Far East real estate newsletter

26th July 2021

Welcome! This newsletter is a new initiative to give our real estate clients and contacts in the Far East an insight into how the UK Legal Market is adapting to the new post-COVID world we find ourselves living in, to give you our thoughts on various topical issues and to give you a summary of any relevant legal updates.

We hope you find this useful and please feel free to forward to your associates. If your associates would like to receive this newsletter then please contact Nigel Griffiths.

COVID drafting – what safeguards are tenants asking for in lease negotiations?

The 2019 coronavirus disease (COVID-19) pandemic has led to a large number of tenants (of both office and retail/restaurant premises) being unable to fully utilise their premises for periods of time, whether such cessation of use was as a result of Government or local authority regulation or a drop in footfall. There was an edict to “work from home if you can” and also non-essential retail was forced to close. Despite these forced closures, tenants were still required to comply with their lease obligations, the most obvious one being the payment of rent.

Tenants have felt exposed and, as a result, when negotiating new leases or renewal leases tenants are now seeking to insert provisions to protect themselves should another pandemic occur that forces closure of their premises.

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Electronic signatures – increased usage during COVID “lockdown”

A positive of the 2019 coronavirus disease (COVID-19) pandemic is that it has led to a substantial increase in the use of electronic signatures, which is largely as a result of many lawyers and clients being forced to work from home. Lockdown and social distancing measures have meant that “wet ink” signing has become unworkable and with the increase in electronic signatures, “wet ink” signatures now seem somewhat outdated. As we in the UK emerge from lockdown, we believe that the ease with which it is possible to produce and exchange/complete documents by electronic signatures will mean increased use of this mode and less reliance on traditional “hard copy” wet ink documents.

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London – will it change post COVID?

Normality is slowly returning to London, but it is a very slow process. Many businesses had their sights set on a 19 June “opening up”, but those hopes were dashed when the Government announced a delay in moving from Step 3 to Step 4 until at least 19 July 2021 – so called “freedom day”. Was it really freedom day? In theory, now that England has moved to Step 4 on 19 July we should see a concerted move back to regular office working and visits.

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Legal updates

by Rhiannon Peploe-Williams and Emily Poynton

COVID-19 – new rules to support commercial tenants

In a Press Release dated 16 June 2021 the UK Government has announced plans to bring in legislation to protect business tenants who have had to remain closed due to COVID-19 and are unable to pay their rents (nightclubs for example). Any arrears will be “ring-fenced” and the new legislation will mean that landlords and tenants have to work together to come to an agreement and decide whether payments are waived, whether they can agree a long term payment plan or otherwise. Landlords will be expected to make allowances for outstanding rent arrears for the periods of closure due to COVID and split the financial loss with their tenants. If agreement cannot be reached, a binding arbitration process is available

Tenant protections from forfeiture for non-payment of rent for business tenancies in England extended to 25 March 2022

The Government has also announced an extension to the “forfeiture moratorium” – businesses that had to remain closed during the pandemic and unable to pay their rent will continue to be protected from eviction until 25 March 2022. This extension is to enable landlords and tenants to come to an agreement on arrears without the threat of eviction. Statutory demands and winding up petitions will also remain restricted for a further three months to protect companies from creditor enforcement action for their pandemic debts. However, this only applies where debts relate to the pandemic.

Landlord and Tenant Act 1954 – review

In the same press release the Government has announced that 1954 Act, which is of course the primary source of legislation which governs the relationship between a landlord and tenant of a commercial property, is to be reviewed. This is part of a wider review of “commercial landlord and tenant legislation”, which will be launched later this year. As well as a review of the 1954 Act, it will consider different models of rent payment and the impact of Coronavirus on the market.

There has been much clamour from trade bodies for leases of retail and food/beverage units/bars/restaurants to move to a more “turnover” based rental structure – ie a structure where there is no or a very low guaranteed rent, but where the rent actually payable is then linked to a percentage of turnover derived from that unit/bar/restaurant. It remains to be seen whether this will be part of the Government review

Building Safety Bill 2021-22 set to reform the building and fire safety system in the UK

Four years after the Grenfell Tower fire forced the UK Government to overhaul its building safety regime it has published its Building Safety Bill. Inside Housing reported that the Bill is set to transform the design and construction of tall buildings in the UK. Changes include a new Building Safety Regulator to oversee the safety and competence in the built environment sector with enforcement powers and rules to strengthen the competence of the building control profession setting minimum standards and reporting requirements.

Savills report venture capital investment into UK companies in 2021 is set to increase demand for UK offices

The real estate agent reported that venture capital investment has hit £10.8 billion this year which could result in the need for 6.5 million sq ft of additional office space in the next two years which is very positive news for the office sector. Savills reported that this healthy pipeline of investment should result in a windfall of office occupier activity and support investment activity in the sector. Amazon and InterContinental Hotels Group are reported by Savills to have signed for significant office space in Reading and Windsor respectively.

High Court and Court of Appeal to the rescue……..

The Court of Appeal has given an important judgement in the case of Monsolar IQ v Ltd Woden Park Ltd [2021] EWCA Civ 961 (29 June 2021) (Baker, Males and Nugee LJJ). In a lease of a solar farm, a mistake was made in drafting the rent review clause. The rent was to be reviewed annually by a “Retail Prices Index” formula, but the drafting was such that assuming an average RPI increase of 2.855% per year, the tenant calculated that the rent would increase from £15,000 to just over £76 million by the end of the 25 year term, as opposed to around £30,000 had the drafting been correct.

The High Court came to the rescue of the tenant and said that the clause produced absurd, irrational and arbitrary results which could not have been intended. The formula should be construed so that the rent was indexed in line with RPI – this was a clear mistake in the drafting of a document which can be corrected as a matter of construction. The Court of Appeal upheld the High Court decision and dismissed the landlord’s appeal. The court rejected the landlord’s submission that that the courts cannot disregard or override the literal wording of the contract in pursuit of commercial common sense. The Court of Appeal drew a distinction between irrational/nonsensical or absurd provisions (which this was) as opposed to imprudent provisions (where the clause may be commercially unattractive or unreasonable for one party).

COVID – how damaged is the UK High Street and retail sector?

An insight can be gained from the results of Superdrug, the health and beauty retailer. The Times reports that profits at Superdrug plunged by 80% year on year. Pre-tax profits for 2020 totalled £18.8 million – compared to £89.4 million for the previous year. They have 788 stores. Online orders climbed by 106% – given that people have become more and more accustomed to buying products online, will increased online purchase be a trend for future years?

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