Real estate disputes: what to watch out for in 2024

Joe:

Hi, my name is Joe Perry-Courtade. I'm an associate in Ashurst Real Estate disputes team. I'm joined today by my colleagues, Alison Hardy, who's the partner heading up our team.

Alison:

Hi, Joe. Thanks for having me.

Joe:

And Senior Associate, Kim Clifford.

Kim:

Look forward to chatting.

Joe:

This is our annual podcast discussing trends that we expect to see in the real estate disputes world this year. We'll be covering tenant insolvency, development disputes, potential reform of the Landlord and Tenant Act 1954, and energy efficiency. So turning to tenant insolvency first, what do you think we'll be seeing this year, Kim?

Kim:

Well, recent figures from the Office of National Statistics show that in the last two quarters we've had the highest quarterly insolvency numbers since Q2 2009, and also the highest numbers of company voluntary liquidation since, well, get this 1960. Things seem to be getting worse, unfortunately rather than better. So similarly to last year, I think it's safe to assume that there will be many more tenant insolvencies on the horizon.

Alison:

Yeah, unfortunately, I agree, Kim. Those figures you mentioned show that the numbers of insolvency in the retail accommodation and food sectors are some of the highest. And there's also been reports recently of 47,000 businesses being in distress in the UK, with a large proportion of those being in construction and real estate.

And whilst in 2020, just as we were in the pandemic early days, we saw a lot of retail and hospitality tenants proposing CVAs, but that trend has definitely now dropped off. And I think we're going to see more of the new-kids-on-the-block restructuring plans and also administrations and liquidation.

Kim:

So really landlords should be keeping an eye out for their tenants going insolvent, as this is likely to trigger events of default in their leases, which could allow them to terminate their lease by forfeiture.
As always, landlords should also be really careful not to lose their precious right to forfeit. To maintain this remedy, it's really, really essential to halt all communication with the tenant and their agents when the event of default arises. If landlords don't want to take the property back this way, perhaps because they're concerned about finding a new tenant in the market or being liable for business rates in the meantime, then there are a range of remedies available to landlords, and we are already advising landlords on which option would best suit their situation and desired outcome.

Alison:

Definitely. And of course, as we know from cases that we're currently progressing through the High Court opposite WeWork, it's important to consider whether the restructuring of guarantors, even in other jurisdictions, might give rise to an event of default for insolvency. And as the threat of insolvency increases, we might expect to see tenants trying to think of more creative ways to ease pressures.

So it's always worth keeping an eye and thinking outside of the box.

Joe:

Thanks, both. Our next prediction links closely to the first topic of tenant insolvency, and the figures we mentioned earlier from the ONS show that the sector with the highest rate of company insolvencies in the last few quarters was the construction sector.

Alison:

Yes, construction bearing the brunt here, often having the unfortunate reputation of leading the way in the number of insolvencies. And that problem is exacerbated this year with supply chain issues, the increased cost of wages and materials, high inflation and interest rates.

We've been instructed on a number of different cases involving disputes as to whether parties to a development agreement have satisfied their reasonable endeavours obligation. And you can definitely see that an increase in insolvencies in the sector might lead to more parties wanting out of development contracts and looking to breaches of reasonable endeavours obligations to try and do that.

Kim:

Yes. And the other contributing factor in the construction industry of course is the Building Safety Act and the cost of replacing cladding or other safety measures. It's a really massive issue and has such wide-reaching consequences across the market, and even where companies have sold their properties, they are having to go back and fix historic problems.

Alison:

Yeah, and there's also problems looking forward. Many developers have agreed to buy sites and now are having to completely reevaluate their whole scheme where second staircases and other safety measures are being required.

Joe:

Yeah, and of course we're seeing cases coming through the courts now on who pays for the cost of replacing cladding. For example, we had that first substantively contested remediation contribution order in the Triathlon Homes LLP case earlier this month. And in that case, the first [inaudible 00:04:49] tribunal rejected the respondents arguments that the making of an order would not be just inequitable, and that the BSA should not have retrospective effect. I'm sure there's going to be lots of those cases coming through the tribunal giving how wide-ranging these issues are.

Turning now then to the Landlord and Tenant Act 1954. In March 2023, the government announced they had tasked the Law Commission with reviewing the 1954 Act as part of its Anti-Social Behaviour plan, and it said it wants to revitalise high streets and town centres, create thriving spaces with landlords, businesses and communities, that they choose to invest in and use.

Kim:

Yes. So the government said its aim was to make sure that the act works for the current commercial leasehold market. And the areas they've said they're looking to review will include security of tenure, notices, and renewal lease terms.

Joe:

Do you think the review could lead to real change that's actually needed, Kim?

Kim:

Well, I think the jury is still out on whether the changes are actually needed. For a long time some people have been saying that the actually, or at least parts of it, are too bureaucratic and inflexible, and that its processes cause extra cost and delay for both landlords and tenants.

I will be interested to see how far the Law Commission goes though. Is it going to suggest a wholesale change, the concept of security of tenure for example, or will it just take the safer route of some amendments and updates to the existing regime?

Joe:

Yeah, I suppose you could argue that the backdrop for the tenant-friendly nature of the act and particularly security of tenure, which was around in the 1950s, is no longer really there. Some people might say we're better suited to a system where the parties need to opt into the protection rather than opt out.

Alison:

Yeah, potentially. But I think that's probably on the more radical side of the potential reforms. I mean, it's hard to imagine many landlords lining up to opt in voluntarily, isn't it? So that might be going too far the other way.

I do think it'll be interesting to see whether the Law Commission can suggest changes that streamline a piece of legislation which covers such a wide range of commercial landlord and tenant relationships, from multi-million pound leases in the city for prime office space, down to the corner shop.

Joe:

Yeah, definitely. And I'm interested to see if we'll get any formal guidance on green clauses. The court seem to have been a bit reluctant to incorporate green obligations into leases where there's been opposition from the other side, but given the push towards sustainability across the real estate sector recently, this could be a good time to address this.

I'd also be interested to see if any sort of statutory arbitration process might be suggested, similar to the COVID arrears scheme that we had a few years ago, that might encourage parties to settle matters outside of the court process. You can imagine perhaps a scheme being able to be kick-started by either the landlord or the tenant or both of them after a notice has been served. And I think any suggestion that brings down cost and reduces unnecessary use of court time and resources will be a positive step. The Law Commission is now promising to publish its consultation paper as soon as possible in 2024, so we shouldn't have too long to wait to see what they're proposing.

Alison:

Yes, and perhaps the Law Commission should be tasked with looking forward for things like this, given how long it takes for these consultations to become law. After all, we're still waiting for the proposed changes to "right to light" to be turned into legislation, and that consultation was 10 years ago, and the proposal to modernise the termination of tenancies was back in 2006.

So sadly, I'm not holding my breath on this one, especially with an election looming. It's a shame I think that such great work by the Law Commission often doesn't make it to the statute book.

Joe:

There was a lot of talk about commercial energy efficiency in 2023. From April 2023 it became unlawful to grant leases or continue to let commercial property in England and Wales with an EPC rating below E, unless there was an exemption or the property wasn't required to have an EPC. And the government has set expectations that the minimum rating for commercial lettings was to increase to a C by 2027 and then a B by 2030. Do you think those conversations will continue into 2024?

Kim:

I think they will, albeit we know the government has already cast out on whether those requirements and timelines will continue on that trajectory that you've just set out, Joe. They recently said and admitted that their timelines required updating, whatever that means. While some landlords will probably be sighing in relief, the government has come under fire for creating uncertainty and rowing back on its promises to push for energy efficiency across the market.

Alison:

Yes, the goalposts do seem to be moving quite a bit, which is frustrating for clients who are trying to plan for the future. However, the general trend in the market still does seem to be to push towards sustainability and energy efficiency. So the government's suggestion that timelines for compliance will be increased will hopefully not lead to complacency.

And we've been discussing with a number of our clients how they can start to prepare themselves for more stringent requirements in the future, including them undertaking full-scale evaluations of their buildings and their portfolios in order to understand what works might be needed to bring them up to scratch. Those sorts of reviews can also help clients budget for the works to be carried out in the coming years and also open up conversations with tenants about sharing the cost of works, et cetera.

Joe:

Yeah, I think there's definitely a risk of stranded assets. Some landlords could end up with expensive prime location assets that they're unable to let because they fail to meet minimum regulatory standards. So it's not something that can be ignored just because the government said that the EPC dates will be later than they'd originally anticipated. I think being proactive rather than reactive seems to be the best way to deal with this.

Kim:

Yes, I agree. Joe. The best way for clients to avoid falling into this trap is to get ahead of the game, that's for sure. For example, they can be looking at their existing lease or leases to check that they contain the sufficient rights to carry out any works that they may wish to do. It is also worth checking if there are already any clear obligations to who has the burden of costs for those works too.
Parties negotiating new leases at the moment should also be wary of these points though, as the new rules may welcome into force during the term of those new arrangements. So it's definitely best to think ahead now. The need for efficiency is only going to increase as time goes on, I think.

Alison:

Yeah, I mean, if you think about acting for a landlord who is granting just even a three or five-year term now in 2024, that's going to span when this legislation comes in. So say, at the five-year term that's going to run through until 2029, almost certainly those new rules will be in place by then. And if the landlord can't continue to let the building from, say, 2028, if the date's pushed out and if the building is below a C rate, then what are you going to do? What do you do about that ongoing obligation to do the works?

Some people are talking about the ability to rely on exceptions in the legislation, but we haven't even got that legislation in final form yet. So it's entirely possible that you might plan to do something and then not be able to do it. So it comes back to the good old Boy Scout "Be Prepared" saying, and I think that is definitely the right way forward and certainly something the market is driving for.

Joe:

There you have it, our thoughts on what we can expect in the property disputes world in 2024.

Thank you very much for listening, and if you would like to discuss any of the points raised in this podcast, please do get in touch with Alison, Kim, or myself, or anyone else in our team using the contact details provided on our website. And to ensure you don't miss out on any future episodes, please subscribe to the Ashurst Legal Outlook now on Apple Podcasts, Spotify or your favourite podcast platform. And while you're there, please feel free to keep the conversation going or leave us a rating or a review. Until next time, thanks for listening, and goodbye for now.