Crisis averted?

‘The whole property industry would have been paralysed had most landlords and tenants not been able to navigate their way through it,’ says Joanna Lampert, Mishcon de Reya’s property litigation partner, reflecting on the impact of the pandemic.

Indeed, property litigators have had their work cut out in Covid times. In March 2020, transactions ground to a halt and supply chain issues plagued development projects. However, the biggest strain has arguably been on the relationships between commercial landlords and tenants.

With businesses closed and much of the workforce working from home, companies’ property needs changed practically overnight. At the same time, UK government intervention for the protection of commercial tenants led to mounting rent arrears.

Notes Lampert: ‘The moratorium that was imposed during the pandemic effectively contributed to the amount of unpaid rent in the market because when tenants were no longer under the threat of forfeiture, they were able to prioritise other debts or preserve their cash.’

While there have been a handful of high-profile court cases as a result, notably Bank of New York Mellon v Cine-UK, many others have seen disputes resolved out of court.

‘We’ve been quite strategic and careful about how we’ve looked after our clients’ interests and how we’ve gone about recovering rent. For every claim that has been taken to court, there were many more where a negotiated settlement was agreed,’ says Lampert.

Now, with restrictions easing and an end to the moratorium in sight, what does the property litigation market hold in store?

The Commercial Rent (Coronavirus) Bill

‘The court system is already overstretched and would simply collapse under the weight of all the cases that are lining up in the wings which haven’t yet been pursued,’ explains Lampert.

In response to that threat, the government has introduced the Commercial Rent (Coronavirus) Bill, in a bid to divert some of these matters into a mandatory arbitration process.

‘The intention is to streamline the system and move it through quickly and cheaply. Bearing in mind that the businesses that will benefit from it have suffered the most from the pandemic and the last thing they need is a very costly long-running litigation,’ says Lampert.

There are, however, reservations about its limited scope. The situations covered by the Bill are isolated to those industries that were forced to close during the pandemic, with only rents relating to the periods of enforced closure ring-fenced. This includes retail tenants for the time shops were closed and hospitality and leisure companies for the lockdown periods which called for their complete closure.

And for office occupiers who have heeded the government’s advice on homeworking, leaving costly real estate empty? ‘They’re out of luck’, says Lampert, noting that the Bill provides them no protection. Even for those that fall within the framework, there are concerns that possible loopholes could lead to unpredictability and, potentially, an uptick in court appeals.

On the upside, Lampert is heartened by the Bill’s proposed viability test. Arbitrators will have to consider the viability of both the tenant and the landlord when reaching a resolution. If a tenant’s business would not survive if forced to pay the rent in full, the arbitrator can grant relief or put in place a two-year payment plan – with consideration of the impact on the landlord. However, if it transpires that the tenant would not be viable even with the relief, they will miss out on protection.

‘If a tenant over-eggs the pudding in terms of the relief it needs, there is the risk that they will go too far and the arbitrator might say “actually you fall outside of the scheme because if your business is as bad as you say it is, it’s not worth rescuing and you don’t get relief from rent,”’ notes Lampert.

However, with the Bill a way off being passed (it is still at report stage in the House of Lords), its reach and uptake are hard to predict.

Lasting impacts

In the meantime, property litigators wait with bated breath for the outcome of the leapfrog appeal to the Court of Appeal granted in Bank of New York Mellon v Cine-UK. In this matter, the appellate court will rule on whether tenants will be required to pay rent for the period of Covid-19 lockdowns.

‘Everyone is watching that case because it will determine whether the entire property litigation industry was giving the right advice during the pandemic. Our team is acting for the landlord who was successful at first instance,’ says Lampert.

If the High Court’s decision is overturned, this could open the flood gates for tenants to dispute payment of rent arrears. But with Mishcon on the side of the landlord and many rent disputes already put to bed, Lampert is optimistic that this will not be the case.

Instead, she predicts that while this has been a seismic time for the property industry, the lasting impacts will be less severe. Meanwhile, Daniel Levy, Mishcon’s head of property litigation, expects the pandemic to lead to an acceleration of changes that were already in the pipeline: ‘Everyone says the pandemic effectively fast-tracked a lot of changes that were going to come in the course of the next five or ten years to the course of 12 to 18 months, and property litigation is no exception.’

Regulatory reforms of the Landlord & Tenant Act 1954 had already been on the agenda but forfeiture has particularly been thrust into the spotlight for reform thanks to the pandemic.

‘The government has signalled that it has forfeiture in its sights, and it remains to be seen whether it will continue in its current form or in a different form,’ Lampert notes. An overhaul of forfeiture was first proposed in 2006 and is expected to be revisited, although Lampert is wary of an overhaul: ‘It is very powerful in maintaining the equilibrium in the landlord and tenant relationship.’

Another change catalysed by the pandemic is of course the way that people live, work and utilise property. Says Lampert: ‘People are being a lot more flexible around their use of real estate, and that is leading tenants to question whether they need the space they’ve got and how they get out of their long-term commitments.’ The market is responding. ‘The development market is booming. Landlords are seeing it as an opportunity to develop their properties and upgrade to future proof them. The focus is not just on traditional real estate but very much on alternative asset classes, including student accommodation and senior living.’

Looking to the future

Despite the volatility of the last two years, partners are optimistic that the market is returning to business as normal – or the new normal – at least. Levy sees a similarly bullish trend in the transactional space: ‘The market now is surprisingly extremely busy. When we had the first lockdown our transactional colleagues were twiddling their thumbs, but if you ask them now, they’re as busy as they’ve ever been because clients do see opportunities and shifts in the sort of stock in which the market is interested.’

As a result, he suspects property litigators’ workloads are going to get a whole lot more varied in the coming years: ‘Particularly given the more flexible arrangements that people want now, the kind of long-term, predictable cycle of disputes are going to be different. They’re all going to be much more one-off.’ Driving this shift will be third-party funding: ‘Litigation funders coming in, willing to support the biggest and trickiest cases and to de-risk them, is going to be a game-changer.’

Levy ends on an upbeat note: ‘English real estate is still an absolute prime world-class asset class, but it is built on a predictable and stable legal and investment environment.’

He also concedes that the flux in the law over the past two years has not been helpful to investment but predicts healthy injections of funds over the coming years: ‘Provided that there is not any more legislative interest in commercial real estate – and the global economy will also be a major determining factor – every indication is that Britain is an attractive place for global money to invest.’