In this edition we take a look at the extension of restrictions on commercial landlords; a proposed ban on ground rents; property tax developments; and recent trends in compromising the rights of retail landlords.
STOP PRESS: restrictions on commercial landlords extended and supplemented
The government announced on June 16, 2021 that:
- Legislation is to be introduced to “ring-fence” COVID-19 related commercial rent arrears and to impose binding arbitration on landlords and tenants who fail to agree repayment plans; and
- The trio of temporary restrictions imposed on landlords of commercial premises in response to the impact on tenants’ businesses of COVID-19 (and related measures), currently due to expire at the end of this month, are to be extended again.
Insofar as the first announcement is concerned, outstanding unpaid rent that has built up while a business has had to remain closed during the pandemic is to be ring-fenced, with landlords expected to make allowances for those arrears and “share the financial impact with their tenants”. However this will only apply to tenants impacted by closures, so that rent debt accumulated before March 2020 and after the date when relevant sector restrictions on trading are lifted, will not be included.
If landlords and tenants cannot come to a voluntary agreement on how to handle the ring-fenced rent arrears, the proposed legislation will also put in place an arbitration process that will result in a legally binding agreement. The government does however reiterate that businesses who are able to pay rent must do so and tenants should start paying rent as soon as they are given the green light to open.
As to the second announcement, the existing moratorium on landlords forfeiting a business lease for non-payment of rent and the restriction on landlords’ use of Commercial Rent Arrears Recovery (CRAR) are to be extended to March 25, 2022 (although one reference in the press release refers to an extension until the new legislation comes into force). Current restrictions on the use of statutory demands and winding-up petitions by landlords pursuing outstanding rent from tenants will remain restricted for a further three months, until the end of September 2021. However landlords and tenants should bear in mind that, as confirmed in recent case law (see our May Real Estate Focus), there is currently no limitation on simply suing for rent.
It was also confirmed that a review of commercial landlord and tenant legislation will be launched later this year and will consider a broad range of issues including the Landlord and Tenant Act 1954 Part II, different models of rent payment, and the impact of Coronavirus on the market.
Leasehold Reform (Ground Rent) Bill
The government was quick off the mark following the Queen’s Speech on May 11, 2021 in which a Leasehold Reform (Ground Rent) Bill was announced (see our April Real Estate Focus).
The Bill had its First Reading in the House of Lords on May 12, 2021 and follows a great deal of adverse publicity about escalating ground rents in long residential leases.
The Bill’s stated purpose is to “end the practice of ground rents for new leasehold properties”.
In brief, as introduced:
- The Bill applies to “regulated leases”, meaning long leases of a dwelling for a term exceeding 21 years and granted on or after it comes into force. Leases granted pursuant to a contract entered into before then are excluded, although “contract” does not include an option or right of pre-emption.
- Landlords of regulated leases must not require the tenant to pay a “prohibited rent”, being any rent that exceeds an annual rent of one peppercorn.
- Certain leases where, according to the government, ground rents “fulfil a justifiable purpose”, are excepted. These include:
- leases that expressly permit the premises to be used for business purposes;
- “community housing leases”;
- “home finance plan” leases; and
- leases that are “rent to buy arrangements”.
- Retirement homes are not excepted and the Bill provides that the restrictions will not apply to them until April 1, 2023 at the earliest.
- Enforcement is through local weights and measures authorities and district councils may also enforce.
- Penalties are determined by the enforcement authority but must not be less than £500 or more than £5,000. Unlawfully charged rents can also be recovered.
The Bill may well be subject to significant changes as it passes through parliament. There have already been calls to extend its provisions to existing leasehold properties to “create a level playing field”.
Property Tax update
The new super-deduction: leased background plant and machinery
The new super-deduction and SR allowance for capital expenditure on plant and machinery announced at the March 2021 Budget were widely welcomed, but there were concerns that enhanced reliefs on leased background plant or machinery were to be excluded. Following engagement with HMRC by a number of representative bodies, amendments have been made to the Finance Bill (now enacted as Finance Act 2021) to rectify this.
The super-deduction (which applies to “main rate” pool assets) and SR allowance (which applies to “special rate” pool assets) introduce enhanced capital allowances for expenditure incurred between April 1, 2021 and April 1, 2023 (provided it was not already committed as at March 3, 2021). The super-deduction is a 130% first-year allowance for qualifying plant and machinery expenditure, which would ordinarily be relieved at the main rate writing down allowance at 18%. The SR allowance is a 50% first-year allowance provided for qualifying expenditure that would ordinarily be relieved at the special rate writing down allowance of 6%.
The super-deduction will now be available for background plant and machinery leased with a building where that lease is an “excluded lease” for the purposes of section 70R Capital Allowances Act 2001. This means that, broadly, the enhanced first-year allowances will be available to landlords where the plant and machinery is the kind that might reasonably be expected to be installed and the sole or main purpose of which is to contribute to the functionality of the building or its site.
As the type of leased plant and machinery commonly leased within buildings is generally “integral features” for the purposes of capital allowances, relief is likely to be at the enhanced SR rate of 50% rather than the 130% super-deduction.
The Trust Registration Service Manual
Non-UK resident trusts which acquire UK land after October 6, 2020 will need to register with the Trust Registration Service (TRS). This is regardless of whether they are liable to pay any UK tax. The deadline for such registration was initially March 10, 2022 but HMRC has announced an intention to extend this deadline until later in 2022 to give trustees sufficient time to register. The precise date will be confirmed by HMRC later in 2021.
The TRS is a register of the beneficial ownership of express trusts and it was introduced to provide greater transparency and counteract money laundering activity. Under the TRS, trustees need to disclose to HMRC the identities/names of all actual or potential beneficiaries.
HMRC has published a new TRS manual setting out guidance on the registration process, the information required and the trusts which need to register.
As originally introduced, the TRS only required registration of trusts which were liable to pay UK tax. The scope was extended from October 2020 to include UK and some non-UK trusts, regardless of whether they were liable to pay any UK tax. This is subject to an exclusion for certain types of trust and the new manual provides guidance and examples in respect of these excluded trusts.
From 2022, certain limited information on the beneficial ownership of trusts registered on the TRS may also be subject to third party access requests. The manual includes guidance on requests for access by third parties.
For further information please contact Tax partner Julia Lloyd
Compromising landlords’ rights: recent trends
The last month has seen three telling decisions from the courts on challenges by landlords to the compromise of their claims against distressed tenants. Two of these involved a company voluntary arrangement (CVA) and one a restructuring plan.
Lazari Properties 2 Ltd v New Look Retailers Ltd  EWHC 1209 (Ch)
The creditors of New Look Retailers Ltd approved a CVA under the Insolvency Act 1986 that negatively affected a number of landlords. Under the CVA, landlords of two premises deemed essential to the business, trade creditors and employees would largely be paid, but the landlords of trading premises would have future rent reduced to a turnover rent, with reduced dilapidation contributions and a right of termination by New Look after a certain period.
The compromised landlords challenged the CVA but were unsuccessful. The court held that CVAs did not preclude treating creditors differently in various circumstances, and that, although a landlord could not be required to accept a surrender of a lease, in this case the tenant was merely ceasing to be obliged to pay the contractual rent, which did not terminate the lease. Neither the differential treatment of certain landlords nor the fact that creditors relatively unimpaired by the CVA had enabled the proposal to be approved, amounted in themselves to unfair prejudice. Landlords would be worse off under an administration (as the likely alternative if the CVA was not approved) and it remained open to the landlords to determine the leases if they considered the lease terms as modified by the CVA unacceptable.
Re Regis UK Ltd  EWHC 1294 (Ch)
Regis operated a chain of beauty salons and entered a CVA in October 2018 compromising the claims of landlords and other creditors. 19 landlords sought to challenge the CVA on grounds of unfair prejudice and material irregularity under the Insolvency Act 1986, including claims of failure to make proper disclosures to creditors, inaccuracy of the statement of affairs, unfair modifications to the leases, the inappropriate 75% discount to landlords’ claims for the purposes of voting on the CVA and the incorrect treatment of two critical creditors.
The court rejected most of the landlord claims but accepted there had not been equal treatment of creditors by treating two creditors as critical – on the facts, it was justifiable to treat the single largest creditor as critical but there was insufficient evidence to justify treatment of a second creditor as critical, which unfairly prejudiced the remaining unsecured creditors.
The judge confirmed that in circumstances where landlords are provided with an option to terminate their leases or to accept the modifications under the CVA proposal and this provided a more favourable outcome to the realistic alternative, there was no unfair prejudice.
Re Virgin Active Holdings Ltd and other companies  EWHC 1246 (Ch)
In this case the court sanctioned a restructuring plan under the Companies Act 2006, Pt 26A (introduced by the Corporate Insolvency & Governance Act 2020) that “crammed down” the rights of certain landlords.
A restructuring plan voted on by creditor classes is not effective unless sanctioned by the court. Generally, the key difference between such a restructuring plan and a CVA is that whole classes of creditors can be “dragged along” despite not having voted as a class in favour of the plan, if at least one other creditor class approves the plan and the court is satisfied that the dissenting class of creditors will not be worse off in the likely alternative of administration.
In this case, the landlords were divided into five classes, some of which were substantively unimpaired, some of which were switched to turnover rents, and some of which switched to zero rents under the plans, in return for payment of 120% of the estimated outcome in the administration alternative. The plans included “break rights” for all landlords to take back their properties.
The detailed judgment analysed many aspects of valuation and market testing to determine whether or not the landlords would achieve a better outcome in an administration process. However, lack of evidence as to any landlord’s ability to achieve a better return meant it was reasonable to treat the landlords as “out of the money” and therefore any value post-restructuring should be decided by creditors who would be expected to receive a dividend in an administration process. The differential treatment of landlord classes was justified on the basis of profitability and the commercial importance that the plan companies attached to certain premises.
Restructuring Plan or CVA?
Given the cross-class cram-down facilitated by restructuring plans, it is likely that restructurings necessitating the compromise of landlord rights will be conducted under the new procedure rather than a CVA, although the court involvement will mean the costs of a restructuring plan will not always be justified.
For further information please contact Partner Alison Goldthorp or Head of Banking Knowledge Rebecca Oliver.