The ebb and flow of real estate disputes has always mirrored the peaks and troughs of the property market. This year has seen ongoing serious international discord, a cost-of-living crisis, heightened construction costs and crippling interest rates. Has this left those involved in property needing to litigate harder than ever to make the most of what they’ve got?
Defend
With the costs of moving and borrowing at prohibitive levels, the need to defend property from external influences which may impact value or hamper enjoyment is felt more sharply than ever. The year started with a high-profile Supreme Court finding that the viewing gallery at the Tate Modern created a tortious nuisance to the neighbours who had injuncted the use of the 360-degree viewing platform which had rendered their homes (as described by the Lord Justices) like being on display in a zoo (Fearn and others v Board of Trustees of Tate Gallery [2023] UKSC 4; [2023] EGLR 14).
The residents of Neo Bankside (an apartment building opposite the Tate Modern) fought to prevent third parties visually intruding their private residences. While the application of Fearn will be very narrow, the courts are rife with other protective tortious claims, most noticeably rights of light litigation. In a market where moving house is prohibitively expensive, residents have revisited their attitude to risk, and the risk of diminishing the value of their property is increasingly being seen as greater than the risk of litigating.
Evade
In other areas, where the pragmatics of proceeding with certain contracts no longer make commercial sense, parties are relying on exit provisions – or simply defaulting – to avoid completions. The increase in development sites where a purchaser might previously have waived onerous obligations is on the rise.
The impact of a change in law and the market challenges has left many developers having to revise schemes that were already afoot, and the remodelling, delay and professional costs combined have left many of them wanting or needing an “out”. And, on those schemes that have completed and are released to the market, developers are also now feeling the double pinch from increased borrowing costs, with purchasers and investors failing to complete on residential contracts, even if the cost of contract evasion means losing their deposit.
All of this is compounded by the introduction of the Building Safety Act 2022. The importance of this as a piece of legislation cannot be questioned, but the unforeseen consequences will bite an already struggling player in the real estate game. It is right for developers to assume accountability, but where there has been any interference with the integrity of a building without their consent, there will be tangential litigation.
Attack
In the landlord and tenant context, it is common to see occupier tenants, especially retailers, refine their occupational portfolio in a difficult market. We are already seeing the early signs of break clause litigation, with attacks made on the validity of notices or performance of break right conditions. While many of these cases will settle, they are indicative of a landlord community that needs to retain a rental income while the high street continues to decline.
Where retail leases are to be renewed, there is a push to ensure tenants achieve any rent reduction as quickly as possible. The chasm between what the different parties believe to be the appropriate rent or interim rent is greater and fought more hotly than in a buoyant market, but new focus is given to the costs involved in the repairing and altering of the property in light of the Minimum Energy Efficiency Standard.
Reports to parliament are that commercial property owners are not making sufficient progress and, in a commercial lease renewal, the tension arises because the MEES obligation falls on landlords, but more often than not the repair of the building is within the tenant’s responsibility. At renewal stage there are now heated and repeated attempts to shoehorn responsibility for energy efficient repairs on to the tenants.
Everyone understands the long-term need to improve the efficiency of our buildings, but the absence of capital, the cost of borrowing, high up-front costs and the lengthy return on investment are significant hurdles. These are worsened by the disruption to normal business activities and therefore misaligned incentives and focus for landlords and tenants. Tenants are refusing to subsume their landlord’s statutory obligations and blur them with their own contractual obligations, but landlords need to find a solution. Anyone advising on a lease renewal must balance the conflict between the duty to the client and the duty to the court, in the context of a more ethical quandary in relation to climate change.
Landlords will have to litigate harder, and more creatively, or consider the wider leasehold package for their tenants, to effectively satisfy their MEES obligation and maintain the portfolio return. The issue on dilapidations and supersession will become more pronounced, with many tenants already spotting an opportunity to relocate to a more environmentally responsible address and negotiate down a dilapidations claim with their former landlords. Hence the need for creativity, since the costs of improving MEES needs to be found from somewhere before parliament intervenes.
The value of the developer and landlord’s commercial strength has never been more significant, and they will have to litigate harder than ever to protect that.
Kate New is a partner at Foot Anstey LLP
