REAL ESTATE LITIGATION: An Introduction
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PROPERTY LITIGATION OVERVIEW FOR CHAMBERS UK 2022
A year on from a very gloomy forecast, and there is a great deal of optimism around the property market, with the housing market hitting record-breaking levels of activity in 2021.
Since the end of the first lockdown in July 2020, the UK property market has been on the rise, led by the government temporarily cutting stamp duty. The number of properties being sold rose significantly during the tax holiday. The rise in demand from buyers has, however, not been met by a flurry of new properties coming on to the market. This growing imbalance of supply and demand has been pushing up the prices, as buyers have had to bid to secure their dream home. UK House Price Index from the Office of National Statistics (ONS) reports that average price of a property in the UK rose by 13.2% year-on-year in June. The strongest house price growth achieved over that period had been recorded in the north west of England with a return of 18.6% in the year to June.
The withdrawal of most stamp duty initiatives is, however, likely to slow further increases. House prices are only expected to fall if interest rates are raised substantially. Mortgage rates have remained very competitive. Further, there is now greater availability of 90% and 95% mortgages on the markets. Based on this information, Intermediary Mortgage Lenders Association (IMLA) forecasts house prices to be broadly flat in the second half of the year.
The fear of a property crash therefore appears to have been averted – which is positive news.
COVID-19’s impact on property litigation
The COVID-19 pandemic has continued to have profound effects on the justice systems. The flurry of legislation and regulations affecting property litigation has continued. The Coronavirus Act 2020 (CVA 2020), which received Royal Assent on 25 March 2020, has been extended on numerous occasions. Although the ban on residential evictions ended on 31 May 2021, the ban on the eviction of commercial tenants for rent arrears is not due to come to an end until 25 March 2022.
The government has also introduced a new Code of Practice for commercial property relationships during the COVID-19 pandemic. However, the courts have confirmed that the Code is voluntary, and landlords are entitled to money judgments against tenants if there are rent arrears. The Code of Practice sits alongside other measures, including the moratorium on forfeiture of commercial leases and changes to Commercial Rent Arrears Recovery, statutory demands and winding up petitions. Further, the Communities Secretary, Robert Jenrick, has announced that legislation will be introduced to ringfence outstanding unpaid rent that has built up when a business has had to remain closed during the pandemic. Landlords will be expected to make allowances for the ringfenced rent arrears from these specific periods of closure due to the pandemic and share the financial impact with their tenants. The proposal includes a binding arbitration process. As at September 2021, no draft bill has yet been published.
The government has also announced a review of commercial landlord and tenant legislation that will be launched later this year and will consider a broad range of issues including Part II of the Landlord & Tenant Act 1954, different models of rent payment, and the impact of the COVID-19 pandemic on the market.
The United Kingdom transitional period has now come to an end with an agreement (of sorts) having been reached between the UK and the EU. With the threat of no-deal removed, and with house prices soaring, the fears of a post-Brexit property crash now appear to be fading. However, notwithstanding house prices increasing across the country, Land Registry data show that London property prices are lagging behind the rest of the country. Nevertheless, unlike after the financial crash, the London property market has at least avoided a major slump and is still only a fraction below all-time highs.
Leasehold reform in England and Wales
Following the Law Commission’s publication of its reports on leasehold ownership in July 2020, the Government has announced that leasehold reform would be tackled through two pieces of legislation. The Leasehold Reform (Ground Rent) Bill was introduced in the House of Lords in May 2021. This Bill seeks to fulfil the commitment to “set future ground rents to zero.” The provisions will also apply to leasehold retirement properties, but not before 1 April 2023.
The Government has also launched the Commonhold Council – an advisory panel of leasehold groups and industry experts to inform the Government on the future of this type of homeownership.
Responses to the Law Commission’s remaining recommendations on enfranchisement, commonhold and right to manage will be issued “in due course” and translated into law “as soon as possible” according to Robert Jenrick. It will be interesting to see what steps (if any) are taken to protect the interests of landlords and developers. However, with the Government occupied on other fronts, it appears unlikely that the Commission’s recommendations will be acted upon in the near future.
The property development sector is undergoing a period of change. COVID-19 continues to cause major disruption, closing offices, retail and entertainment venues while driving shoppers online. Lockdowns and social distancing rules have dramatically impacted a wide range of sectors. However, all is not bad.
Although we can expect some sectors to remain depressed, a side effect of the relative decline in certain sectors is that we can expect a boom in conversion projects. It is likely that 2021 will bring a surplus of newly vacant shops, offices or pubs in sought-after locations. With the government introducing further Permitted Development Rights to allow even more non-residential buildings to be converted into new homes, we can therefore expect a significant rise in conversions, turning these properties into desirable homes or, perhaps, flexible office spaces.
However, with the Stamp Duty holiday coming to an end, there may be fewer sales being completed. Uncertainty about the level of demand means that developers could face additional challenges in 2021.
The pandemic has also supercharged certain sectors. The boom in online shopping has resulted in ever-higher demand for warehouses, logistics control centres and distribution points. With more people working remotely, we can also expect high demand for data centres, so expect growth in IT infrastructure too. 2021 and beyond are therefore likely to result in major changes within the development sector.
To respond to the coronavirus pandemic, there have been several policy interventions in the possession process. The Financial Conduct Authority (FCA) announcements and the passing of the CVA 2020 have meant that possession actions of all types have dropped to unprecedentedly low levels. Mortgage possession figures have dropped significantly, with claims, orders, warrants and repossessions all dropping by 85% or more in comparison to January-March 2020.
Further, data shows that total mortgage arrears remain close to historically low levels due to the mitigating effects of payment deferrals and other tailored forbearance. Early trends show that arrears are moving on twin tracks: COVID-19 related support has helped customers to remain out of arrears but those in pre-pandemic financial difficulty have continued to build up arrears, notwithstanding the application of payment deferrals. The fear of a huge surge in mortgage repossession has therefore not materialised, which is excellent news.
Private rented sector
COVID-19 has had a significant effect on the private rented sector. In addition to the blanket ban on evictions until 31 May 2021, there have been various changes to the length of the relevant statutory notice which must be given as a precursor to possession proceedings for most residential tenancies.
Now that the stay of claims and ban on evictions has been lifted, the County Court is unsurprisingly facing a severe backlog of residential possession claims, with courts prioritising possession claims against tenants with the most egregious rent arrears. There remain many delays to residential evictions, which are likely to continue into 2022.
Nevertheless, research from the London School of Economics indicates that the effect of these various measures is that there is unlikely to be a sudden spike in evictions. Rather there will be a slow burn that will go on at least into 2022. Estimates suggest that there could be at least three times the numbers of formal evictions than before COVID-19, leading to an additional 30,000 more households in temporary accommodation. Further, long-term rent arrears and loss of credit-worthiness among tenants, and loss of income and confidence for landlords, will probably trouble both individuals and the private rented sector as a whole for years to come.
The substantial backlog of cases will not improve any time soon and the effects of this are probably going to be felt throughout 2021 and beyond.
Electronic Communications Code
Just two days before the Court of Appeal handed down its long awaited judgment in Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another  EWCA Civ 90;  PLSCS 25 dismissing the operator’s appeal, the Department for Digital, Culture, Media and Sport commenced its consultation on changes to the Electronic Communications Code.
The launch of the consultation is perhaps indicative of what appear to be the growing tensions between landowners and operators and the recognition that, with the rollout of 5G, there may be the need for further government legislation to seek to resolve the apparent impasse between landowners and operators under the Code. Watch this space.