On the property litigation horizon

The Covid-19 pandemic has had a seismic impact on the real estate sector. As the pandemic enters its third year, real estate litigation specialists continue to grapple with an ever-changing legal landscape.

Among the very first measures taken by government were the suspension of centuries’ old remedies that underpin property rights, which themselves are the foundation for the UK’s attractiveness as a stable and predictable place to invest long-term. While government policy has been to protect businesses and save jobs, this has come at a substantial cost to the real estate industry. The statutory moratoria on forfeiture for unpaid rent and commercial rent arrears recovery (CRAR), as well as protection under the Corporate Insolvency and Governance Act 2020, provided breathing space for tenants but have left landlords exposed to an estimated £6.4bn of rent debt. The robustness of lease structures themselves have been challenged existentially by CVAs and new avenues of restructuring and insolvency.

In an unprecedented move, the government is now passing legislation (the Commercial Rents (Coronavirus) Bill) to impose a mandatory arbitration scheme for resolving disputes in relation to ring-fenced commercial rent debts. Under the scheme, due to come into effect in March 2022, arbitrators will have the power to waive or defer unpaid rent to preserve the viability of a tenant’s business where that is consistent with preserving a landlord’s solvency. The government has declined to prescribe the approach to be taken to assessing ‘viability’, which will inevitably need strategic thought and give rise to challenges to arbitration awards.

Waiting in the wings are a series of appeals against judgments obtained by landlords against tenants in respect of unpaid rent, which will resolve a wide range of legal issues arising out of the pandemic.

Moving away from pandemic-related issues, the cladding scandal has left upwards of £15bn of remedial costs to be allocated, and litigated, while the government has sought to introduce policies, assurance and assistance to assuage leaseholders and to get the ossified flat market moving again. The Building Safety Bill proposes a new regulatory framework for overseeing construction and building safety systems in relation to high-rise buildings.

This year should also see reforms to prohibit the payment of ground rents under new residential long leases under the Leasehold Reform (Ground Rent) Bill. Legislation that will substantially change the process for residential lease extensions and collective enfranchisement is also expected.

Property is in the gaze of policy makers, with the Landlord and Tenant Act 1954 under review and new forms of ‘commonhold’ property ownership also on the policy agenda. The moratoria on forfeiture, CRAR, statutory demands and winding up petitions were all political decisions, never taken before, and as we move into what may prove to be another turbulent year, we outline below some of the significant legal and regulatory developments we can expect in the world of property litigation.

Mishcon de Reya’s property and construction litigation team comprises seven partners and 14 lawyers. We are strategic thinkers, experienced negotiators and our trial experience is second to none. If we can help you or your business navigate the challenges ahead, please contact a member of the team.

Landmark property disputes

2021 was a busy year for property disputes, with a huge volume and variety of matters coming before the courts. 2022 looks likely to be no different. Trials for Mishcon de Reya’s team are already scheduled on matters including relief from forfeiture and restrictive covenants. Aside from these, our predictions for the key property cases are:

COVID arrears – BNY Mellon v Cine UK: The Court of Appeal will address the tenant’s arguments used to defend non-payment of rent under its lease. These arguments include the wording of rent cesser (suspension) clauses and whether there was a ‘partial failure of consideration’ under the leases. Mishcon de Reya acts for the landlord, and this case will be heard in conjunction with an appeal brought by Picturehouse Cinemas Ltd against London Trocadero (2015) LLP, which will be running very similar arguments.
Company voluntary arrangements (CVAs) – Lazari Properties 2 Ltd v New Look Retailers Ltd: Last year the High Court dismissed a challenge to New Look’s CVA which reduced future rents, as well as to compromise historic rent arrears. The failed challenge sought to set the CVA aside on the grounds of unfair prejudice and material irregularity. An appeal is listed for March 2022.
Nuisance – Fearn & ors v Board of Trustees of the Tate Gallery: The Supreme Court will decide whether the owners of flats have a claim in private nuisance arising from being observed, photographed and filmed from the Tate Modern’s viewing gallery.

We also expect a rise in disrepair claims at lease expiry, particularly where remedial work includes some eco upgrading, and increased claims against guarantors.

Overhauling construction safety

The legislative and regulatory impact of the Grenfell Tower fire has been widespread. The newest application is the Building Safety Bill, which is currently on its way through Parliament. The Act’s stated objective is to make homes safer, to be achieved by giving residents of high-rise buildings more say in the management of their buildings. Building owners will be required to manage safety risks with clear lines of responsibility during the design, construction and completion of high-rise buildings, with potential criminal charges for those who don’t meet their obligations.

All of these proposals affect future construction projects, but tucked away within the Bill is a proposal to retrospectively extend the limitation period under s1 of the Defective Premises Act (DPA) to 30 years. This section of the Bill is expected to come into effect in September 2022, enabling DPA claims to be made in respect of developments completed as far back as August 1992. This unique retrospective legislation applies to all residential developments, not just high-rise buildings.

The DPA places an obligation on those responsible for building residential premises to ensure that they are fit for habitation. This liability extends to developers, contractors, sub-contractors and design professionals. Overnight, claims that have previously been statute-barred will become potential risks. Missing paperwork, employee turnover and unreliable memories will all make it much harder to defend these claims, also leading to insurance premiums becoming more expensive.

Litigation funding opportunities

That litigation funding is on the increase can no longer be doubted. In July 2021, AlixPartners reported a four-fold increase in the value of funded cases and cash held by UK funders in the last five years. This increase has led Mishcon de Reya to develop MDR Solutions 1, our own funding facility with leading litigation funder Harbour, offering funding to our own clients on commercially attractive terms. But what is driving this trend and is it relevant to the real estate sector?

Aside from the enticing returns successful cases can deliver to investors, two interlocking factors in particular are driving group claims. First, more claimants are seeking ways to call big companies to account, often but not always for personal financial gain, but cannot do that on their own or in small groups. Second, companies face a growing and compelling level of legal and regulatory pressure to behave in a way that is environmentally, socially and governmentally ‘better’, which is also fuelling group claims. Numerous examples can be seen in relation to data breach, competition damages and Covid-related business interruption claims, and the real estate sector is not immune. Group claims are building around multiple post-Grenfell issues, as are large one-off professional negligence claims against surveyors and contractors.

Not all potential claims will see the light of day. Litigation funding, while criticised by some for being unregulated, has its own built-in safeguards; no reputable funder will fund a case that does not have good merits and recovery prospects, so only the strongest cases tend to go forward.

Restructuring trends

Company voluntary arrangements (CVAs) were seen prior to the pandemic. The restrictions on businesses imposed by Covid-19, with the resultant reduction in income for companies particularly in the retail, hospitality and leisure sectors, has meant that CVAs continue to be a potential option for companies in difficulties. A new process introduced by the Corporate Insolvency and Governance Act 2020 also enables companies to enter into a restructuring plan with their creditors.

Both processes involve the company putting forward a proposal to deal with its existing and future liabilities. This can include waiving or reducing debts that are or will become due and have in particular been used to limit liabilities to landlords. A CVA will bind all of a company’s unsecured creditors if a sufficient number of those unsecured creditors (in value) and the company’s shareholders vote in favour of the proposal. A restructuring plan will bind all of a company’s creditors provided that the majority of at least one class of creditors approves it and the court exercises its discretion to disregard the votes of the dissenting creditors.

Recent cases have shown that it is difficult for disgruntled creditors to challenge either process. The trend for both is therefore likely to continue. In a property context, tenants in financial difficulties may want to look at whether either route can be used to limit their rental liabilities, while landlords should ‘know their tenants’ and consider whether any steps can be taken to ensure that rent is paid or to better their position in any potential CVA or restructuring plan.

The continued rise of PropTech

The real estate industry is experiencing a digital revolution. We are seeing ever more technological innovations specifically designed for the property market, collectively known as PropTech.

One driver for change is Least, whose mission is to transform commercial leasing. The Least app digitises the negotiation, production and execution of leases, providing parties with an up-to-the minute record of their transaction and ultimately speeding up tenant occupation. Least was co-founded by Mishcon de Reya partner Nicholas Kirby and receives strategic and operational support from the firm’s venture investment arm MDR LAB.

Other PropTech start-ups are tapping into the potential of AI and machine learning. Qualis Flow analyses data captured automatically from construction projects to highlight areas of inefficiency and potential risks, helping contractors to reduce waste and resource use. Infogrid creates smart buildings by automating facilities management. It collects data on the use of buildings, such as air quality and the flow and behaviour of occupiers, and provides owners and occupiers with insights to improve carbon efficiency, reduce costs and improve occupier safety.

While PropTech provides obvious benefits for the development, management and trading of real estate assets, it inevitably creates new challenges for property lawyers. The gathering and creation of data raises important questions about the data’s origins, ownership, processing, protection and use. New forms of contract will need to be created to reflect the integration of technology into the development and use of buildings. The ancient concepts of land law do not necessarily sit easily with the features of modern technology. Inevitably, the advance of PropTech will provide fertile ground for dispute.

Navigating development disputes

Despite Covid-19 uncertainty, development activity has remained strong, and disputes at all stages of the development cycle remain rife.

Of noteworthy interest in 2021 was the rise of rights of light-related claims fuelled by surveyors and solicitors combining to scour planning websites for new developments. This increase in purported claims may spell the end of the traditional ‘wait and see’ style insurance policy at nil excess with insurers no longer being able to take the view that a claim is unlikely to arise. They may instead prefer the risk sharing approach of an agreed conduct or reactive conduct style policy which sees the developer seeking to negotiate with its neighbour and paying any settlement sum within the specified excess.

The increased claims activity also resulted in a contraction in the insurance market at the end of 2021, with one large insurer pausing on underwriting new risks. 2022 could usher in increased premiums due to the lack of competition and heightened risks. While higher premiums and excesses may not prevent insurance being the default for developers seeking to ring-fence financial losses arising from rights of light claims, it will likely result in some questioning the worth of insurance and whether they are better off ‘self-insuring’. We may also see developers exerting more pressure on local authorities to use their legislative powers to override easements.

Given the prevalence of tall buildings particularly within cities, rights of light remains a risk to development, but proactive developers who negotiate early with neighbours, with or without the backing of insurance, should avoid any unexpected claims.