The aftermath of Covid

In part one, we looked at pandemic clauses, rental evidence and the impact of the arbitration scheme post Covid. Now it is time to consider how the real estate market is responding to continuing and increasing financial pressures in the economy, and what lies in store in terms of legislative reforms and market trends. The market’s response With pandemic reliefs exhausted, the recovering real estate market is now responding to new emerging pressures in the increased cost of borrowing, inflation and soaring energy prices. Statistics published by the government show that, in July 2023, the number of compulsory liquidations was 81% higher than in July 2022, following historic lows witnessed in lockdown periods. Before the pandemic, landlords were conservative in resorting to legal action for rent recovery, but they are now less willing to allow arrears to accumulate and are quicker to rely on insolvency procedures to flush out any “bad” tenants. Although some reports suggest that prime London rents are almost back to their pre-Covid peak and Tube journeys are back to nearly 90% of pre-pandemic levels, what is underlying is a different story – some tenants are looking to downsize to accommodate their new flexible working model, demanding smaller but better stock in preferable locations and looking for flexible and shorter lease terms. One can understand why landlords are trying to work with tenants collaboratively. Many are investing in their buildings with the view to meeting the demand for a more modern, grade-A specification, while others with poorer specifications are considering alternative uses, the most obvious of which being residential. Energy prices have also influenced the market, although there are now signs that they are cooling. Landlords have been affected by energy performance, given it is now unlawful to continue to let commercial property with an F or G EPC rating under the Minimum Energy Efficiency Standard, and more and more companies are looking for greener stock in order to reduce their carbon emissions and meet energy-related corporate targets. Green lease provisions are increasingly common as parties try to agree and allocate between them the burden of making buildings more energy-efficient. It is unlikely that change in this respect will come from the lease renewal regime. In Clipper Logistics plc v Scottish Equitable plc (unreported, Sheffield County Court, 7 March 2022) the tenant successfully argued that it should not bear the burden of MEES covenants in that new lease as the majority of the obligations imposed by the regulations fell on the landlords. In accepting the tenant’s argument, the court did not appear to take into account the benefit the tenant will receive in paying lower running costs directly as a result of the landlord’s capital expenditure. What comes next? The biggest impact over the next 12 months is likely to be caused by the long-awaited reform of our leasehold legislation for residential flats and houses. The government is committed to taking forward a comprehensive programme of reform to end what it perceives as unfair practices in the leasehold market. The idea is to make it easier and cheaper to buy leasehold homes. It remains to be seen how this plays out and whether the interests of landlords are fairly considered. Reforms are also expected following the announcement by the Law Commission of its intention to review Part II of the Landlord and Tenant Act 1954. A consultation paper is set to be released by December 2023. The Building Safety Act 2022 is a very significant piece of legislation that was introduced last year, with a number of provisions still to come into force. Landlords and tenants will be interested to understand how the new regime affects the allocation of liability for building safety remediation works. The call for a second staircase for high-rise residential schemes of more than 30m had only just been announced when the housing secretary declared the government’s commitment to reduce the threshold to 18m. Although the exact period when the changes are anticipated is not set, developers are being encouraged to prepare for them imminently. There are many other changes on the horizon, but a final one worth mentioning is the impending Renters (Reform) Bill, which will bring with it the abolition of “no-fault” evictions. It is likely to be very unpopular among landlords. In August 2023, no-fault evictions were at a six-year high, with more than 7,000 claims being brought before the court between April and June this year. A long shadow Walking down Cheapside, the pandemic may feel like a thing of the past, with commuters pouring out of Bank station and City workers queuing around the block at lunchtime. However, halted developments, empty shop units and retailers playing revolving doors are a stark reminder of the virus that brought the world to a standstill. We are not yet clear of the symptoms of long Covid, but we know the market is resilient enough to evolve, and to learn to live alongside it until it becomes a thing of the past and balance is restored. Will Densham is a partner and Kanchan Adik is a principal associate at Eversheds Sutherland