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Tenant Insolvency

Solicitor Jennifer Hollyoak looks at the obligations, protections & risks around tenant insolvency in a period of ongoing uncertainty.

With the UK Covid alert level being raised alongside the  implementation of tighter social restrictions this week, it’s fair to say that everybody is “feeling the pinch”.  Both residential and business tenants are finding it difficult to continue working during these uncertain times, which may result in some tenants being unable to make payments under the terms of their leases. This may also result in more leases being disclaimed by insolvency practitioners seeking to dispose of onerous property.

In turn, it is increasingly more difficult for landlords to raise funds to meet their own obligations under the leases as they are being met with a rise in tenant insolvencies. In June, our Legal Director Phil Parkinson and Associate Katie Edwards provided a practical guide for dealing with the issue of tenant insolvency (available to download on the link below).

Commercial Tenants and the Corporate Insolvency and Governance Act 2020

Since this guidance, the Corporate Insolvency and Governance Act 2020 (CIGA 2020) has gained royal assent in the government’s attempt to provide some breathing space for businesses to explore options for rescue. This act introduces a number of measures, the most notably restrictions on statutory demands and creditor winding up petitions in addition to a free-standing moratorium.  

Restrictions on Statutory Demands and Winding Up Petitions

Originally, CIGA 2020 placed a restriction on the service of statutory demands between 1 March 2020 – 30 September 2020. During this period, any statutory demands issued could not be relied upon as evidence of a debt to support a petition presented to the court. This deadline has now been extended until 31 December 2020 (inclusively). This restriction is not conditional upon Covid having impacted the debtor.

In addition to the above extension, a creditor is unable to present a petition for winding up between 27 April 2020 and 31 December 2020 (inclusively), without reasonable grounds for believe that the company would have become insolvent regardless of the impact of Covid.

Moratorium

The CIGA 2020 introduced a moratorium within the Insolvency Act 1986 whereby eligible companies would be able to invoke a moratorium so businesses can consider restructuring opportunities free from creditor action.

The moratorium, which is not a gateway to a particular type of insolvency (or any action at all if the company can be rescued), has an initial period of 20 working days, but this is capable of being extended up to 40 business days without consent from the court or creditors being required.

Whilst this moratorium is overseen by an insolvency practitioner, the directors of the company will remain in charge of the running of the business on a day-to-day basis. During this time, no steps may be taken without the permission of the court in relation to commencing / continuing any legal process.

As a result of Covid, the government included within the CIGA 2020 a temporary relaxation to the criteria company must meet in order to invoke a moratorium during a temporary period. These included:

  1. If a company is subject to an outstanding creditor winding up petition, they will not have to apply to court to invoke the moratorium during the temporary period.
  2. If a company has previously been subject to a CVA, administration or a moratorium within the past year, they will not be disqualified from invoking a further moratorium during the temporary period.
  3. During the temporary period, the Monitor for the moratorium will only have to certify that “it is likely that a moratorium for the company would result in the rescue of the company as a going concern or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus

This temporary period has now been extended until 30 March 2021, albeit the government are expected to lay a further statutory instrument which is anticipated to roll back some of the above temporary modifications.

Landlords will therefore need to bear in mind the above extensions in restrictions when seeking to recover arrears from insolvent tenants. This process will now be a more onerous task and subject to delays as a result of the above restriction.

Furthermore, with the Business Tenancies (Protection from Forfeiture: Relevant Period) (Coronavirus) (England) (No 2) Regulations 2020 extending the protections from forfeiture for business tenancies until 31 December 2020, the options available for landlords to pursue commercial tenants for arrears are limited.

In the circumstances Landlords, their advisors and managing agents will need to take care when considering their obligations pursuant to their leases balanced against the likely challenges they may face if action is required to recover arrears from an insolvent commercial tenant. Specialist advice by our team can provide Landlords with a clear overview of the potential risks and obligations they may face in order for practical and commercially considered strategies to be formed.

Should you wish to discuss any of the issues and points discussed in this blog, please contact us.

Tenant Insolvency

JB Leitch Secure Further Building Safety Successes

JB Leitch Secure Further Building Safety Successes

The JB Leitch litigation team have further consolidated their reputation and expertise in building safety and tribunal matters, with two successful determinations for dispensation and the variation of multiple leases last week.

Both matters concerned the same property, comprised of two residential apartment blocks (of seventeen storeys with 182 individual apartments) with JB Leitch acting for the Right to Manage (RTM) Company.

Securing Dispensation

The first matter concerned an application for dispensation from all or some of the section 20 consultation requirements, in respect of qualifying works to install a fire alarm system at the property in order to reduce the extent of the waking watch currently in place and also to reduce the financial burden to Leaseholders by the operation of the waking watch.

The urgency of the work was identified in reports from both the Fire Service and a building safety consultancy commissioned to review the building cladding system, which found that that the High-Pressure Laminate Panels enclosing the roof top apartments were “…not fire resistant, has a Class D Fire Rating and is a significant fire risk to the property.” The report advised that the property was no longer suitable for a “stay put” strategy in the event of fire and a “simultaneous evacuation” strategy should be adopted. The Fire Service added their advice to “incorporate a simultaneous evacuation system to any block that has a form of flammable cladding.”

The respondent’s objections included that the intended works were an improvement and therefore not covered by the Lease and that there was no urgency or proper basis to dispense with the consultation. The respondent also noted that the applicant had sought to avoid Leaseholder scrutiny by the application and there was a failure to inform Leaseholders of the intention to apply for dispensation.

Our response countered that a significant risk of fire requires urgent action, as highlighted in the reports, that there had been appropriate engagement with Leaseholders via a series of updates and monthly bulletins, zoom meetings and a Notice of Intention. On the matter of costs, it was highlighted that the Lease did allow for “providing operating … and adding to any security, firefighting appliances … fire alarm system”.

Dispensation from full consultation was granted. The Tribunal found that this provision enabled the Applicant to carry out the proposed works of installing a fire alarm, and further acknowledged that there is a degree of urgency given that the alarm system will significantly improve the process of giving warning the residents to evacuate. The summary also noted that Leaseholders had received adequate documentation and updates, and that the costs of the system would mitigate those of the waking watch.

Lease Variation & Inclusion of Interim Expenditure

The second matter focused on a variation of all long residential underleases at the property, to allow inclusion of interim expenditure under the service charge clauses.

The need for the application was the discovery of fire safety issues at the property, with the Applicant experiencing difficulty in arranging insurance cover which is only available at a much higher premium than it estimated for the advance payment of the service charge. The Applicant wished to recover those higher premiums by way of a supplemental demand payable within the current financial year.  With the urgency of installing a fire alarm system, a supplemental demand would also need to be made within the same period. The terms of the Lease did not allow the Applicant to demand a service charge payment within the financial year, and as an RTM company has no funds of its own to cover service charge costs which arise. Our application addressed the following key points:

  • Should a variation be made if the leases failed to make satisfactory provision?

The arguments raised in respect of the additional service charge obligation and limiting the variation on a one off basis would not work in accordance with the Landlord and Tenant Act. The provision, as JB Leitch drafted, allowed for interim demands to be served in respect of other expenditure including the fire alarm and any other unforeseen expenditure.

  • Was the variation within the grounds of section 35(2)(e) of the Act, that is to say, did the underleases fail to make satisfactory provision?

It was highlighted that the Act states “recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party or of a number of persons who include that other party.”

  • Did the variation make satisfactory provision?

The Tribunal found that the draft does provide adequately for the service of interim demands, thereby enabling the Applicant to serve a supplemental demand more than once in the financial year without notice.

The Tribunal determined that the underleases failed to make satisfactory provision for costs that may be incurred and require to be paid in the course of the financial year and the proposed variation was required to meet this need.  It had been shown in that it would not be possible for the Applicant as a RTM Company to insure the property without the proposed variation. Also, it would not have been possible to carry out urgent works for the safety of the Leaseholders which arise and for which payment is required during a current financial year.

It is noteworthy that the Tribunal also found that the recovery by the Applicant from the Leaseholders of the expenditure incurred (or to be incurred) is for the benefit of the Leaseholders. Indeed, so far as the expenditure in the present circumstances it would be detrimental to the Leaseholders for it not to be paid. 

Associate Katie Edwards comments: “Both cases serve to illustrate the ongoing prioritisation and urgency of safety works, the obligations of all parties and challenges in areas such as insurance. In a climate of uncertainty and evolving legislation, we are delighted to have provided both clear guidance and positive results for our client”.


Fire Safety Work & Cost Recovery via the Service Charge

JB Leitch secure an important determination at the First-tier Tribunal for the recoverability of costs for urgent fire safety work costs under the service charge.

With considerable attention being given to the urgency and liabilities surrounding building safety, notably with the reach of the new £1bn remediation fund, the new Fire Safety Bill or concerns around EWS1 and safety certification, this week sees JB Leitch secure a determination on the cost liabilities associated with safety works and the reasonableness of cost recovery via the service charge. This decision is both timely and significant given the ongoing debate and uncertainty on the extent to which landlords and Managing Agents should be liable.

Background:

JB Leitch represented the Applicant Landlord in an application under section 27A of the Landlord and Tenant Act 1985, for a determination of liability to pay and reasonableness of service charges against the Respondent leaseholders at the development.

The application related to urgent fire safety work, specifically the replacement of flat and communal area doors, ancillary works to frames surrounding panels and separate parcel boxes that had been identified as damaged and failing to comply with FRA standards. The main issue for our client was whether the apartment door sets were demised to the leaseholders and would be part of their repairing covenants and not a service charge or were part of the landlord’s repairing obligations and are a service charge. Of specific focus was:

·         The replacement of doors, frames and surrounding joinery in communal areas

·         The replacement of doors, frames, parcel boxes and side panels to the individual flats.

Once recoverability had been determined under the charge, our client confirmed to the Tribunal that consultation would subsequently begin under sections 20 and 20ZA of the Landlord and Tenant Act, and that quotations for the works had already been obtained.

Lease clauses and the service charge mechanism:

In presenting the agreed obligations of both parties within lease covenants, attention was drawn to the pertinent terms and clauses on the service charge and maintenance. Clause 4(3) provides that the lessor will “maintain in good and substantial repair and condition” the external main walls, the internal concrete walls, main hall, staircases and landings. Clause 2(1) of the lease outlines that the lessees are obligated to pay the service charge and notably that that charge provisions consist of services stated in clause 4.

The decision:

The Tribunal concluded that:

·         The replacement of the communal door sets is covered by the landlords covenant at clause 4(3) and the leaseholders are liable to contribute to the costs of the works through the service charge.

·         The individual door sets are not covered by the landlord’s covenant at clause 4(3) and the leaseholders are not liable to contribute to the costs of the works through the service charge –although leaseholders will be responsible for their own entrance door sets and will need to carry out the works themselves under their repairing obligations.

·         The section 20 consultation should be carried out in respect of the communal doors, which should produce a quotation that could be considered reasonable by the FTT. The process will also allow for any concerns raised by the responding leaseholders to be addressed.

·         Although the flat doors are not a service charge, it worth noting that there is no reason why the work cannot be arranged and co-ordinated by the landlord or managing agent and dealt with as a separate contract between the landlord and leaseholders who agree to such an approach.

Summary:

The decision also illustrates that demised premises refer to individual fats and not the block, and that an entrance door to a flat is the leaseholder’s obligation as it is part of the flat when constructed. In relation to the final bullet point above regarding flat doors, this would be likely be taken up by the majority of the leaseholders as it will be easier and likely result in a cost saving as opposed to having to appoint contractors individually.

In conclusion, the decision provides a timely reminder of the significance of the service charge in both maintaining property and ensuring sufficient levels of safety. Despite the current crisis, service charge recovery is integral to providing adequate provision to conduct urgent building safety work, and in accordance with the terms of the lease and subsequent consultation, ensuring reasonable apportionment of cost.

Fort further information on this case and our experience in building safety matters contact Katie directly: k.edwards@jbleitch.co.uk

Fire Safety Work & Cost Recovery via the Service Charge

Solving the Issues of Tenant Insolvency

Solving the Issues of Tenant Insolvency

Legal Director Phil Parkinson and Associate Katie Edwards offer succinct guidance on the issue of tenant insolvency, providing practical and direct answers to some of the most pressing and frequently asked questions.
 
Within the complex landscape that landlords, their advisors and agents are operating, the issue of insolvent tenants is becoming more frequently encountered. Complicated legal and practical questions arise as the required action depends on a number of variable factors, including the form of insolvency and whether the lease is encumbered with a legal charge. Any form of tenant insolvency imposes various restrictions on enforcement remedies available for a landlord, which presents an issue within a block that may be suffering from cash flow issues due to a lack of service charge funds. A review of the legal position a landlord may be in, together with which remedies are available, is set out below:
 
Bankruptcy
 
Can Court proceedings be issued for recovery of rent/service charge?
Not without permission of the Court due to the restrictions contained at s285(3) of the Insolvency Act 1986 (“IA 1986”). An application can be made for permission to issue and serve recovery proceedings but the Court will need to be persuaded that there is good reason to do so.   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes. Bankruptcy of a direct tenant provides no restriction on pursuing their Guarantor. Accordingly, a landlord ought to verify whether any Guarantors exist in relation to situation involving tenant insolvency.   
 
Can a rent deposit deed be called upon?
Yes. There is no restriction on calling on a rent deposit deed – on the strict basis that no specific contractual provisions are engaged due to the insolvency event.   
 
Can forfeiture proceedings be issued?
Yes, pursuant to s285 of the Insolvency Act 1986 and the Court of Appeal authority of Sharples v Places for People Homes  [2011] EWCA Civ 813. A restriction does exist preventing a landlord from being unable to plead recovery of any arrears as a debt.
 
Individual Voluntary Arrangement (IVA)
 
Can Court proceedings be issued for recovery of rent/service charge?
During the initial moratorium, not without leave of the court as per s252 IA 1986. Once the IVA has been approved, proceedings can only be issued for claims not governed by the IVA.
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes, unless released by the wording of the IVA.   
 
Can a rent deposit deed be called upon?
Yes, but only with leave of court pursuant to s252 IA 1986.
 
Can forfeiture proceedings be issued?
During the moratorium, not without leave of the court. Upon approval of the IVA proceedings can be issued in certain circumstances – see Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504.
 
LPA Receivers
 
Can Court proceedings be issued for recovery of rent/service charge?
Yes.
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes.   
 
Can a rent deposit deed be called upon?
Yes.   
 
Can forfeiture proceedings be issued?
Yes, following Transag Haulage Ltd v Leyland DAF Finance plc [1994] 2 BCLC 88.
 
Administration
 
Can Court proceedings be issued for recovery of rent/service charge?
Not without leave of court or administrator's consent under Schedule B1, paragraphs 43 and 44 IA 1986.   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes.   
 
Can a rent deposit deed be called upon?
Only with permission of the court or administrator's consent and only where the deposit is a financial collateral arrangement.   
 
Can forfeiture proceedings be issued?
Only with permission of the Court or with the administrator’s consent.
 
Liquidation (Creditors/Members Voluntary Liquidation)
 
Can Court proceedings be issued for recovery of rent/service charge?
Yes, although the liquidator can apply for the proceedings to be stayed under s112 of IA 1986.   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes. 
 
Can a rent deposit deed be called upon?
Yes.   
 
Can forfeiture proceedings be issued?
Yes, although the liquidator can apply for the proceedings to be stayed under s112 of IA 1986.
 
Company Voluntary Arrangement (CVA)
 
Can Court proceedings be issued for recovery of rent/service charge?
During the moratorium, no proceedings can be issued without leave of the court Schedule A1, paragraph 12 IA 1986. Following approval of the CVA, only for claims not governed by the CVA following Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch).   
 
Can Guarantors be pursued for recovery of rent/service charge?
Yes, unless the wording of the CVA releases a Guarantor’s liability.   
 
Can a rent deposit deed be called upon?
During the moratorium, the consent of the Court is required. Following the finalisation of the CVA no such consent is required.   
 
Can forfeiture proceedings be issued?
During the moratorium, not without leave of the court. Following the approval of the CVA, only for rent as modified by the CVA, or not within its terms, or on the ground of insolvency if the lease permits as per Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504.
 
In summary, deciding on specific action and a way forward when dealing with an insolvent tenant takes detailed consideration and, usually, specialised legal advice – in particular in advising on situations where a discretionary application is required to be made to the Court for consent to pursue a particular option. It should be noted that the issues and implications can be severe and involve consequences for the landlord, tenant and other third parties.
Should you wish to discuss any of the issues and points discussed in this blog, please contact us.

EWS1: Who Pays the Price?

Legal Director Phil Parkinson and Associate Katie Edwards, our leading experts in all matters related to building safety, comment on recent government guidance in relation to the External Wall Fire Review process (EWS1) and the implications for “building owners”.

Context & Background

Three years on from the Grenfell Tower fire, the issue of building safety remains as prevalent today as it was in the aftermath of the tragedy. This has recently been highlighted in the government’s guidance on maintaining remediation work through the COVID-19 crisis and the progress of the Fire Safety Bill which is now at its second reading. Last week saw the publication of the long awaited prospectus for the new £1bn remediation fund and a response to consultation on the previous funding scope and processes. Following revised government guidance, in recent months we have also seen increasing debate around the implications to leaseholders on the potential value of their property where fire risk assessment or remedial work is deemed necessary - and mounting confusion on where the cost liability for such work should be attributed.

EWS1 and the Mortgage Trap

Given increasing concerns regarding the potential length of time needed to commission and conduct the work with a finite pool of qualified expertise available, an emerging issue is that mortgage lenders have been unwilling to lend money on flats in such buildings unless they receive a confirmation of what the external wall system consists of. Failure to provide this statement is leading to many potential sales and remortgages falling through, leaving owners and prospective buyers frustrated, seemingly trapped by some valuers placing £0 value rating on a property – widely referred to as the mortgage trap. In addressing this dilemma, the Royal Institution of Chartered Surveyors (RICS), the UK Finance Association and the Building Societies Association developed the External Wall Fire Review (EWS1) form in December 2019, designed to standardise the reporting of what materials make up an external wall system and assessing the suitability lending purposes based on a "qualified professional" conducting a fire-risk assessment, before signing the form which is then valid for five years.

Although the introduction of the EWS1 has been a welcome step in attempting to unblock the market and reduce the zero value ratings, there are still areas of concern that need clarification. Many of these issues centre upon the definitions used in recent guidance. In January 2020, the Government published a new Advice Note (Building safety advice for building owners, including fire doors) on providing guidance for anyone responsible for, or advising on, the fire safety of external wall systems of residential buildings 18 metres or above in height. The note states that the owners of all multi-storey, multi-occupied residential buildings should investigate and remedy the risks of combustible cladding.

“Building owner” has therefore become something of a catch all term, but it’s not that simple. Who is an owner? A freeholder in a two party lease? What about three party leases where the freeholder may have no relationship, liabilities or automatic permissions with regard to a property?  What about Right to Manage (RTM) companies where leaseholders have acquired the landlord’s management functions by transfer to a company set up by them? Similarly how does the definition apply to comonhold arrangements and the unit holders therein?

Avoiding Mixed Messages

Whilst the Housing Secretary has reiterated that leaseholders will not be expected to meet the costs of remediation which will fall to building owners under the new £1bn fund, it is important to highlight the need to specify that the term building owners includes responsible persons when looking at the EWS1. In the context of the concerns raised above, the term “building owners” has indirectly caused confusion and concern around sole liability that could, on face value, be seen to apply to freeholders only and prevent the recoverability of costs. Perhaps, and as made explicit in the RICS website (https://www.rics.org/uk/news-insight/latest-news/fire-safety/cladding-qa/), it may have been advisable to be more specific in the Advice Note, using a similar description to that put forward by the Institute (toward the end of May):

“The seller should request that their building owner or managing agent commission an EWS assessment for those buildings in scope. The building owner or managing agent is responsible for confirming what materials are on their building. In respect to the EWS form, the person responsible for the building needs to confirm what the wall system is made up of and whether an assessment is required”.

January’s revised Advice Note, outside the main body of the text, does however provide a footnote which states that for the purposes of the document a building owners is “the owner of the building or the person, group, company or other entity on whom duties are imposed or enforcement action could be taken under the following legislation: (i) the Housing Act 2004 in relation to certain hazards; or (ii) the Regulatory Reform (Fire Safety) Order 2005 to ensure the safety of occupants of a building from fire (see Articles 3 & 5 of Regulatory Reform (Fire Safety) Order 2005 for those with duties)”.

Again, specifying that this encompasses and refers to owners, responsible individuals or managing agents, may have mitigated further confusion - and may be worth clarification in subsequent modifications to the guidance. It is also noteworthy, that the prospectus published last week for £1bn Building Safety Fund is clearer in this definition, (although in the content of eligibility for the capital remediation and associated costs only), the document states:

In the private sector, registration is open to building owners, freeholders or the responsible entity ( A responsible entity is the body that has the legal right to carry out the remediation works and to legally recover the costs from leaseholders as service charge)  for buildings within scope that

Advice: Who Pays the Price?

On the assumption that the term “building owner” does indeed encompass freeholders, managing agents and RTMs as responsible persons, there is the question of clarifying who will bear the cost of an EWS1 assessment by a suitably qualified individual.

As in many cases, this will depend on the lease. Leaseholders should always look carefully at the provisions of their leases and the extent to which they  are liable to contribute to the costs of any works the landlord carries out such as the EWS1 assessment and other safety measures. If such work falls under the definition of the services the landlord is obliged to provide then leaseholders may be required to contribute to the cost of the works through the service charge.

Additionally, contingency for the assessment and certification may be provided for landlords and managing agents within the schedules of their insurance policies, and if suitably comprehensive with regard to building safety matters, may not necessarily represent a potential increase in premiums.

Whilst debate continues, it is also worth noting that the majority of residential landlords and managing agents will have undertaken safety checks as a norm, with many buildings signed off by the appropriate building control authority in accordance with building regulations at the time of construction. These regular checks will have identified and allowed the effective management of safety risks, including planning, budgeting and providing notice for any work required and apportionment of costs incurred for which notice would have been served.

Debate around the practicality of obtaining expert advice to conduce EWS1 assessment continues, with the Association of Residential Managing Agents (ARMA) estimating many months delay given the potentially intrusive nature of work, restricted access due to Covid-19 and a limited pool of qualified experts to draw upon. Given the urgency reiterated by the government, it is likely we will soon see further measures, amendments – and clarifications - to facilitate the certification process in supporting leaseholders and “building owners” alike. We will keep watching and keep you updated.

If you are experiencing challenges with regard to building safety matters or EWS1, please contact us:

Phil Parkinson, Legal Director: p.parkinson@jbleitch.co.uk

Katie Edwards, Associate: k.edwards@jbleitch.co.uk

EWS1: Who Pays the Price?

Covenants, Consent & Caution: Commenting on Duval v 11-13 Randolph Crescent Ltd [2020]

Covenants, Consent & Caution: Commenting on Duval v 11-13 Randolph Crescent Ltd [2020]

As you may be aware, the Supreme Court recently handed down its decision on the high profile and long running case of Duval (Respondent) v 11-13 Randolph Crescent Ltd (Appellant) [2020], which arose from an appeal by the landlord and freehold owner of the building. The appeal considered whether, on the construction of the clauses in the lease, the landlord was entitled, without breach of covenant, to grant a licence to a lessee to carry out work which, but for the licence, would breach a covenant in the lease, where the leases of the other flats required the landlord to enforce such covenants at the request and cost of any one of the other lessees. There has been considerable comment already made on the decision, and we thought we would share a balanced perspective on the case and its implications.

The Case in Context:

At the heart of the case was the issue of breach of covenant. A leaseholder had sought a licence from the landlord to carry out works to a flat, which involved removal of a substantial part of a load bearing wall. Each of the flat leases for the block included:

  1. a covenant against making improvements to the demised premises without previous written consent;
  2. an absolute covenant against cutting any wall within or enclosing the demised premises;
  3. a covenant that each other flat lease would contain like covenants, and that the landlord would enforce those other covenants at the request of the lessee, subject to payment of, and security for, its costs.

Following objection from another leaseholder (Duval), the licence was refused, but the landlord subsequently reconsidered the matter and granted a licence. Duval consequently issued proceedings against the landlord seeking, amongst other things, a declaration that the landlord did not have the power to licence the works, which were in breach of the lease, specifically an absolute covenant, which prevented lessees from cutting into any roofs, walls, ceilings or service media. It was agreed by all parties that the works would breach the covenant. The initial decision found that the landlord had no power to waive any of the covenants without the prior consent of all of the lessees of the flats in the building – a decision that was appealed by the landlord. 

The appeal, in 2017, then found that the landlord had the power to license works that would otherwise amount to a breach of a clause within the lease and that, once licensed, such works could not be the subject of enforcement action.

In response, a further appeal was filed by Duval in October 2018, in which the Court of Appeal declared that in granting a licence, the landlord would be in breach of Duval’s lease, thereby finding in Duval’s favour. The landlord consequently appealed to the Supreme Court.

The Recent Decision at the Supreme Court:

The decision on the 6th May dismissed the landlord’s appeal, holding that the complainant lessee was entitled, on provision of security, to require the landlord to enforce it as an absolute covenant. In essence, this decision held that the landlord could not give its consent without breaching Duval’s lease.

In Consideration of the Decision:

There has been considerable discussion on the impact of the decision for landlords over the last two weeks. Some commentators have highlighted the extreme importance of the decision, noting that it will have a serious impact on how landlords manage their estates going forward and challenge existing practices for issuing retrospective or prospective licenses of consents.

The Practical Implications of the Case:

In our experience, landlords often already provide careful consideration on requests for permission against the covenants within a lease. There is also a question of balance - as to whether, as seen in many breach of covenant claims, a lessee would have to suffer a loss to claim any damages? Does a request for license significantly impact or impede the other leaseholders in a significant way? Theoretically, it could argued that many alterations actually improve a building.

Advice:

In many regards, the case does offer a cautionary note to landlords in reiterating the need to be vigilant in the drafting and consideration of lease covenants and licensing consent – specifically noting the need to be clear and specific regarding absolute covenants and mutual enforceability – however, in practical terms it may well that be the impact of such breaches will continue to be minimal and the majority of breach of covenant matters continue to follow form. We will watch with interest the level of influence the decision provides.

 


“Let There Be Light”

Associate Camilla Waszek draws upon recent case law and first-hand experience to comment on the challenges and remedies associated with establishing rights to light.

A "right to light" can be defined as an easement that gives a landowner the right to receive light through defined apertures in buildings on his or her land. This could be seen as the right to receive uninterrupted light, which passes across adjacent land, into a window. If a building owner has a right to light and the path of light is interfered with or obstructed - for example by a new building or development, then a legal challenge could be brought to ensure the value, amenity and utility that available light brings, are preserved.

Background:

The issue of the right to light has a long history in English property law, extending as far back as 1663, with the Ancient Lights act being based on the theory that a landowner acquired an easement to the light by virtue of his use of the windows for that purpose for the statutory length of time. Since the Prescription Act of 1832, the right to light is protected under common law, adverse possession or by establishing a claim to the right to light where you have:

  • Acquired the right;
  • Not have the claim defeated by having lost the right; and
  • Be able to prove an actionable nuisance.

Casting a Shadow:

Typically, rights to light are lost if the right is interrupted for more than 12 months, within a 20 year period, so if a right is obstructed then swift action needs to be taken, otherwise any claim will be statute barred. Interruption includes actual physical interruption or by service of a Light Obstruction Notice, which is a notional physical interruption, which has the same effect of an actual physical interruption.

If there is an interruption to the right to light, in order to be actionable, it must be a substantial interference so that that the amount of light left following the interference provides insufficient light “according to the ordinary notions of mankind” rendering it uncomfortable.

In order to assess whether an interference is substantial, the Court will typically consider whether the room with the right has moved from being adequately lit to poorly lit, by reference to the Waldram method.

An Illuminating Approach:

The Waldram method essentially involves plotting the area of a room which receives adequate light before the proposed infringement, and the area that will be adequately lit afterwards. Light is measured in lumens, and one lumen is regarded per square foot. It is then possible to ascertain how much of a room was adequately lit before and after the infringement with the convention being that if the remaining area of adequate light exceeds 50% of the area of the room, there is no infringement or nuisance. This is commonly referred to as the “50/50 rule”. Remedies for the interference can include injunctions or damages in lieu of an injunction, including diminution in the value of the owner’s interest to the value gained by the infringement.

A Case in Point:

In Beaumont Business Centres Ltd v Florala Properties Ltd the property was already deemed to be poorly lit prior to the interference, however it was held that where a room is already poorly lit, in order to establish a claim in nuisance the Claimant needed to prove that the reduction in light to its premises had made them substantially less comfortable than prior to the interference. The Waldram method therefore remained a useful starting point for considering the interference.

As the defendants premises were occupied by a third party tenant, not a party to the proceedings, Beaumonth was awarded a declaration against the freeholder that it was entitled to an injunction so, if so advised, it might join the tenant to the proceedings to seek an injunction. In the alterative, Beaumont was entitled to “negotiating” damages of £350,000 representing just under 1/3 of the defendant’s profits gained from its nuisance.

Shining a Light on Some Key Points:

The Beaumont case also provides some useful points for consideration, specifically:

  • That artificial light is not considered when assessing a right to light claim and that poorly lit rooms can still have actionable loss, even if the reduction in light is small.
  • Reiterates the decision in Coventry v Lawrence that the Court has an unfettered discretion to award damages in lieu of an injunction where the facts of the case warrant it, however, injunction remains the primary remedy and the onus remains on the infringing party to show why it should not be granted; and
  • Profits gained from the nuisance may be used when assessing damages.

For landlords and leaseholders, the decision in Coventry v Lawrence, as reaffirmed in Beaumont, is a useful tool when considering injunctive action for a breach of covenant or, alternatively, the assessment of damages in lieu of the injunction as a consequence of a breach.

If you would like to discuss rights to light further, please contact Camilla directly:

c.waszek@jbleitch.co.uk

“Let There Be Light”

A Case for Conventional Conduct

A Case for Conventional Conduct

JB Leitch succeeds in providing a persuasive and satisfactory conclusion to a high value building safety case drawing on the principle of estoppel by convention.

Further to posts regarding our success in urgent safety matters, we have recently succeeded in a case where we acted on behalf of a freehold client seeking to maintain the regularity of service charge payment from a head lessor, in order to secure valid insurance in a building suffering issues with safety – specifically in the insulation behind the exterior cladding.

The background:

Our freehold client was having difficulties finding an insurer given the identified issues. However, after finding one provider only, this presented a significant increase to the premium payable which needed to be paid urgently to ensure the insurer’s offer did not expire. This left the client with no option or possible alternatives.

The challenge:

The main area of contention was based upon the fact that our client demands the service charge and insurance to the head lessor (in this case a housing association) who then subsequently demand down to the lessees.

The head lessor had always paid yearly for the service charge and insurance, but was now disputing this as the lease stated that service charges are to be paid on a quarterly basis. We advised the client on the complex principles of estoppel by convention and how they could make arguments that the head lessor’s conduct of regular payments throughout the years created an assumption that they could not now go back on.

As previously defined in the High Court, estoppel by convention is established where parties have established “a convention by agreement or understanding and have regulated their subsequent dealings according to that convention” (be it tacit agreement or assumption based previous conduct) concluding that “it would be unjust or unconscionable” if one of the parties moved away from it.

A successful conclusion:

Our advice and subsequent correspondence between the parties resolved the situation very favourably for our client, with the head lessor eventually making payment in full for the whole service charge without the need for any costly litigation.

In summary, the case also serves to illustrate that building safety and urgent risk mitigation continue to be critical and influential priorities for the sector.


Service Charge Recovery & COVID-19

Legal Director Phil Parkinson provides advice on the importance of taking a balanced & pragmatic approach to residential service charge recoveries during the COVID-19 crisis.

During this challenging period, it can be difficult to get a clear picture on the best way forward. Many landlords and managing agents are seeking clarification on the matter of service charge recovery and the provision of services under the current conditions. Many report having recently received or heard a lot of information about the need to comprehensively change the way they work.

Some advice being provided across the sector is placing heavy emphasis on managing agents negotiating payment holidays, arranging deferred payment plans or reducing the provision of services almost as a default position. Although commendable in anticipating some of the operational challenges faced, and appreciating that clear, frequent and empathetic communications are a given with lessees in extenuating circumstances, we would caution that setting up entirely new processes, systems and arrangements should be made to accommodate what may likely be a small proportion of instances that require further action.

In supporting this view, we would repeat the broad consensus on the practical actions that can continue to be undertaken:

  • Service charges can still, and are being recovered now
  • Claims can still be made online and default judgments obtained
  • Credit control and recovery processes are continuing as is correspondence with lenders and leaseholders
  • Applications and Appeals can still be lodged electronically and matters set up for later enforcement beyond the standstill of the Courts and Tribunals

The reasons for maintaining continuity as far as possible will benefit landlords, managing agents and leaseholders in the long term. Primarily, this will ensure services can still be provided and developments can continue to be well run, safely and securely.

In our experience, the majority of service charge recoveries will not require actions such as deferment, discount or appeal. Broadly establishing new credit control measures, agreements, materials and resources – along with an administrative framework - could be impractical, disruptive, costly and potentially contentious later. It would be prudent to consider these changes as the exception, not the rule.

Continuing normal recovery functions (as far as possible) also manages expectations and provides clarity for all parties as to their ongoing obligations under the lease. Unpaid service charges may be considered as a breach of lease and given the uncertain duration of the crisis, continued recovery mitigates the cumulative build up and compression of debt arrears, supporting both business continuity and the continued provision of services under the service charge. However, it would also be advisable that leases are carefully reviewed to gauge the level of obligation in providing services (or conversely the scope for service reductions) whilst service charge is in arrears, as in the longer term disrepair and such works may cost more in the long-term if left unmanaged due to low funds.

In some instances, revised service charge budgets may need to be considered as a matter of urgency, given the need to ensure escalating and additional cleaning costs can be met. Additionally, checking the lease to see if the use of the reserve fund, under the service charge, can be deployed as a contingency would be advisable. It should be remembered that landlords are still under a legal obligation to keep their property in repair and ensure any necessary inspections of the property are performed (but which must also be safely balanced against the risk of the infection or spread of the coronavirus). If there are insufficient funds from lack of service charge recovery, landlords may potentially be opening themselves up to being sued, or having to provide a loan to the service charge account creating further liability.

As matters stand, preserving continuity may be key. Changes should be balanced and proportionate to anticipated need. We are all in a period of uncertainty. Preserving stability - where we can - in our lives, routines and work, will be a foundation that helps carry us through.

If you would like to discuss this post further, please contact Phil directly: p.parkinson@jbleitch.co.uk

Service Charge Recovery & COVID-19

OUR SERVICES: UPDATE

OUR SERVICES: UPDATE

Due to necessary precautions and current Government guidance as a result of COVID-19 (coronavirus) our offices are closed and all our staff are working remotely. We will do our best to reply in good time, but during this period response times may be delayed. Please also be aware that post, payments or documents sent to us by Royal Mail or other physical delivery services may take longer to process.

We are still routing calls via our main number but this may also be affected depending on call volumes.

We apologise for any inconvenience caused. We are however committed to ensure we prioritise public health guidance for the health of our staff, clients and community.


Comment on the CMA Investigation Update Regarding the Selling of Leasehold Property

The Competition and Markets Authority (“the CMA”) recently published an update on its ongoing investigation in to the selling of leasehold properties. This investigation is running parallel to the Law Commission’s leasehold reform consultation.
 
JB Leitch’s Head of Real Estate, Rob Denman, offers analysis and comment on the update and its potential implications.
 
The Report

Within the report, the CMA have identified six main areas of concern:

  1. Ground rents that increase significantly over time
  2. Grounds that may mean that a long lease is considered to be an assured tenancy under the provisions of the Housing Act 1988
  3. Ground rent increases linked to RPI
  4. Sales practices for leasehold houses 
  5. The cost of permission fees and service charges
  6. The lack of checks and balances protecting homeowners from potentially harmful terms and practices

The report is only an update at this time but the CMA have confirmed that they are preparing to take action through the powers of the Enterprise Act 2002 to “tackle certain instances of mis-selling of leasehold property” and “to address the problems faced by homeowners from high and increasing ground rents”.

Comment

The report raises some interesting points regarding developers sale processes and it is against developers that I envisage the CMA’s ire and future action will be initially directed.

Despite freeholders not being the immediate target of such action it is they who now hold the reversions of such properties and it is they who will bear the brunt of any enforced/agreed variations to existing lease terms. Freeholders will therefore need to consider their current relationship with developers that they have previously purchased freehold reversions from and what recourse they have against them (if any) if the freehold reversion values were to diminish due to enforced variations.

Rather surprisingly the CMA report does not refer to the 14 point government-backed ‘Public Pledge for Leaseholders” issued in March 2019 (“the Pledge”). The Pledge itself goes someway to address the concerns raised by leaseholders in the CMA report albeit that the CMA report does not agree with ground rents with RPI increases. Those signatories to the Pledge demonstrated their strong commitment to leasehold reform. Their commitment can be viewed in stark contrast to that of the government whose various agencies pontificate about such reform but never put any flesh on the bones of their findings. In any event it is those stakeholders in the industry itself that will bring about meaningful and practical change.

The CMA themselves have suggested that the requirement for action could be negated as “it is able to accept formal undertakings from traders in lieu of court action where they agree to address the CMA’s consumer protection concerns”. There have been a number of projects instigated by freeholders (following agreements with developers) to vary leases with supposed ‘onerous terms’.

If the CMA’s position does not change once they have concluded their investigation I envisage a potential scenario where developers provide the required undertakings to the CMA (following agreements between developers and freeholders who have subsequently purchased freehold reversions) to stave off court action so that all leases that are deemed onerous are varied accordingly.  This position could be further strengthened with a freeholder driven enhanced pledge for leaseholders which mirrors what the CMA and mortgage lenders consider to be acceptable lease terms for all stakeholders. This would give the CMA a much vaunted win but also allow the freehold sector to survive and potentially thrive in a scenario where all parties know what a ‘non-onerous’ lease is and how it can work.

Comment on the CMA Investigation Update  Regarding the Selling of Leasehold Property

Exceeding Authority?  When First-tier Tribunals Step Outside Their Jurisdiction

Exceeding Authority? When First-tier Tribunals Step Outside Their Jurisdiction

JB Leitch were recently successful in respect of an Upper Tribunal (UT) appeal in which the decisions of the First-tier Tribunal (Property Chamber) were not upheld and consequently set aside. The matter highlights that despite the presence of judges and designated sectoral expertise of the FTT panel members, decision making can be far from infallible…

Katie Edwards, Associate within the JB Leitch litigation team, looks at the matter further. 

The Role of the Tribunals:

Under the 2008 Tribunals, Courts and Enforcement Act, the First–tier Tribunal and an Upper Tribunal structures were introduced, both of which were split into Chambers (comprised of similar jurisdictions or similar types of experts to hear appeals). In most First-tier cases, decisions are made by a qualified judge and two other members, although this can vary between chambers and sections.

The UT primarily, but not exclusively, was intended to review and decide appeals arising from the First–tier. Like the High Court, it is a superior court of record – as well having the existing specialist judges of the senior tribunal’s judiciary at its disposal it can also call on the services of High Court judges (1).

Errors in Judgment:

When cases are transferred to the FTT from the courts, it can logically be assumed that a reason for doing so is to provide expert scrutiny and strong contextual understanding of the matters referred - and the parameters within which decisions can be fairly made.

However, as recent cases have shown, this is not always the case. The tribunal can be subject to many variable issues that cause error and failure in any other organisation or group – such as misinterpretation or assumption based on a lack of clear communication or limited information.

Our appeal in the recent Holding & Management (Solitaire) Limited v Miller (2019) UKUT 402 (LC) amply illustrates the point, to the extent that the presumption made by the FTT clearly exceeded the limits of its jurisdiction which subsequently created a clear case for appeal.

A Case in Point:

With a claim against Mr. Miller in the County Court for unpaid service charges, administration charges, legal costs and interest, Mr. Miller defended the service charge element on the basis that he had previously arranged for window replacement to his property’s windows, having paid £200 to the landlord for license to do so. Despite this the window replacement for the rest of the block were part of the services to be provided by the landlord and paid by the lessees including Mr. Miller – who also counterclaimed for £480 due to health, work and costs he had to undertake.

The matter was transferred by the County Court to the FTT under an Order stating “This claim be sent to the First-tier Tribunal (Property Chamber)”. The FTT set directions headed “Directions on an application under section 27A of the Landlord and Tenant Act 1985”.

Ultimately, The FTT decided the following:

  1. The service charge payable in respect of the window replacement and associated fees was reduced
  2. Administration charges were not payable
  3. Legal costs claimed within the County Court proceedings were not recoverable
  4. Interest claimed was refused
  5. S20C order made
  6. Counterclaim struck out/dismissed

Overstepping the Mark?

An appeal was made directly to the Upper Tribunal after permission to appeal was refused by the FTT. The appeal was made in respect of the following:

  1. The FTTs lack of jurisdiction to deal with matters of the County Court being legal costs, court fees, interest and the dismissal of the counterclaim.
  2. The failure to deal with the service charges and administration charges that were in issue before it.

The Upper Tribunal concluded the following:

  1. The FTT did not have jurisdiction to deal with any matters of the County Court. The transfer of the matter to the FTT was only in respect of matters that the FTT can deal with, being whether a service charge is payable and reasonable. Albeit Judges of the FTT can sit as Judges of the County Court, no such order was made within the County Court. The FTT Judge did not have the specific deployment to sit as a County Court Judge and further did not notify the parties of this at, or prior, to the hearing. Accordingly the FTT’s decision regarding costs, interest and the dealing of the counterclaim were set aside.
  2. The service charge claimed within the proceedings were not service charges in respect of costs associated with the window replacement. The FTT therefore had no ability to make a determination in respect of the service charge associated to the window costs as these were paid for by sums within the reserve fund. The use of the reserve fund was not an issue before the FTT to determine. Further it is noted that Mr. Miller made no dispute to the service charge that was before it. The decision by the FTT regarding the service charge was set aside.  Re the administration fees, the Upper Tribunal acknowledged that the FTT confused the £60 administration fees with the legal costs. The Respondent’s lack of challenge to these fees and a statement that they are exorbitant without any explanation or reasoning to that assertion does not warrant them unreasonable. The decision about the administration fees was therefore set aside. 

            As none of the decisions made by the FTT were upheld, the order under S20C was also set aside.

In summary, some may argue that assumption - although some may say hubris - played a part in this case, particularly in the approach to addressing the whole claim, not just those issues within the jurisdiction of the FTT. However, the case also provides a cautionary note that a matter in hand can sometimes be lost (or not given sufficient reading) if subsumed within the complexities of a whole claim.

If you would like to find out more about this and similar cases the team have been involved with, contact Katie directly at: k.edwards@jbleitch.co.uk

References:

1: https://www.judiciary.uk/about-the-judiciary/the-justice-system/jurisdictions/tribunal-jurisdiction/


Safety First: JB Leitch Secure another Dispensation for Safety

JB Leitch, have secured urgent dispensation at the First-tier tribunal for fire safety measures to be implemented at a modern mixed use development in Manchester. Legal Director Phil Parkinson discusses the case and its implications.

The issue of fire safety remains a high priority following the recent findings of the first phase of the Grenfell Inquiry and the government’s response. However, many landlords and managing agents have already set diligent plans to ensure residential blocks, mixed use developments and commercial premises provide a safe environment for tenants to live, work and play.

Background:

In order to both minimise delay and mitigate further risk, landlords can seek to bypass the customary consultation process required under section 20 of the Landlord and Tenants Act (1985) by applying to the First-tier Tribunal (FTT) for dispensation in relation to major works where the works are urgent and the leaseholders will not be significantly “prejudiced” – or financially at a loss as a consequence.

Specifically “Section 20” stipulates that landlords need to consult the leaseholders before carrying out major works which will cost any individual leaseholder more than £250 in any annual period. If consultation is not undertaken the landlord cannot recover more than a capped amount of £250 from each leaseholder towards the cost of the works and recoverable under the service charge - unless the FTT dispense with consultation, when the leaseholders will be obliged to meet the full costs, on top of the service charge obligations set out in the lease.  

A Balanced Approach:

Although media coverage has tended to provide an arguably subjective view on the matter of cost attribution for fire safety works in recent months, it should be noted that the process of applying for urgent dispensation can be borne primarily out of an immediate need to protect both tenant’s safety, the building as an asset or the landlord having to bear the significant shortfall from the capped contribution.  On a case specific basis, the FTT can also add the particular conditions it deems appropriate regarding costs. It should be noted that applications are openly considered and balanced on factors such as requirement and urgency. Specifically, Section 20ZA(1) indicates:

“Where an application is made to the appropriate tribunal for a determination to dispense with all or any of the consultation requirements in relation to any qualifying works … the tribunal may make the determination if satisfied that it is reasonable to dispense with the requirements”.

A Case in Point:

JB Leitch has a strong track record in both fire safety matters and tribunal applications, and another recent and successful case typifies where the firm’s areas of specialism have successfully enabled a client to apply for, and receive, urgent dispensation for works comprising the installation of fire safety systems.

JB Leitch represented a management company who manage a distinctive building in Manchester. The building is a contemporary mixed use scheme containing 207 apartments, a single commercial unit, underground car parking and 2 live/work units. In November 2019, the application to the FTT was made on the basis of securing dispensation from consultation centred on the reasonableness of conducting urgent fire protection measures following a series testing which identified including compartmentation, rewiring of smoke vents and installing a new fire detection system. 

Following discussion with Greater Manchester Fire & Rescue Service, the applicant arranged for fire marshals to patrol the property on a 24/7 basis, but were also keen to carry out all of the recommendations in order to return to a “stay put” policy and remove the need for marshals. 

However, from the respondents’ perspective, (comprised largely of tenants at the building) the common theme wasn’t related to the urgency or necessity of works, but rather concern about where ultimate liability for the cost of the works should fall. The tribunal noted that the applicant had secured a “without prejudice loan” to begin the works, even though contractors had not yet been selected – and therefore the costs identified - The applicant would proceed on the basis that this loan would have to be repaid and that the cost of the works will ultimately be borne by the respondents as service charge payers.

In conclusion, the tribunal successfully granted dispensation, adding “that essential works to ensure that the Property has adequate fire safety measures should be undertaken as soon as possible: this is appropriate not only to minimise risk to the health and safety of the occupiers of the Property, but also to minimise the cost of stop-gap protection in the form of on-site fire marshals. We have no hesitation in finding that the balance of prejudice favours permitting such works to proceed without delay”.

What Does the Decision Tell Us?

It is evident that this case highlights that health and safety was the key priority for the tribunal, with the issue of cost allocation under the service charge deemed another matter to be decided in the future. With JB Leitch securing the dispensation by reiterating the measures already taken by the applicant, such as notifying each respondent of the intention to undertake the works, the reasonableness and urgency of enacting the recommendations made satisfies perhaps the most fundamental point – the decision made may save lives.

Safety First: JB Leitch Secure another Dispensation for Safety

Commercial Control: Establishing Guidelines on Service Charges for Commercial Properties

Commercial Control: Establishing Guidelines on Service Charges for Commercial Properties

With our considerable experience, specialism and success in service charge recovery, we recognise that there has been limited provision or guidance for commercial service charges. The Royal Institute of Chartered Surveyors (RICS) however, are seeking to address this with the introduction of the “Service Charges in Commercial Property, 1st Edition, September 2018".

Whilst not statutory, it is intended that this will have a more powerful impact then simply being a guide that you may or may not wish to use.

The main difference with this Code of Practice is that it provides mandatory requirements that must be adhered to by professionals involved in the management of service charge accounts, particularly by RICS members. The thinking behind the Code is that it will impact not only against RICS members, (if this is not implemented by them where there is ambiguity in the Lease) but will also affect the drafting of new leases, as well as serving as a judicial influence and point of guidance in disputes. Whilst, it remains to be seen how this will impact upon commercial leases what impact this will have, it is a significant attempt to influence the drafting of commercial leases as well as the disputes that arise between the parties.                

Good News for Landlords, Management Companies and Managing Agents

The guidelines make it “mandatory “that any practitioners “must” advise occupiers to make "prompt payment" and impresses upon the occupiers that the service charge has “legal effect". It also endorses that “apportionment” of service charges should be “fair and reasonable”.  Furthermore, that if there is a dispute with the Tenant, the RICS members must advise their client that they can only retain the disputed sum. However, again, this will be dependent on the terms of the lease, as most leases will state they cannot withhold payment of the service charge which has been demanded.

Some other of the mandatory requirements that the guidelines impose, (where there is no provision in the lease) are summarised below:

  1. “Owners and managers must seek to recover no more than 100% of the proper and actual costs of supply of services unless the lease states to the contrary”.  It could be said that the majority already comply with this requirement.
  2. “Annual service charge budgets and explanations where appropriate to all tenants”
  3. It stipulates that owners and managers must provide the following on an annual basis:-
  • Inclusion of “a service charge apportionment matrix”.  This is a significant change.
  • There is also reiteration of the condition that “All expenditure must be in accordance with the terms of the Lease” – which is largely a given.
  • Recognising that budgets are something of a standard, we would note that some don't include explanations of some amounts in the service charge budget.
  • An approved “set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge”.
  • The guidelines also highlight that “Service Charges monies must be held in one or more discrete (or virtual) bank accounts”*

Whilst interest is not something usually appearing in the accounts, this may change as a result of the Code of Practice. Also, with a substantial increase in "mixed use" developments, it should be considered that it may be difficult from a purely practical point of view to apply different interest rates for commercial units.

In short summary, whilst most managing agents will already be complying with the mandatory criteria, it is beneficial for them to check that the relevant part of the Code to their particular development is being adhered to as far as possible.

What else is significant?

There are also particular points to note covering aspects not usually dealt with in the Lease, including “Commercial Property Service Charge Handover Procedures" and provision regarding new leases. As regards new leases the guidance seeks to impresses that, where possible, the new terms in the lease should be adopted to reflect the Practice Statement.

In reality, however, it is likely that the terms of the lease will be governed by the parties and any new terms proposed regarding the service charges would be difficult to include in any new lease, as it would lead to a "dual” system of service charges which could be unsatisfactory for both the Landlord or Management Company and the Tenant.    

In addition, we noted that on management fees, the guidance “requires that fees be set on a fixed price basis" as opposed to a percentage basis; however, it is worth highlighting that there is provision for an annual review of the fees or for them to be indexed linked. Further to this, that the total costs of the management fees are a reasonable price for managing the provision of services taking into account “location and operation of the services” along with the recommendation that asset management works and rent collection should be charged separately.       

Conclusion

Putting this in context, with no statutory and current controls over Service Charges for commercial properties, it remains to be seen as to what impact this will have on commercial property disputes regarding service charges, particularly as the terms of the lease will still prevail; however, should a dispute arise or there is non- payment of service charges it is imperative to take legal advice at the earliest opportunity to ensure the Landlord’s or Management Company’s position is protected.

*(Virtual bank accounts - a subsidiary or sub-account of a physical bank account that allows segregation of funds)”

To read more about JB Leitch’s commercial litigation team and services, visit: https://www.jbleitch.co.uk/services/commercial-property-litigation


Leasehold Enfranchisement Reform – Law Commission Report

The Law Commission has published its long awaited report on ‘Leasehold home ownership: buying your freehold or extending your lease - Report on options to reduce the price payable’. The report follows the Commission’s consultation on wide-ranging reforms to the enfranchisement regime (enfranchisement being the extension of an existing lease or purchase of the freehold interest in the property).

The Commission is shortly due to publish three further reports on the following areas:

  1. a report on all aspects of a reformed enfranchisement regime
  2. a report on the reform of the right to manage
  3. a report on the reform of commonhold ownership

The mandate of the report was for the Commission to report to the Government on “options to reduce the premium payable by existing and future leaseholders to enfranchise whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests”.

The Proposed Schemes

The report has proposed 3 schemes of valuation:

Scheme 1 - It would be assumed that the leaseholder isn’t the purchaser of the asset. The premium here would be based on a premium payable for the ground rent income for the remaining term (‘the Term’) plus the value of the right to have the property back (‘the Reversion’).

Scheme 2 – It would be assumed that the leaseholder isn’t the purchaser of the asset but may do so in the future. The premium here would be the Term plus the Reversion plus Hope Value (i.e. half of the Marriage Value)

(Marriage Value is an additional payment to reflect that the value of owning the freehold interest outright is worth more than the sum of the freehold and leasehold interests in separate ownership. Hope Value is the potential selling of the asset to the leaseholder in the future if it is sold to another party first)

Scheme 3 – Would be a continuation of the current law. It would be assumed that the current lessee is the purchase of the asset. The premium here would be the Term plus Reversion plus Marriage Value

Schemes 1 and 2 would reduce the premiums currently paid. Scheme 1 would get rid of both Marriage Value and Hope Value. Scheme 2 would get rid of Marriage Value and (in certain cases) Hope Value.

Further Proposed Amendments

As well as the proposed amended Schemes 1 and 2 the report also suggests the following additional amendments that would look to reduce the premium payable if any of the three proposed schemes were adopted going forward:

  1. Prescribing rates for Term, Reversion and Marriage Value.

This would be the most controversial amendment. At present such rates are very much a subjective debate between valuers for landlords and tenants. Government would need to determine them and would need to decide what the applicable market rate was.

  1. Capping the treatment of Ground Rent

The report suggests capping the level of ground rent that is taken in to account when calculating the value of the Term. The justification for this amendment is purportedly ‘onerous ground rents’ and the impact they have on the Term valuation.

  1. Restricting or capping Development Value payments on collect enfranchisement cases

Leaseholders could be given the option to decide to accept a restriction on future development of a block in return for the non-payment of Development Value.

  1. Differential pricing for different types of leaseholder

The valuation system could working differently depending on whether the leaseholder was an owner occupier or a buy-to-let investor.

  1. Removing the 80 years or less cut off for payment of Marriage Value

This would only apply if other proposed reforms were implemented which would have the overall effect of reducing premiums.

  1. Allowing a discount for leaseholders’ improvements

Any increase in value of the property which is as a result of an improvement carried out by the leaseholder would be deducted from the freehold value.

  1. Discount for the risk of holding over

The right to hold over can reduce the value of the freehold and is therefore currently used to reduce the premium paid. This could be removed in limited circumstances if other proposed reforms were implemented which would have the overall effect of reducing premiums.

Comment

The Commission has, as per their instructions, proposed reforms to the current enfranchisement process so as to “reduce the premium payable by existing and leaseholders to enfranchise”.

However, as they themselves state, they do not make recommendations as to what a fair premium is. It is for the Government and Parliament to ultimately decide this. These recommendations are therefore essentially superfluous to that greater question. The current system may even be deemed to work perfectly well if the current methodology for calculating the applicable rates (Term, Reversion, Marriage Value and Hope Value) is reformed to produce what the Government eventually decides is a fair premium.

Amendments to rates and the premium calculated must, as the Commission’s own instructions state, ensure “sufficient compensation is paid to landlords to reflect their legitimate property interests”. The Commission’s own report reflects on this citing the need to comply with Article 1 of the First Protocol of the European Convention on Human Rights as enacted through the Human Rights Act 1998 as well as being conscious of the risk for potentially reducing income for pension funds and charities to which we are all dependant in one way or another. The phrasing of this part of the instruction is at odds with the first part of the instruction to “reduce the premium”. Surely you need to determine what “sufficient compensation” (i.e. a fair premium) is first and then determine the appropriate pathway to ensure that such a level of compensation is paid. The Commission are giving options to the Government to try and reach a target that has yet to be determined. This is putting the cart before the horse.

If the Government is serious about enfranchisement reform then they should stop dallying around the issue and address the pertinent question of the level of premiums payable and whether or not they consider them to be fair. They need to decide once and for all whether the premiums payable are fair and if not reform the system to determine a fair premium and in doing so to strike a fair balance between leaseholders’ and freeholders’ interests. Any other reports such as this are just window dressing and do not address the central issue.

 

Leasehold Enfranchisement Reform – Law Commission Report

Fire Safety: The Regulatory Position

Fire Safety: The Regulatory Position

On the evening of Friday 15th November, news reports nationally focused on an intense fire at The Cube, a 6-floor block of student accommodation in the centre of Bolton. Although the cause of the fire has not yet been officially confirmed, similarities to Grenfell Tower ensure that this event keeps the subject of block fire safety at the forefront of the property sector’s minds.

J B Leitch’s Legal Director Phil Parkinson, our specialist in niche regulatory fire safety issues, comments on the legal aspects related to properties such as The Cube, and advises landlords and property managers on steps to take to protect both investments and flat occupiers.

What action has been taken since Grenfell to improve safety in tall buildings?

An extensive national project is underway to survey high-rise buildings over 18m in height and the building stock of large institutional and social landlords, much of which has now been completed. Assessment of cladding and fire safety procedures is of particular focus.

A fund of around £200m has been made available to remove and replace unsafe cladding from around 170 privately-owned high-rise buildings.

The Cube was 17.84m in height, and will not therefore have fallen under the scope of the national survey. To take a proactive approach to fire safety across portfolio investments, landlords and managers are now looking to commission their own voluntary assessments of buildings not falling within the national scope, and it will be reassuring to many occupiers and leaseholders that surveys are being undertaken.

What happens following an incident such as this?

Immediately following an incident, landlords or managing agents will generally need to ensure an on-site presence quickly. Surveyors and insurers will access the site to assess damage, and will work with fire authorities to ascertain the causes of the fire and the structural impact of the fire on the building.

Legally, and when assessing costs for repair works or preventative measures, what happens next will depend on those responsible for the property and how ownership of the building and the flats within it is structured. Often, flats are let on long leases to occupier or investor leaseholders, allowing a landlord to recover costs through service charges, but occasionally landlords may assume responsibility for the whole building themselves, presenting faster rental yield returns but greater risk in terms of assuming costs for ensuring fire safety in the event that a building is deemed to require repair work, replacement work or additional safety measures.    

What can be done to protect landlords and occupiers?

From a practical perspective, it is essential to ensure that the right insurance is in place. Undertake thorough due diligence on policies and the coverage you can expect to receive, invest in a comprehensive policy, and take a ‘safety first’ approach by instructing surveys on buildings under 18m where cladding has been applied to the exterior of the structure.

Ultimately however, assessment of safety isn’t an operationally legal issue but rather an undertaking required to be carried out with reference to a legal framework. Surveyors and engineers must determine the safety credentials of a building and whether the building is compliant with safety regulations. Legally, a building must be compliant with regulations and we will call upon safety experts for determination as to whether a building is defective.

Lease structure and advice available to landlords

How a lease is structured may well determine who is responsible for fire safety works and how those works are to be paid for. The lease terms will set a starting position; obligations under statute often do not reflect what can be recovered under the lease, but interpretation of the lease terms will be considered initially.

Advice on title structure and relevant leases is of great value to landlords, in particular where costs may be recoverable or otherwise in advising where a landlord is potentially exposed. By closely reviewing liability at an early stage, landlords may be much more thoroughly protected.

Where Prohibition Orders or Enforcement Notices are served, our team has successfully advised on and, when necessary, challenged these on behalf of landlords which will allow parties more breathing space to gain expert advice, reports and surveys as necessary.

As a block management specialist, J B Leitch is expertly positioned to advise landlords, investors and property managers in the regulatory advice of fire safety issues, both at the commencement of a development in lease structure planning and in providing proactive, niche understanding relating to existing building stock.

Knowledgeable advisory services by our team will present a clear overview on risk and challenge opportunities, protecting both investments and those living within high-rise buildings.


Communications Breakdown

The government and main political parties each recognise the need to provide the UK with world class digital connectivity – to increase our competitiveness, boost productivity and meet future demands of consumers and businesses in both mobile and fixed connectivity. The new Electronic Communications Code was introduced in late 2017, to provide a framework to make it easier for network operators to install and maintain apparatus such as phone masts, exchanges and cabinets on public and private land.

However, recent case law highlights some relevant points of interest and potential impact for Landowners and Managing Agents (who are managing the Land on behalf of Landowners). The case of Cornerstone Telecommunications Infrastructure Ltd (Cornerstone) v Compton Beauchamp Estates Ltd (Compton) [2019] at the Court of Appeal, was a success for landowners who have mast(s) or any other telecommunications apparatus on their land.

The case dealt specifically with whether the Tribunal could compel a freeholder to confer rights on an operator where they were not in "physical occupation" of the Land. The Court of Appeal that held the tribunal had no jurisdiction to do so. In reaching its decision, it specifically considered who was an "occupier" for the purposes of the Electronic Communication Code (Code). It determined that an occupier was anybody in "physical occupation" of the land. However, if the operator did have an agreement with the physical occupier then the Tribunal may have been able to compel a freeholder to confer rights under the Code.

The case illustrated that Telecoms giant Vodafone were already in occupation of the land, although their tenancy had expired and they were currently in occupation under a “tenancy at will" – typically where a landlord and a tenant agree that a tenant will be allowed to occupy a property before a lease has been issued.

They shared occupation of the Land with Telefonica UK Ltd. The appellant in the case was Cornerstone Telecommunications Infrastructure Limited (Cornerstone), which was a joint venture between the two companies in occupation of the Land. Compton was the freeholder of the land. Cornerstone wanted to compel the rights under the Code on Compton - and served Notice only on Compton and not on Vodafone. Cornerstone had not requested Compton to agree to be bound by a code right already granted. At no point did Cornerstone state that Vodafone should be a party to the agreement.

The appeal was dismissed and The Court of Appeal made it clear that Cornerstone should have reached an agreement with Vodafone (the occupier) and if no agreement could be reached then the Upper Tribunal could resolve them.

Whilst there is no Bill at present proceeding through Parliament (at the time of writing), the government is keen to ensure that there are no delays to ensuring broadband and telecoms operators secure connections without delay. They have previously laid the Telecommunications Infrastructure (Leasehold Property) Bill before Parliament which is currently not proceeding; however, it appears inevitable that there will be legislation giving operators rights of entry as well as further installation rights to ensure their future plans for broadband are met.       

In conclusion, where an operator is applying pressure for the freeholder to confer rights under the Code it may be extremely advantageous to them not to reach an agreement with an operator (regarding rights over their land for telecommunication apparatus), where a third party is already in occupation. It is imperative that they seek legal advice should they be approached by an operator for rights over their land for telecommunications apparatus.

Communications Breakdown

Balcony Views: Reviewing new guidance on balconies containing combustible materials

Balcony Views: Reviewing new guidance on balconies containing combustible materials

The recent Advice Note on Balconies on Residential Building produced by the Ministry of Housing, Communities and Local Government (“MHCLG”) sets out the suggested action to be taken by responsible entities for buildings that may contain combustible materials on their exterior walls. It is advised that landlords and/or management companies should ensure that they are fully aware of the materials used on all balconies on their buildings and carry out works to change these materials where they are deemed inappropriate in limiting the spread of fire.

 

Where does the responsibility lie in respect of the leases?

 

Access to a balcony to inspect and test the materials and potentially carry out works requires a thorough review of the specific leases to the building. It is important to establish where the responsibility lies in respect of works required for the following reasons:

 

  1. Who owns the balcony? The extent of the lessee’s demise should be considered, does this include the balcony or is there a right/easement in place granting the lessee use of the balcony?
  2. In the event that the lessee owns the balcony, to what extent is the balcony demised? This could be the surface layer only or could extend further to the lower membrane. It is unlikely to include the structural parts of the balcony itself but this will depend on the lease.
  3. Can access be gained? – balconies can only be accessed via the flat to which it is attached to. Without the consent of the lessee, works cannot be done as the same may amount to trespass. If the lease makes provision for access, the process set out in the lease should be adopted. If required, access injunctions can be sought.

 

The Service Charge

 

In the event that works are required to the balconies and the extent of the demise established, works to the retained, maintained and structural areas may form part of the service charge mechanism within the leases. Works to a demised area of the balcony generally will not and the repair, maintenance or improvement of demised areas will be the responsibility of the lessee.

 

Landlords and management companies should be comfortable with what costs form part of the service charge expenditure before incurring the same. If the services to be provided are not clear, advice should be sought.

 

Lease Regulations

 

Where combustible materials are used in the construction of balconies or on the exterior walls of the building, MHCLG advises that balconies should not be used for smoking, barbeques or storage of combustible materials etc. The responsible entity of the building should communicate to all leaseholders (and arguably residents) that these activities should not be carried out and could cause or increase the risk of fire and the spread of fire.

 

Depending upon the lease terms, the regulations contained within usually make reference to the use of balconies and these regulations should be enforced in the event of non-compliance. In the event that the regulations may not reach the threshold to take action against leaseholders who fail to adhere to the advice and requests made in respect of the use of their balcony, there may be provision within the lease to alter, amend or add to the current regulations within the lease upon notice from the landlord or management company. This will allow for additional regulations to be incorporated and in the event of breach, action may be taken.

 

What is clear from the Advice Note is that the implementation of the advice on a practical level is dependent upon the ownership of the balconies in question and the extent to which the landlord or management company can rectify issues of combustible materials being present or in enforcing covenants where required. If the provisions are not clear, legal advice should be sought.


Great Expectations

A fascinating report commissioned and recently published by LexisNexis investigates the increasing significance of client experience as a key differentiating factor for law firm clients.

As a barometer on common practices and client perceptions, the report serves as a timely reminder that in changing times, the value of relationships as well as processes should not be underestimated.

Common themes emerge from the industry research undertaken, including how firms manage engagement, resolution of problems, disconnects, and practices that add value. With regard to the recommendations for law firms, the report offers three main areas for consideration and development.

Firstly, the report asks what it means to actively understand what it means to be a client - their values, pressures, and constraints and focusing on engagement that is not only transactional but sees the relationship as clearly distinct from activities to create greater empathy and understanding.

Secondly, the findings invite law firms to improve the client experience through structured processes. Specifically, this includes building solutions around the client journey and potential pain points.

Thirdly, the report asks that firms consider value networks and increased collaboration with providers and clients to improve client experience through processes such as co-creation.

In many ways, the report serves as an effective litmus test against which we can assess our journey of ongoing development and reflect on how many of these criteria already form a significant part of our operational ethos.

On understanding client needs, a recognised strength within the JB Leitch team is undeniably the level of market and industry knowledge we have. At a strategic level, our business development team have fostered long term relationships with both industry bodies and clients alike, creating a market led knowledge network that keeps in tune with movement in the market as well as the issues of the day that concern clients. It allows us to add value through constructive challenge as well as providing deeper contextual insight. This is perhaps, best represented by the recognition we received at the Property Management 50, with business development Director Karen Bolland receiving a “Legend” award for continuing to support clients and the wider industry at a level of dedication that is unsurpassed.

On the second recommendation (focusing on providing clients with clearly structured processes), our trajectory is assured and innovative – but importantly never static. Operationally, the scale of our clients varies greatly. The resources, processes and pressures for a smaller firm are different than those of the largest. What we provide is a highly refined process led approach to all of our work, be it for arrears collection, complex breach cases, forfeiture or real estate matters. If form follows function, then the JB Leitch team structures and systems reflect this. Each stage of a case follows an agreed process map, resides with the relevant team and is escalated accordingly.  The golden thread of continuity throughout this is the IT infrastructure that we have invested in, developed and refined to provide detailed information and activity flows to financial management. Indeed, it is the very rigour of these structures that allows us the latitude to build bespoke solutions.

However, it is important to note that having established processes means we are not intractable or in danger of complacency. We proactively encourage client feedback and input. For JB Leitch, a good client relationship is based on two way conversation with the trust and integrity to be open. Highlighting this, one of our key differentiators is the way develop client reports based entirely around what the client wants. We effectively take an open brief, analyse, collate, compare, comment and design BI that is meaningful, useful and results orientated. We listen, we understand and jointly consider the best solutions. It is, to reflect the third recommendation, a collaborative and co-creative process.

In summary, the examples given are representative of our approach on a day to day basis, however we also recognise that fostering a strong client experience reflects a more fundamental representation of JB Leitch’s vision and values, and perhaps the report findings echo the most prescient of these: “Clients First”.

Great Expectations