortage, could these proposals have the unintended consequence of further reducing housing stock as the burdens for landlords outweigh the benefits? And will an onerous regime cause landlords to demand a higher rent in return for new tenant rights and security of tenure?
5. Professional negligence claims against solicitors and valuers are likely to increase
In an uncertain market, sellers, purchasers and lenders can find themselves saddled with unattractive investments. Landlords with non-paying tenants may first try to enforce, against tenants, guarantors and former tenants. When immediate remedies fail, and losses crystalise, investors may cast the net wider to recoup their damages. Towards the end of a period of downturn, property investors start to consider claims against their professional advisers.
Claims against solicitors for ineffective guarantees, unusable forfeiture clauses and failure to report on encumbrances affecting value are likely to increase in the current environment. Valuers too will come under the microscope for bullish valuations that have not held up in market conditions.
6. Transactional default and enforcement action will continue to increase
Adjusting to a post-pandemic world has proven less straightforward than hoped by many. As the demand for commercial and retail premises remains volatile, many tenants are exercising their break clauses or looking for
ways out of agreements for lease which are less attractive than when they entered into them. We are also seeing a trend in purchasers looking to challenge their obligation to buy under sale contracts. This leaves landlords and/or sellers taking enforcement action to try to uphold or defeat the transaction under scrutiny. We will expect to see such disputes and enforcement action remain elevated so long as demand for commercial and retail premises remains dampened by flexible working and online shopping, only to be further catalysed by the nationwide cost of living crisis.
7. More tenants to seek early surrenders for under-utilised premises, or seek to consolidate or re-purpose the use of their office premises in light of new working models
The Government's decision to close certain businesses and venues in response to the Covid-19 pandemic throughout 2020 and 2021 has meant that there are still many commercial premises, such as offices, which have been left seemingly under-utilised and empty by tenants compared to pre-pandemic levels.
Part of this change can be explained by the move to remote and hybrid working models for office employees post-pandemic. Employees are now more likely to be afforded the flexibility of working from home whilst also using the office as a less frequent hub in which to connect and collaborate with colleagues. All of this has meant that office tenants have found that they do not necessarily need the same level of fixed office or desk space in their premises as they once did and are seeking ways in which to hand back, consolidate or re-purpose their premises to support their new business models and their employees' new ways of working.
In light of this, landlords will need to be wary not inadvertently to accept a surrender of a lease, or waive a breach of the lease user provisions, as tenants continue to test the parameters of this new post-pandemic world with less need for traditional office spaces.
8. Lease provisions will be strained as life sciences tenants attempt to repurpose under-used offices for research and development
Post-pandemic, the need for urban office space remains depressed, in contrast with the worsening shortage of laboratory space. Life sciences tenants are increasingly looking to repurpose their offices to laboratories. Facilitated by a conducive planning backdrop, life sciences tenants will increasingly seek to stretch user and alterations provisions in their leases to accommodate plans to repurpose their existing offices, or parts of them, as laboratories. Landlords will need to engage with questions on the interpretation and scope of these lease provisions and consider their strategy if they wish to resist.
Where tenants seek to introduce laboratory space in a multi-let building, landlords will need to confront risks such as ensuring their service charge and metering arrangements can accurately charge potentially increased utilities consumption by the laboratory and ensuring they have sufficient insurance and managing agents capable of accommodating the unique requirements of research premises.
However, the upshot for landlords is that rent reviews may yield higher rents where a user clause is wide enough to include life sciences in the hypothetical letting.
9. Intervention needed to close gaps in the telecoms Code prejudicing developers
A structural defect in the drafting of the Electronic Communications Code has been identified by the courts which affects properties with an intermediate lease in place. The defect adds another layer of complexity for developers in an already long, dual stage process to remove telecoms equipment. The issue is critically important, so legislative intervention may be needed if the gap is not closed in the appeal courts. Unfortunately, we are unlikely to see a quick fix, so developers may need to re-think their holding structures in the meantime to avoid delay and uncertainty.
10. Radical changes to the business rates regime will undermine confidentiality in commercial lease dealings
Significant changes to the way that the process will be operated are expected over the coming years: revaluations will take place more frequently, which may be a benefit to occupiers, but, in return, occupiers will have a significantly higher burden in providing information to the Valuation Office Agency about their occupation. There will also be additional reliefs available to assist investment in property
and an exemption for eligible plant and machinery used for onsite renewable energy generation and storage.
As revaluations take place more frequently, there may be a move away from Transitional Relief, which is available for the life of the List where ratepayers face significant increases to the rateable value at revaluation. No detail of any changes to Transitional Relief for the 2023 Rating List have yet been announced but it is anticipated that the proposals will be published imminently.
11. Developers must consider options to decarbonise or risk delay and challenge
Decarbonisation. Net-zero. ESG. Sustainability.
All responsible developers should be very familiar with these terms now, particularly as the UK became the first major economy in the world to pass laws to achieve net zero carbon emissions by 2050. However, our buildings are responsible for over 25% of UK carbon emissions, according to the RICS' recent report "Decarbonising UK Real Estate", which concludes that "the UK will not meet its climate targets without reducing carbon emissions from buildings".
The public inquiry into Marks & Spencer's plans for its flagship Oxford Street store has recently demonstrated the importance of developers engaging with these issues.
12. Landlords will be faced with continuing and potentially increasing risk of breaching sanctions when managing portfolios of tenants
The sanctions regime was (for the most part) introduced against companies and individuals linked to Russia, this arising after Russia's invasion of Ukraine. Most well-known is the list of individuals that are specifically identified and whose assets have been frozen by the legislation. However, the sanctions regime goes much further than that. Landlords may find themselves unable to accept rent or enforce obligations given by guarantors, even when the guarantors are not subject to the regime. In particular, a landlord is at risk that a tenant becomes subject to sanctions by virtue of a change in ownership which may not be immediately obvious to it. This places an onerous obligation on landlords who manage portfolios, to monitor and keep under review the ownership structure of their tenants, or risk facing civil or criminal liability by breaching the sanctions.
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Timescale: Q1-Q4 2023 Comment
The Building Safety Act 2022 was granted Royal Assent on 28 April 2022, and some of its provisions came into force on a staggered basis throughout 2022. Others will come into force at a later date. The Act was introduced in response to the Grenfell Tower tragedy. It seeks to prevent the costs of remedying unsafe cladding and other consequential issues falling on individual leaseholders in existing buildings and introduces a more stringent building control regime for the construction of new higher-risk buildings.
The Act is a lengthy and complex piece of legislation, and new enough that its repercussions in the sector are only now beginning to be visible. From a service charge perspective, the basic thrust of the Act is that it is the building owner, and not the leaseholder or tenant, who is responsible for remedying defects in cladding and other fire safety features, and it will be a criminal offence for the building owner to seek to recover those costs from the leaseholders or tenants through the service charge.
In certain circumstances, the government can take action to require the removal of defective cladding and to enforce the costs of doing so against the developer. There are additional provisions allowing the government to prohibit developers from carrying out further development where there are safety concerns.
Certain parts of the Act apply to buildings that are at least 5 storeys or 11 metres high. Developers or owners of buildings of that size are likely to face significant costs on any structures with unsafe cladding, and landlords will be unable to recover those costs by recharging them to their tenants.
In our experience, challenges to service charges become more prevalent in periods of economic uncertainty, and in the context of higher energy costs across the board, business will be looking at all possible avenues for reducing their outgoings. It therefore seems likely that tenants will capitalise on the new statutory tools to bring further challenges to service charges against building owners, landlords and insurers, with the added threat of developer claims and enforcement action.
Steps to take now
Owners of affected buildings should already have audited and considered their buildings' cladding and fire safety risks. If any reinstatement works are necessary, advice should be taken as to the extent to which those can, and more importantly cannot, be charged to the flat owners or renters.
Landlords and owners should ensure they are familiar with and advised on the provisions of the Building Safety Act 2022 to avoid costly disputes with leaseholders, or potential criminal liability.
Developers should be aware of the cladding and fire safety features of any recently developed properties, and budget for carrying out of any remedial works as early as possible now that the Act has passed into law.
1. An upturn in commercial and residential tenant activism, including service charge challenges due to the deployment of the Building Safety Act 2022
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Timescale: Q1- Q4 2023 and beyond Comment
In January 2021, the Housing Secretary confirmed long awaited proposals to ban leasehold ground rents in England and to introduce a new mechanism for leaseholders to extend their leases. This announcement followed the Law Commission's recommendations in 2020 for wholesale reforms to the residential leasehold system which had been decried for many years as being outdated and "medieval".
During 2021/22, a draft bill swiftly passed through Parliament resulting in the Leasehold Reform (Ground Rent) Act 2022 (the "2022 Act"), which has now banned ground rents for most new long residential leases. However, the extension mechanism remains unimplemented, and our expectation is that further leasehold reform will be on the agenda during 2023 and beyond.
The proposed extension mechanism would be for existing leaseholders of houses and flats to extend their leases up to 990 years without needing to pay a ground rent to their landlord. Leaseholders of houses can currently only extend their term once for 50 years with a ground rent, whereas flat owners are currently entitled to do so multiple times for 90 years with a nil (peppercorn) rent.
It does not seem that the Government considers that the 2022 Act has gone far enough in itself to answer the concerns about the residential leasehold system as a whole. Given that the 2022 Act does not have retrospective effect, there are still millions of leaseholders who are currently paying ground rents because their leases were, for example, granted before 30 June 2022 when the 2022 Act came into force. The introduction of a new mechanism for existing leaseholders to do away with ground rents completely, and to extend their lease terms up to 990 years, would be a game-changer in the residential leasehold market.
Given the lack of detail provided with the Government's as yet unimplemented announcement, there is no clarity currently as to what the basis would be for assessing compensation payable to a landlord in return for its loss of ground rent income. Currently, leaseholders who wish to extend their leases, for example if they wish to sell or re-mortgage, face paying a premium to their landlord to reflect the benefit to them of replacement of a ground rent with a peppercorn rent. There is also a complicated valuation process that deals with how that, and "marriage value" (which reflects the increase in value of the property following the lease extension) is calculated and shared with the landlord.
We expect that the lack of progress on this aspect of the announcement, if we ignore the wider political and economic factors which have taken centre stage during 2022, is that it is hard to implement a "one cost fits all" approach to a new lease extension process. There are hugely varying property values across the country and the reality is that a process which extends a lease term by up to 990 years turns it into a virtual freehold. Landlords would find that their own reversionary interest (ie, when they can expect to re-occupy the premises when the lease expires) would become so distant as to be almost meaningless, with leasehold tenure working only to ensure that positive covenants are automatically enforceable against tenants and their successors in title.
It will be hard for the Government to introduce legislation which fairly balances the interests of the landlords or investors who might be relying on the income stream afforded by ground rents, with the interests of leaseholders under a new system which takes this income stream away. For leaseholders, the concern will be that any new system (which includes the complicated legal process itself) is not as prohibitively expensive as the existing system, and to ensure that the premium/costs for extending a lease to 990 years does not increase commensurately so as to create a large financial obligation at the outset rather than over the lifetime of the term by paying ground rent to their landlord. By way of analogy, we have seen recent examples where a change in Government policy designed to help individuals (eg stamp duty holidays) has actually seen an increase in property prices and left those the policy was designed to help in a worse position!
Steps to take now
Review new residential leases to ensure that there are no provisions demanding a ground rent beyond a peppercorn. There are financial penalties for persons breaching the 2022 Act (between £500 to £30,000) if they demand and accept a prohibited rent and do not refund it to the tenant within 28 days of receipt.
Review and identify existing residential leases which were granted before 30 June 2022 to determine which leases may be affected by the proposed extension mechanism if legislation is introduced.
2. There will be continued political momentum for further residential leasehold reform in 2023 and beyond
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reasonable between the parties taking into account the terms of the existing lease. It is not sufficient for a landlord to say that they will be content for an increase in tenant obligations to be reflected in a lower market rent. As the ESG agenda advances, we foresee that courts will become increasingly open to the inclusion of green lease provisions, particularly if framed as also ultimately benefitting the tenant as well as landlord, as the country grapples to meet net-zero carbon emissions by 2050.
However, enforcement of green lease provisions is likely to be difficult using traditional methods. This is particularly the case where green lease provisions amount more to a statement of intent than a specific legal obligation. Forfeiture may be difficult to exercise for breaches of green lease provisions if perceived to be minor and, where exercised, courts will likely be quicker to grant relief from forfeiture than for breaches of more established lease covenants. Damages claims pursued by landlords are likely to be equally challenging, with difficulties proving loss and showing that any loss was caused by the tenant's breach of green commitments, particularly in the context of multi-let buildings where causation of loss from environmental performance failings will be difficult to allocate between tenants.
Therefore, at least at first, green lease provisions will likely be most effective to bring about behavioural change and encourage cooperation between landlords and tenants, rather than being enforced against unwilling tenants.
Steps to take now
Landlords should review the energy efficiency and environmental performance of their property portfolios and consider how improvements might be made under existing lease provisions or by virtue of upcoming lease expiries and renewals.
Consideration should be given to green lease provisions in new and renewal leases, at least regarding EPC standards and potentially on a wider range of topics.
Where landlords propose green lease provisions in renewal leases under the 1954 Act, they should attempt to agree these with the tenant rather than leaving them to be decided by the court.
Landlords should seek advice where they wish to enforce green lease provisions in existing leases, due to the potential difficulties in so doing.
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s 3. Green lease provisions will become much wider and more common in scope, as the focus on ESG continues to take centre stage
Timescale: 2023 and beyond Comment
Traditionally, 'green lease provisions' have been a diverse category of measures, spanning formal lease obligations and looser commitments (such as in a memorandum of understanding) which require landlords and tenants to manage and improve a building's environmental performance.
The green lease provisions currently seen most often relate to energy efficiency, such as prohibiting tenant alterations that would reduce the property's EPC rating. This is understandable given that regulations (the 'MEES Regulations') already require a commercial property to have an Energy Performance Certificate ("EPC") rating of at least E before a new or renewal lease can be granted and, from April 2023, will require this rating for a property to continue to be lawfully let.
In the longer term, the government has proposed that all commercial properties must have a minimum rating of B by 2030, with a potential interim milestone of C by 2027. Provisions safeguarding a building's EPC rating and/or providing the landlord adequate ability to improve it will become even more widespread, to ensure that landlords are not caught out by these rapidly increasing standards.
Beyond this, the drive to include wider-ranging green lease provisions is increasing, caused by a desire by landlords to future-proof buildings against volatile energy prices and stricter
regulatory regimes but also to ensure that buildings remain attractive to tenants, who will increasingly follow shifting market sentiment in emphasising ESG policies.
According to JLL's Decarbonising the Built Environment report, 34% of occupiers globally already had some form of green lease provisions by late 2021 but a further 40% planned to sign up to them by 2025.
We will likely see provisions such as consent for alterations linked to the environmental performance of the proposed works, more environmentally-angled reinstatement provisions and provisions which allocate the increased costs of buying specifically green energy for a building or undertaking works to improve the building's environmental performance. The scope of provisions will extend more frequently beyond energy efficiency, encompassing water and waste management, sustainable materials for repairs and alterations and green transport measures.
It remains to be seen how the courts will approach such provisions if asked to order their inclusion in renewal leases under the 1954 Act under the guise of 'reasonable modernisation'. In the absence of any reported cases, the current position is that a party proposing a change to the lease must be able to demonstrate that the proposed change is fair and
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Timescale: Q3 2023 and beyond Comment
The Government has recently confirmed that the Renters Reform Bill (the "Bill") will be introduced in the 2022-23 parliamentary session to abolish 'no-fault' section 21 evictions in the Private Rented Sector ("PRS"). Section 21 notices are currently used by private landlords to repossess their properties from assured shorthold tenants without having to establish any fault on the part of the tenant. Once the initial fixed term of the tenancy has passed (usually 6 – 12 months), a section 21 notice gives the tenant two months' notice to vacate. There has long been concern that such a procedure has a detrimental effect on tenants' wellbeing and sense of security, where, for example, a model tenant may nonetheless face the prospect of eviction from their home through no fault of their own during the current cost of living crisis.
Looking ahead, the proposal is that all tenancies will be converted to periodic tenancies where the tenant can end the lease at any time on two months' notice, however landlords will be restricted to being able to end the tenancy only in specific circumstances.
The Government has confirmed its plans to introduce the Bill following the Fairer Private Rented Sector White Paper in June 2022, however these policies and reforms are not expected to form part of legislation until at least late 2023. Once the Bill becomes an Act of Parliament and comes into force, the reforms will impact both current and new tenancies in two stages. First, after at least six months' notice, all new tenancies will become periodic and governed by the new rules. Then, at least 12 months' later, all existing tenancies will automatically transition to periodic tenancies and be governed by the new legislation.
The Bill will reform the current grounds for possession to ensure that landlords have effective means under section 8 of the Housing Act 1988 to gain possession of their properties when necessary, including strengthening mandatory grounds for possession concerning persistent rent arrears and severe anti-social behaviour. New discretionary grounds will also be introduced to allow landlords to sell or move close family members into the property.
These reforms specifically exempt purpose-built student accommodation. However, students renting within the general PRS will be included within the reforms, such as houses in multiple occupations ("HMOs"). The rationale to only exempt purpose-built student accommodation from the reform is due to some students not having family or local ties to their place of
study meaning that these students need the same opportunity as other renters to live in secure homes within the PRS.
The government also proposes to allow landlords to increase rent once annually for residential tenancies, aiming to bring to an end rent review clauses and improve tenant ability to challenge excessive rent increases through the First-tier Tribunal. This ban may negatively impact how the investment class assess rental forecasts and will limit a landlord's ability to quickly respond to market movements in rent, particularly once "no-fault" evictions are banned.
Further improvements in tenants' rights include a proposal to "ensure landlords do not unreasonably withhold consent when a tenant requests to have a pet in their home, with the tenant able to challenge a decision." This proposal comes with amendments to the Tenant Fees Act 2019 where pet insurance could become a permitted payment so that damage to property is covered.
Although these reforms may make the PRS less attractive as an investment class, the quality of housing stock should improve as the Bill also seeks to extend the Decent Homes Standard to the private sector. The Decent Homes Standard plays a key role in setting standards for social homes to meet by considering statutory minimum standards, facilities and services, the state of repair, and whether the home provides a reasonable degree of thermal comfort. The extension of the Decent Homes Standard will benefit around 1.6 million people who currently reside in hazardous, low-quality homes that pose an imminent risk to the tenant's health and safety. To enforce this, a higher duty will need to be imposed on landlords to ensure properties meet the Decent Homes Standard, which could be achieved by any breach being a criminal offence.
Steps to take now
Review and identify any ASTs ("Assured Shorthold Tenancies") where the landlord is still currently able to issue a section 21 "no fault" ground to obtain possession where this is needed.
Identify any purpose-built student accommodation and other student-rented private accommodation to determine whether they will be affected by the proposals.
Review the Decent Homes Standard to identify any properties that fall below this standard and consider remediation works.
4. The Private Rented Sector (PRS) may become less attractive as an investment class, although quality of housing stock should improve
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Timescale: 2023/2024 Comment
Claims against professional advisers tend to hit the Courts 1-2 years after the initial shocks of a downturn start to crystalise. The wave of claims arises when buyers, sellers, lenders, and landlords assess their losses on hitherto attractive investments, and when there is a clear picture of how the asset has performed over the medium term. There is a good reason for this: professional negligence claims can be complex to prove. While there is a wealth of case law on the subject, each case is fact-specific, and inevitable questions of causation, measure of damages and mitigation arise.
Issues of valuation can also be tied up with the legal advice given on the basis of the valuation, so claims may well arise against both the solicitors and the valuers involved. In the recent case of Charles B Lawrence & Associates v Intercommercial Bank Limited (2022), the Privy Council analysed the separate duties owed by the solicitors (in advising on the title to the property) and the valuers (valuing the property on the assumptions in the legal advice), in a case where a loan had been made on a security that turned out to be worthless. The Privy Council attributed loss accordingly, and the lender did not recover the full amount of the loan.
Valuation itself is particularly challenging in an uncertain market, and it is important to be very clear as to the basis of the valuation. Blind reliance on the number alone can lead to unrealistic expectations and, ultimately, disappointment. If the basis of the valuation (and consequently the scope of the valuer's duty) is limited or unclear, a negligence claim against the valuer may not be successful.
Claims by lenders against valuers for overvalued mortgage-backed securities are particularly likely to rise. In those cases, the questions of the valuer's duty of care and the lender's reliance on the valuation are likely to be disputed.
It is important to be clear on the scope of the solicitor's duty to advise. The Court of Appeal reiterated in the recent case of Spire Property Development LLP & Anr v Withers LLP (2022) that a solicitor does not owe a duty to go beyond the scope of their express instructions and give advice in relation to other matters, save where that advice is "reasonably incidental" to the sought advice. In general terms, that means that the solicitor is obligated to answer the specific question asked, and is not required to consider wider questions that might assist the client.
The law around landlords' remedies, including claims against former tenants and their guarantors, demonstrates how claims against existing guarantors, and forfeiture claims, depend on the correct legal advice having been given at the time of the lease grant, or acquisition, of the property. In a shrinking market where arrears claims become more common, imperfect drafting in agreements or leases that – in better times – might have gone unused and unnoticed are brought into sharp focus. Landlords faced with non-paying tenants, who cannot rely on their remedies due to errors in the drafting or advice, are therefore likely to look to their former solicitors' insurers to make up any shortfall. We expect to see an upsurge in those claims over the medium to long term.
Steps to take now
Be aware of the limitation period for negligence claims and issue proceedings well before the earliest possible date for expiry or agree a standstill agreement.
Regularly assess the basis for valuations and check that they are still accurate, particularly where an asset is underperforming.
Put in place document holds on any correspondence and reports with solicitors and valuers, to ensure that evidence is preserved.
Be cautious about "bullish" valuations, especially if they were given before the market started to fall.
Be clear on what your solicitor team is being asked to advise upon, and if in doubt, ask clear and specific questions.
5. Professional negligence claims against solicitors and valuers are likely to increase
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Timescale: Q1-Q4 2023 Comment
During lockdown, as many retail and office spaces were forced to close, demand for premises plummeted and has not returned to pre-pandemic levels since. With the shift to agile working and online shopping, it is questionable if it ever will. As the cost-of-living crisis continues to affect individuals and businesses around the country, businesses are having to reconsider whether to enter into property transactions or even exit arrangements altogether where they have that option.
One impact that we are seeing is an upturn in commercial tenants breaching the terms of their leases. Many tenants of retail or hospitality premises benefited from the Covid-19 restrictions on forfeiture and other landlords' remedies for non-payment of rent. Those restrictions were lifted in March 2022, but the Covid commercial rent arbitration scheme provided continuing protection for certain ring-fenced arrears. That scheme closed in September 2022 and if a tenant did not make a referral to an arbitrator under the scheme, all protection is now lost. A landlord's full suite of enforcement options are now back on the table and we are already seeing a rise in enforcement action as tenants are seeking various ways to minimise costs by breaching their lease, including unauthorised sub-leasing/sharing occupation, increased service charge disputes or breach of keep open clauses.
With regards to office space, landlords have traditionally been reluctant to allow their tenants to sub-let premises, and in the instances where it is allowed often do not have a great deal of involvement with the sub-tenant. However, we may see a change in attitude to reflect the new climate of flexible working. Allowing a tenant to sub-lease parts of premises which are under-utilised can help to prevent a potential tenant default.
Where tenants have the benefit of break clauses, they are often subject to compliance with conditions such as service of a notice, payment of rent and giving up occupation, As break conditions are strictly construed by the courts, even a minor discrepancy can be enough to frustrate the operation of the break. This is particularly important where the tenant has a one-off break on a certain date, as if it is not exercised properly, the tenant remains on the hook for the rest of the term, unless it can negotiate an exit with its landlord. This will put the landlord into a strong bargaining position.
Any agreement for lease or sale agreement where there is an element of conditionality also provides ripe ground for disputes. We are seeing tenants default on completion of leases pursuant to agreements for lease and buyers failing to complete purchases. The changed and somewhat uncertain landscape means that tenants and buyers do not want to, or are financially unable to, go ahead with what they signed up for. However, landlords may have invested significantly in a property on the basis that the agreement for lease was in place, or sellers may be unable to secure comparable terms of sale so attempts to terminate agreements by tenants/purchasers are likely to be carefully scrutinised and challenged.
Unfortunately, the risk of transactional and lease default cannot be avoided entirely. However, remaining in good communication with the counter-party can help a landlord/seller to spot when appetite for a deal is softening or when a tenant is experiencing hardship which may lead to default, so that landlords/sellers remain one step ahead.
Steps to take now
Review documents to check conditionality and ensure that all steps are taken to satisfy any matters in your control.
Tenants should instruct their solicitors to prepare and serve break notices and advise on any conditions to operate the break, whilst landlords would be well advised to review notices received and break clauses carefully against any notice provisions or conditionality.
Act promptly in relation to any suspected default to ensure that you understand the options open to you so that you can try to mitigate the position as best as possible.
6. Transactional default and enforcement action will continue to increase
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FOREARMED: A REAL ESTATE DISPUTES GUIDE TO LIKELY TRENDS IN 2023 AND BEYOND
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Timescale: Q1 – Q4 2023 and beyond Comment
We are seeing an increasing trend towards tenants seeking ways to minimise liabilities or extricate themselves from the leases which they entered into pre-pandemic which do not have the benefit of break clauses. Whilst the entry into a 5, 10 or 15 year office lease might at one point have provided these tenants with the certainty they required to attract business and employees to fixed premises, with the new remote/hybrid model of working post-pandemic, these tenants are now finding that their offices are currently under-utilised and/or no longer fit for purpose.
We are seeing increasing examples where tenants are attempting to negotiate early surrenders with their landlords in order to hand back leases, or floors within a larger demise, in order to consolidate their working spaces and cut costs in an increasingly difficult market. Landlords, particularly those who own a larger building or estate, would be well advised to carefully consider whether an early surrender would be beneficial to their letting strategy for a particular scheme. Whilst the payment of an early surrender premium might afford a landlord with some easy upfront cash, in this increasingly difficult market they might then struggle to re-let the premises and/or attract the type of tenant mix it wants as part of its letting strategy for a scheme. A landlord would also need to be aware that, unless it can re-let the premises, it might then in due course become liable for empty business rates.
Similarly, we are also seeing examples where tenants are trying to agree a change to the user clause in their lease in order to diversify the utility of their premises. For example, there is a rise
in pharmaceutical tenants converting redundant office space to laboratories (for more information, see section 8 of this guide). Again, landlords will need to pay careful attention to the pros and cons to agreeing to such changes (together with the associated planning and alterations requirements) and how this will impact on the ongoing operation of the letting scheme.
Whilst there is no legal obligation on a landlord to agree to such changes, or accept an early surrender of a lease, the shifting power dynamic between landlords and tenants (where tenants had the bargaining upper hand during the pandemic) can sometimes result in tenants taking matters into their own hands in order to provide pressure on landlords to come to the negotiating table. Whilst tenants no longer have the protection of the Covid-19 moratoria, there is still a sense that some tenants think they can withhold payment of rents for premises they "no longer need" or breach provisions of their lease with impunity.
During 2023 and beyond, landlords will need to be mindful of enforcing the provisions of the lease which their tenants have signed up to, and to avoid inadvertently accepting or waiving any breaches of the lease.
Steps to take now
Landlords should avoid accepting any keys to premises that a tenant may try to hand back. Otherwise the tenant may be able to claim that the lease has been surrendered by operation of law.
Similarly, landlords should be careful not to re-enter premises (for example to carry out repairs) outside of the parameters of the entry rights granted to the landlord by a lease. Motivated tenants will look for any opportunities to claim that the landlord has taken back the premises in order to avoid having to pay rent for under-utilised or even empty premises.
Landlords should carefully consider the market before agreeing to any early surrenders of a lease – it might prove increasingly difficult to attract new tenants to a scheme that appears empty of tenants.
A tenant's change of use application might be appropriate in some circumstances, but there could be hidden consequences to the landlord's reversionary interest if wholesale changes need to be made to the premises to accommodate a different use.
7. More tenants to seek early surrenders for under-utilised premises, or seek to consolidate or re-purpose the use of their office premises in light of new working models
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Post-coronavirus pandemic, more and more tenants are grappling with a reduced need for urban office space, as regular working from home beds in as the norm. At the same time, a booming life sciences sector is accentuating the UK's shortage of laboratory space.
We are increasingly seeing tenants interested in repurposing their existing office space for use as a laboratory and consider that this emerging trend is going to increase in frequency into the future.
The planning context is facilitative. In September 2020, the Town and Country Planning (Use Classes) Order 1987 was updated such that previously disparate use classes were consolidated into a new Class E covering (non-exhaustively) retail, offices and research & development. This means that planning permission may not be needed in repurposing offices to certain kinds of laboratories.
A tenant's first hurdle is likely to be the user provision in their lease. This will often have been negotiated with the tenant's business and the nature of the premises in mind, such that an office building will likely be specified for use as just that. A determined tenant may try to run an argument that their proposed research use falls within the scope of their existing user provision and landlords will have to engage with finely balanced legal questions as to interpretation of these provisions which, due to a lack of relevant case law, will initially be untested.
The next issue is likely to be alterations. Some non-purpose-built premises will be better suited for conversion to a laboratory than others, with those benefitting from high ceilings and flexible utilities/riser provisions being best-equipped. Tenants are likely to need to apply to their landlord for consent to alterations to fit out the premises as a laboratory, and most landlords will be under a contractual (possibly augmented by statutory) obligation not to unreasonably withhold or delay consent. In contrast to most requests for consent to alter, works to convert offices to laboratory spaces may present more reasons for landlords to reasonably withhold consent if they have concerns around, for example, noise or hazards.
In multi-let buildings, landlords will need to consider particular risks arising from one of their tenants attempting to introduce laboratory use in the building. Landlords will want to ensure their managing agents have sufficient expertise to manage, for example, sensitive deliveries to the premises and that their service charge arrangements accommodate potentially higher utilities usage from one tenant (such as by unit-specific sub-metering). Landlords should be cautious of potentially increased liability due to failing to provide reliable services – there is likely to be more financial damage from loss of electricity to a laboratory than an office. They should also ensure that they have flexible and comprehensive insurance cover, and adjust this as needed should laboratory use be introduced to their building.
Landlords may also need to be wary of restrictive covenants on their own freehold, restricting use of the building. If there are relevant restrictions, landlords may look to ways of circumventing this, such as covenant insurance, or may seek to discharge the covenant by application to the Upper Tribunal under section 84 of the Law of Property Act 1925.
Steps to take now
Landlords should pay close attention to their lease provisions when leasing to life sciences tenants, particularly the user and alterations provisions.
If life sciences tenants request to repurpose their offices to research and development facilities, landlords should take advice and consider whether they wish to resist this in light of the terms of the tenant's lease.
If life sciences tenants apply for consent for alterations, landlords should closely consider any adverse impacts from the alterations, and whether a proposed laboratory would reasonably justify them withholding consent.
Landlords should ensure that their insurance, managing agent and service charge arrangements are sufficiently flexible, and ensure that these are changed as necessary should laboratory use be introduced to their building.
8. Lease provisions will be strained as life sciences tenants attempt to repurpose under-used offices for research and development
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FOREARMED: A REAL ESTATE DISPUTES GUIDE TO LIKELY TRENDS IN 2023 AND BEYOND
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Timescale: 2023 Comment
In August 2022, the Upper Tribunal of the Lands Chamber identified structural defects in the Electronic Communications Code which prevents termination of a Code agreement where there is an intermediate lease (also known as a concurrent lease) in the case of Vodafone Limited v Gencomp (No.7) Limited and A P Wireless II (UK) Limited. Intermediate lease interests are very common in practice. They arise if, after a Code agreement has been granted to an operator, the landlord grants a lease of premises to a third-party tenant, which includes the area subject to Code rights. A common example would be a Code agreement permitting installation of roof-top apparatus to an operator, followed by the lease of the whole building to an occupational tenant. In a property context, the occupational tenant becomes the competent landlord of the operator and would usually be the person entitled to serve a termination notice. However, the Code does not recognise such concept and provides that a termination notice may only be served by a site provider who is a party to the Code agreement. Whilst the Code expressly provides that the original landlord and their successor in title are considered "a party" to the Code agreement, derivative interests, such as the occupational tenant, are not a party (albeit they are bound by the agreement).
When the Code was re-written in 2017, it became particularly friendly to operators. Landowners have seen their annual rents reduced dramatically, operators acquired automatic upgrading and sharing rights which cannot be diluted by agreement and termination notice periods increased from 28 days to 18 months. However, the upside for landowners was said to be a streamlined termination process modelled on the Landlord and Tenant Act 1954 providing certainty for developers and removing the perceived pitfalls under the previous version of the Code.
Despite celebrating its fifth anniversary in December 2022, we have seen very few cases where developers have successfully terminated a Code Agreement and enforced removal of telecoms equipment. That suggests, conversely, that the process is working and settlements are being reached between landowners and operators before requiring the courts to determine the matter. However, many of the operators have shown a tendency to be particularly contentious and this latest defect in the Code provides an easy argument for an uncooperative operator to challenge a termination notice before negotiations for removal even begin. If an operator needs to acquire an alternative site, they will have little incentive to
commit the time and costs of doing so unless the developer is able to convince them of its intention to redevelop. That is a tough job, when it appears to be barred from serving a termination notice because of a continuing intermediate lease.
Steps to take now
We welcome clarity from the Courts and/or Parliament on the matter of competent landlords and the interaction with the Code, but that is unlikely to be forthcoming imminently.
Developers should review their holding structures to identify any areas where Code rights overlap with intermediate leases. If possible, surrendering the intermediate lease (or at least the part of the demise subject to the Code rights) is one way to address the issue, but specific advice should be sought to consider wider implications of any surrender.
Developers would be well advised to serve any termination notice in the name of the original landlord, or their successor in title. A separate notice may also be served by the intermediate tenant, without prejudice to the validity of service of the other notices. This approach covers all bases until the matter is clarified, but a developer would still need to ensure that it is in the position to satisfy the court of its intention to redevelop (and be the person immediately entitled to the reversion) at the date of any hearing.
For new Code agreements, a requirement to novate the agreement to any intermediate tenant (or back to their landlord at the end of the intermediate lease) may reduce the risk of the defect arising, but it may present difficulties if the operator delays or refuses to complete the novation.
9. Intervention needed to close gaps in the telecoms Code prejudicing developers
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Timescale: Changes will start to come in during 2023 with the majority applying from the subsequent revaluation in 2026. Comment
Following the Business Rates Review in 2020, HM Treasury published its Final Report in October 2021, setting out the intended changes to the business rates regime. A technical consultation on those points took place in late 2021 and the report is awaited.
Revaluations have traditionally been conducted on a 5-yearly cycle, although, in recent times, that cycle has been extended due to external events: the 2010 List applied until 2017 and, due to the impact of Covid-19, the current revaluation was postponed to 2023 with the Antecedent Valuation Date being 1 April 2021. There is now an intention that revaluations will take place on a 3-yearly cycle and that all Challenges to entries in the List should be dealt with before the end of life of the List.
The move to more frequent revaluations has been largely welcomed by the industry as a means to ensure that valuations are more regularly adjusted to reflect market forces. However, as the Valuation Office Agency ("VOA") is now to be required
to value around 2 million non-domestic properties and clear all Challenges within a three-year window, one significant change is proposed, which will increase the burden on ratepayers.
Ratepayers will have a new obligation to provide information about rents/accounting data to the VOA, including:
1. information about the property;
2. information about the tenancy and use of the property;
3. trade and accounts information (where relevant to the valuation); and
4. costs information (where relevant to the valuation).
The VOA already collects information in categories 3 and 4 for those properties where this data is relevant to the valuation: for those properties and their ratepayers, the only difference will be that the information must be provided annually.
For other ratepayers, this will be a wholly new obligation. The precise details of the new system were subject to a consultation in 2022 and publication of the final report is awaited. However, it is likely that there will be an obligation to report within 30 days of a change to the property information, such as the grant of a new lease, a rent review or a change to the rent payable. There will also be an annual requirement to confirm that the information held by the VOA remains accurate. Although sanctions for non-compliance are unlikely to be imposed initially, it is likely that they will be introduced from the start of the 2026 List.
Steps to take now
No immediate action is required.
However, clients may wish to consider that the obligation will require tenants to provide accurate information about rents payable etc, even if information is set out in a confidential side letter and not the lease. The obligations will override confidentiality provisions which may cause concern to some clients where a personal concession has been granted to a tenant. This information will have to be provided to the VOA and may, therefore lose its confidentiality.
10. Radical changes to the business rates regime will undermine confidentiality in commercial lease dealings
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FOREARMED: A REAL ESTATE DISPUTES GUIDE TO LIKELY TRENDS IN 2023 AND BEYOND
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Timescale: Ongoing Comment
Environmental concerns should be a risk identified by any developer embarking on a new project. The frequency of, and impact from, protestor actions are clear from the news, albeit many developers may consider themselves at a lower risk unless they operate in the energy and infrastructure sector.
However, with our country's drive to reach net-zero by 2050, developers are facing increased scrutiny regarding the alternatives to complete demolition and re-building. For example, the public inquiry into Marks & Spencer's proposal to replace its 100-year old Art Deco building on Oxford Street, London attracted widespread media attention in 2022. SAVE Britain's Heritage campaigned for the building to be refurbished instead, claiming that 40,000 tonnes of embodied carbon would be released by the demolition. The application was then
called-in by the Secretary of State and a public inquiry was held in October/November 2022. At the time of our publication of this guide, a decision had not yet been made, but either way, M&S has faced increased costs and delay as a result of the call-in. Scrutiny of such redevelopment projects is highly likely to increase.
Hot off the heels of the closing statements in the public inquiry, the RICS published its report titled "Decarbonising UK Real Estate" on 7 November 2022. It reaches the stark conclusion that urgent action is needed to decarbonise UK buildings as existing policy is insufficient to meet the UK's net-zero commitments by 2050. The RICS identified five areas of concern and recommendations to address them:
11. Developers must consider options to decarbonise or risk delay and challenge
Concern Recommendation
No decarbonisation targets for industry subsectors (eg residential) nor individual buildings.
Define science-based targets for UK real estate at the subsector and individual building levels, engaging through the Net Zero Carbon Building Standard initiative.
Complex metrics for assessing building performance make it difficult to understand whether updates to building regulations go far enough.
Mandate net-zero carbon emissions for all new buildings as soon as possible, and any delay must be justified with solid evidence.
Limited support in England for retrofitting. Establish a national programme to fund retrofit projects, following the direction contained in the National Retrofit Strategy developed by the Construction Leadership Council.
Lack of energy management incentives risk undermining efforts to construct and retrofit energy efficient buildings.
Improve the EPC scheme to make it fit for the different purposes that it serves.
Accelerate a national performance-based rating scheme to ensure that final energy use and carbon emissions are publicly available metrics.
Develop fiscal policies to stimulate improvements in building operations by 2030.
No embodied carbon regulations (emissions are uncontrolled and unmeasured, with little incentive to reduce them)
Introduce embodied carbon requirements in a new section of the Building Regulations as proposed by the Part Z initiative, mandating embodied carbon assessments to be conducted at design and completion stages, and introducing maximum limits for embodied carbon.
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Whilst these recommendations are at an early stage, developers should stay abreast of such proposals to remain ahead of the tide and ensure their development appraisals give proper weight to environmental factors, which historically may have been seen as less important. Otherwise, developers may find future investors and occupiers vote with their feet…
Steps to take now:
Responsible developers should fully explore all avenues for their projects and consider whether the environmental benefits of retrofitting tip the scales against demolition and redevelopment.
Click here for our Decarbonising Cities series for further information on this topic, including an overview of pioneer cities, with our experts and key industry figures sharing their insight on how cities can spearhead the campaign to net zero.
FOREARMED: A REAL ESTATE DISPUTES GUIDE TO LIKELY TRENDS IN 2023 AND BEYOND
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By March 2021 the world had been dealing with Covid-19 for a year. In the UK, mass vaccination was just beginning, Boris Johnson had been Prime Minster for 20 months (with only 14 months to go as it turned out). And we in the Real Estate Dispute Resolution team hunkered down to predict the future for the commercial real estate sector in Forearmed 2021. Our focus was to avert risks spotted on the horizon and we made 17 predictions for the next 36 months. We are now over half-way through that timeframe, so we wanted to stocktake and see if our thoughts proved right or wrong.
How did we do?
We have hit a lot of the targets already, especially in seeing a lengthy exit to the Covid-19 moratorium regime, buyers looking to challenge whether conditionality has been satisfied on sale and purchase contracts, and with continuing debate as to what the effects of flexible working will be on the office sector. We have not yet seen new law being forged on damages for loss of bargain but there is still time. What has not come through, at least in Court cases, yet has been disputes concerning property valuation during Q2 of 2020: this may arise in 1954 Act, rent review or the dilapidations context, but it appears that a lot of disputes on that subject have been settled rather than litigated.
This is how our predictions fared …
And finally...
Timescale: 2023 and beyond Comment:
Sanctions apply to any Russian domiciled company in respect of financial instruments and loans. It is likely to be a fairly straightforward job to assess whether a tenant is on the sanctions list or is a Russian Domiciled company. If so, then that entity will already be facing liquidity issues because its own UK bank will or may not permit new transactions or transfers (unless there is a relevant UK government licence in place). Similarly, a landlord with a UK bank may not receive money paid from a Russian bank because the UK bank may not accept it, unless there is a licence in place. This would leave the landlord with a claim for arrears, but it would not be breaching the sanctions regime.
What is more difficult for a landlord is the situation where a tenant company is itself owned by different entities being either individuals or companies, or a mixture of both. In the case of such shareholder companies, they may themselves be owned by other entities and ultimately there may be a question as to who controls them. A tenant that is a UK company may be owned only by non-sanctioned entities when the lease is granted, but the ownership of parent entities can move around. So, the landlord is at risk that its tenant becomes subject to sanctions by virtue of such a transaction. The rule relates to majority ownership/control, and there are some quirks to that under the UK sanctions regime. For example, a company will not be subject to sanctions where (eg) there are three shareholders, each holding one third, two of whom are subject to sanctions, because no one person holds more than a 50% share (albeit that if it is the case that minority sanctioned shareholders who in aggregate hold more 50% are acting together in concert, the company will be treated as if it is sanctioned). But a company where there are two shareholders, one (sanctioned person) owning 51% and one (not sanctioned) owning 49%, would fall within the regime even though the aggregate interest held by sanctioned persons was lower than the first example.
Whilst criminal liability under the sanctions regime requires mens rea (ie intention to commit a crime) or awareness that one is dealing with persons who are sanctioned, the position for civil enforcement of an infringement is strict, ie the risk of civil findings/penalties against a landlord does not depend on whether they are aware that they are dealing with a sanctioned entity. In practical terms, we expect landlords to take care in reviewing controlling interests in their tenants not just at the point when the lease is granted or where there is a proposed
assignment or underletting. We have seen the inclusion in leases of additional wording by way of continuing warranties/ covenant that tenants and guarantors are not subject to the sanctions regime, which may potentially be useful as the starting-point for an additional remedy against a tenant (ie termination) where that covenant is breached. However, it does still depend upon the landlord being aware that the entity is sanctioned. This also does not assist in shifting responsibility away from the landlord for any breach of the sanctions regime eg by accepting rent (etc.).
It is worth noting that a landlord faced with a sanctioned entity as a tenant is stuck in more ways than simply as regards collection of rent. Other steps, including recovering monies from a non-sanctioned guarantor or former tenant under an AGA/GAGA may not be permissible as this may be perpetuating the continuation of the sanctioned tenant's lease. Steps such as accepting back keys, or accepting a forbearance from a sanctioned tenant so that it has a "rent holiday/ postponement" are not permissible, but enforcement to forfeit the lease may be available, including for breach of warranty, as described above, as this is not a consensual arrangement (and therefore different from accepting back keys, which amounts to an agreed surrender). Specific advice would need to be sought.
Steps to take now:
Landlords must take specific advice before dealing with tenants caught by the sanctions regime.
Regular investigation and monitoring of ownership structures for each tenant will increase administrative burden, but puts landlords in the best position to avoid inadvertent breaches of the sanctions.
Including warranties into new leases can add another layer of protection for the landlord and reduce the administrative burden of regular monitoring.
Licences may be available from OFSI to deal with a tenant caught by the regime, but specific advice is required.
12. Landlords will be faced with continuing and potentially increasing risk of breaching sanctions when managing portfolios of tenants
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Prediction Reality
1. Covid-19 enforcement moratoria will end, but we expect them to go beyond June 2021.
The restrictions were extended, but finally ended in March 2022.
2. Tenant CVAs will continue to push the boundaries of landlord acceptability
We have seen CVAs go further than ever before in creating prejudice to creditor landlords through Lazari Properties 2 Ltd & Ors v New Look Retailers Ltd & Ors. The landlord's challenge was unsuccessful in the High Court but permission to appeal was granted. However, the parties settled the matter the night before the Court of Appeal hearing.
3. Tenants' guarantors will try to manoeuvre themselves out of liability
There has been much manoeuvring amongst HeadCo guarantors, most notably EMI Group Limited v Prudential Assurance Company Limited.
4. Valuation issues may arise for 2020/2021 rent reviews
Most of the action has been within private arbitrations, however our experience has been that there has been much debate as to exactly what hypothetical rents might be payable in Q2 2020, given that the world was bracing for the effects of the pandemic. It appears however that tech and life science demand has remained strong within the wider office market.
5. Tenants could try to engineer the 1954 Act to lower rents
Tenants have been continuing to seek short flexible tenancies on renewal.
6. Dilapidations claims could become tricker for landlords
Dilapidations claims where the tenancy ended in 2020 are still working their way through their usual negotiation processes so it is too early to say whether the statutory cap will have any unusual effects in limiting claims (but we think that will happen).
7. Termination by landlords for tenant's repudiatory breach, and loss of bargain damages, may be recognised by the courts
This has not (yet) happened, but then again we did allow 36 months for that to come to pass.
8. Sale and purchase disputes, particularly those concerning conditionality, will be on the rise
We have seen many disputes where unwilling purchasers have challenged whether contractual conditionality has been satisfied and these continue to gain traction so have remained in our predictions for 2023.
9. The law of relief from forfeiture could extend to new territory
This has already happened. In December 2022, the High Court granted relief from forfeiture of an option to renew the lease in Hush Brasseries Limited v. RLUKREF Nominees (UK) One Limited & Anor [2022] EWHC 3018 (Ch).
10. Professional negligence claims will increase, especially on valuation matters
We expected a rise in professional negligence claims in valuation matters, and continue to expect that (so much so that they have made our predictions this year again) but such claims tend to take some time to come through.
11. Misrepresentation claims tend to be a focus We have seen purchasers checking carefully what pre-action representations were made on assets that have been shown to be underperforming.
12. Residential disputes are likely to increase It is undeniable that residential disputes have increased, not only in the continuing context of cladding/fire safety, but also as regards ambitious planning applications for home extension within dense residential areas.
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13. Protection against squatters may be needed for empty, closed or infrequently used commercial premises
We have seen some hefty and persistent incidences of trespass in empty commercial/development property, exacerbated for landowners by the delays in Court listings for possession.
14. Developers will increasingly seek to vary planning permissions and section 106 agreements
We have seen an increase in the variation of planning permissions and section 106 agreements, particularly where the alternative would be to submit a new planning application. The impact of the Supreme Court's decision in Hillside Parks Ltd v Snowdonia National Park Authority [2022] UKSC 30 has placed renewed focus on varying existing permissions to authorise scheme changes instead of submitting "drop-in" applications.
15. Joint venture development disputes could become more likely
We have seen this in practice.
16. Insurance policies will be scrutinised and tested, with particular attention on business interruption insurance and warranty and indemnity insurance
Further cases have reached the courts on the issues not decided by the test case, such as aggregation. W&I claims continue to be seen, as claims from recent activity work their way through.
17. Issues around return to work will be prevalent This has been more of an issue in employment matters than real estate and we noted the potential for employees to be reluctant to return – this has proved to be an issue.
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HERBERT SMITH FREEHILLS24
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Matthew Bonye Head of Real Estate Dispute Resolution T +44 20 7466 2162 [email protected]
Frances Edwards Senior Associate, Real Estate Dispute Resolution T +44 20 7466 2279 [email protected]
Graeme Robertson Senior Associate, Real Estate Dispute Resolution T +44 20 7466 2793 [email protected]
Matthew Weal Senior Associate, Real Estate Dispute Resolution T +44 20 7466 7535 [email protected]
Leon Culot Associate, Real Estate Dispute Resolution T +44 20 7466 2018 [email protected]
Shanna Davison Professional Support Lawyer, Real Estate Dispute Resolution T +44 20 7466 7561 [email protected]
Contacts
Jeremy Walden Managing Partner, UK and EMEA Real Estate T +44 20 7466 2198 [email protected]
Daniel Hudson Partner, Corporate Crime and Investigations T +44 20 7466 2470 [email protected]
John Chetwood Partner, Insolvency and Restructuring T +44 20 7466 7548 [email protected]
Matthew White Head of Planning T +44 20 7466 2461 [email protected]
Sarah McNally Partner, Insurance T +44 20 7466 2872 [email protected]
Tim Healey Head of Construction and Engineering T +44 20 7466 2356 [email protected]
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