With so much focus on rent concessions for tenants and the new forfeiture moratorium, landlords should make sure they also protect their rights to recover rents and other fixed charges from former tenants and guarantors by serving notice under section 17 of the Landlord and Tenant (Covenants) Act 1995 within 6 months of the sums falling due.
It would be easy to overlook this important step in the current climate and forgetting to serve the notice within 6 months prevents recovery action against former tenants and guarantors.
Section 17 applies to former tenants and former guarantors under “old” leases [pre-1 Jan 1996] as well as former tenants and guarantors who have liabilities under Authorised Guarantee Agreements relating to “new” leases.
Please get in touch if you would like to discuss these issues.
BUDGET 2020 – Principal measures of interest for individuals and trustees
23 March 2020
News
The UK Budget 2020 announced on 11 March 2020, was rather overtaken by world events. Having been long-delayed and thrown into doubt by the resignation of the former Chancellor, Sajid Javid, in February, in the end it was COVID-19 that really moulded the new Chancellor’s speech.
Whilst there have been unprecedented developments since the Budget, both in regard to the global pandemic itself and the UK government’s subsequent response, it is still worth reflecting on the announcements made in the Budget and the impact they will have for individuals and trustees.
There was much speculation regarding possible measures that might be introduced – not least in relation to IHT, especially the possible abolition of APR and BPR – but in fact, the only changes of significance for wealthy individuals and their families and advisers, were those that had been long anticipated and trialled in the Conservative manifesto. These were the restriction of the lifetime limit on gains eligible for Entrepreneurs’ Relief (ER) from £10 million to £1 million, and the introduction from April 2021 of an SDLT surcharge for non-residents purchasing UK residential property (NRSDLT).
Restriction on Entrepreneurs’ Relief
What is changing?
The headline change is that the lifetime limit on the value of chargeable gains that will qualify for ER reduced from £10 million to £1 million with effect from 11 March 2020. ER provides for a lower rate of CGT, 10%, to be paid on disposal of all or part of a business subject to certain conditions. Interestingly, £1 million was the original lifetime limit when ER was introduced in 2008. This limit was raised to £2 million and then £5 million in 2010, and then to £10 million in 2011, where it has remained until the Chancellor’s announcement on 11 March 2020. The Chancellor indicated that this change would affect fewer than 20% of those using the relief.
What anti-forestalling provisions were introduced?
The change in limit aside, the real stings in the tail were the anti-forestalling provisions that were also introduced. These applied to certain arrangements involving an unconditional contract made before 11 March 2020 where the asset or assets in question had not been conveyed or transferred in accordance with the contract before that date. In this situation the relevant provision would apply unless the parties confirm that obtaining a tax advantage was not a purpose of entering the contract or, in the case of connected parties, also confirm that it was entered into for wholly commercial reasons.
Similar provisions were also put in place for certain arrangements where shares were exchanged for those in another company on or after 6 April 2019 but before 11 March 2020 with the aim of locking in a gain that could qualify for ER at the time of the exchange rather than on a later disposal under the general CGT rules. An election is required to achieve this. In the specified circumstances, broadly where the two companies involved are closely connected in terms of their ownership, if such an election is or has been made on or after 11 March 2020, the disposal of the relevant shares is to be treated as taking place at the time of the election rather than at exchange.
In both cases, where the anti-forestalling provisions apply, ER will only be available up to the £1 million lifetime cap rather than the £10 million limit.
The anti-forestalling provisions are unusually harsh, as Budget day provisions are generally introduced with effect from midnight on Budget day at the earliest, with the effect that any arrangements entered into on or prior to that day would be grandfathered. Perhaps because a change in ER had been trailed by the Government in its manifesto, albeit with no detail, the Chancellor chose to target arrangements that had little or no commercial reality but were simply intended to lock in ER against its restriction or abolition.
What is the likely impact?
While the Chancellor noted that 80% of businesses will be unaffected by the restriction, there are still many more successful business owners for which this will be a significant blow. Nonetheless, it is worth bearing in mind that, even without ER, CGT is currently at historically low levels – 10% for basic rate taxpayers and 20% for others (for all assets apart from residential property) – rates that are half or lower than the corresponding income tax rates of 20% or 40% respectively, or 45% for those earning over £150,000.
Non-resident SDLT surcharge
What is changing?
As with a change to ER, there was little surprise that the Government announced the introduction of a surcharge for non-residents acquiring UK residential property. The Government consulted on such a surcharge at a possible rate of 1% between February and May 2019. In November 2019, the Conservative party announced in its election manifesto in November 2019 that it would introduce the surcharge at 3%. In the event, in his Budget, the Chancellor announced that the surcharge would be set at 2% and will take effect for acquisitions on or after 1 April 2021.
What anti-forestalling provisions/transitional rules were introduced?
However, as discussed in our note here, transitional rules have been put in place, the effect of which is that contracts exchanged on or after Budget day may be caught by the surcharge unless completion or substantial performance is achieved before 1 April 2021. Thus, where possible, anyone who wishes to avoid the surcharge and did not exchange on a property prior to Budget day, should aim to achieve exchange and completion (or substantial performance) of any new purchase within the transitional period.
What is the likely scope of the surcharge?
While we know when the new surcharge will be introduced and its rate, for potential buyers who spend periods of time in the UK, there is still doubt as to whether they will be regarded as non-resident for this purpose. In the consultation last year, the Government set out its proposals for the application of the surcharge, which are summarised in our note here of 15 February 2019, but it has not yet published a summary of responses to the consultation nor, more importantly, an update on its proposals.
The principal issue is the test for non-residence. The consultation proposed a simple 183-day test for individuals (and life tenants of life interest trusts) whereby, if an individual spent fewer than 183 days in the UK in the 12 months ending with the effective date of the transaction, they would be regarded as non-resident for this purpose. If this test is introduced, it will give rise to a situation where an individual could be UK resident for general tax purposes under the statutory residence test but non-UK resident for the purposes of the surcharge – effectively, the worst of all worlds.
The position is less stark for companies, for which the proposed test was the place of their central management and control, and for discretionary trusts, whereby the proposed test of the residence of the trustees was to be a modified form of the statutory residence test, considering the position over a period of 12 months ending with the date of the transaction, rather than over a tax year. As we argued in our response to the consultation last year, it was unclear why this test could not also have been applied to individuals.
In addition to the residence test, we also had concerns with regard to acquisitions where more than one person was involved, whether this was a partnership, a married couple or civil partnership, tenants in a collective enfranchisement, or purchasers in a linked transaction. In each of these situations, the consultation proposed that one non-resident person would taint the entire transaction, rather than the surcharge being proposed proportionately according to the interest or interests of the non-resident person or persons involved.
What happens now?
The Budget papers indicated that the Government will shortly publish a summary of responses to the consultation. This is likely to be accompanied by final details of the scope of the surcharge and the applicable rules, and possibly also draft legislation. It is to be hoped that changes may have been made to the residence test and other proposed provisions of the measure following representations by ourselves and others.
Final thoughts
Due to the impact of COVID-19, we understand that the Chancellor’s Budget had to be significantly rewritten. It is to be hoped that by later in the year, we will be over the worst of the current pandemic. We know that the Government intends to hold a second Budget in the Autumn and it is likely that measures that had to be omitted from this Budget may then re-emerge. It is not impossible that such measures might include changes to IHT, possibly even a complete rethink of the tax, maybe along the lines floated in a recent paper by an All-Party Parliamentary Group (discussed here).
Certainly it is likely that the impact of Brexit and the Government’s plans to invest in infrastructure and to support the economy may give rise to more ambitious tax measures in the Autumn than we have seen in this Budget. However, in the meantime, it seems likely that our attention and that of the UK Government, and governments worldwide, will be focussed firmly elsewhere.
Budget 2020: £1 billion Building Safety Fund announced for the remediation of unsafe non-ACM cladding
12 March 2020
News
In yesterday’s budget, the Government announced the provision of a £1 billion “Building Safety Fund”, which will be made available in 2020 – 2021.
What is the new fund for?
The new fund is being provided to facilitate the removal and replacement of unsafe non-ACM (aluminium composite material) cladding from high-rise residential buildings. This represents an acknowledgement by the Government that in addition to ACM cladding similar in nature to that present at Grenfell Tower, there are other cladding systems in regular use in the construction industry which represent a significant danger to life.
Hasn’t the Government already made remediation funds available?
Yes. The £1 billion investment announced yesterday is in addition to the £600 million funds set aside in 2019. However, the 2019 funds are only available to meet the costs associated with the removal and replacement of ACM cladding. As noted above, the new fund will support the removal and replacement of non-ACM cladding systems, including high-pressure laminate (HPL), wood and other class C/D cladding as identified by the Independent Expert Advisory Panel.
Who can apply for the funding?
The fund will be available to building owners in the private and social housing sectors, in respect of residential buildings reaching a height of at least 18 metres. Whilst building owners may apply for funds, the Government has made it clear that any grant for the remediation of a private-sector residential building is intended to be for the benefit of the leaseholder owners of the residential units.
The Government guidance also confirms that any building owner who has already committed to remove and replace non-ACM cladding is expected to honour their commitment without applying to the fund, in order that the fund is available to support those building owners who may not be able to bear the cost of remedial works.
Are there any conditions to the availability of funding?
Yes. The Government expects building owners to explore whether they have any contractual or tortious recourse against the parties responsible for designing and installing the unsafe cladding systems. We can expect the Government to require that building owners commit to pursue any potential claims as a condition of funding being made available and to repay any money recovered to the Government. It remains to be seen whether and how the Government police this requirement.
Can we expect any further funding on top of the £1.6 billion already committed?
No. The Government has stated that no further funding will be made available for the remediation of unsafe cladding.
Regulatory changes
Yesterday’s announcement comes ahead of the introduction of a new regulatory regime in line with the reforms recommended by Dame Judith Hackitt. In the meantime, we can expect the Government to continue to monitor the efforts of building owners to remediate unsafe residential buildings and to “name and shame” those where no action has been taken.
If you require any further information regarding the issues set out in this article, please contact Emily Holdstock or Alexandra Treacy.
COVID-19: What will the impact on construction projects be?
6 March 2020
News
The WHO has declared the COVID-19 a public health emergency of international concern with the potential to become a pandemic, and the government has cautioned that cases of COVID-19 in the UK are likely to rise significantly over the coming days and weeks.
In the event of a major outbreak of COVID-19 in the UK, construction projects could be affected. Should there be significant interruptions in supply chains, or if workers are required to down tools and remain off-site for long periods of time, what rights and remedies might the respective parties to a building contract or development agreement have?
One thing that all developers can do now is review the contractual position under their existing contracts, in anticipation of contractor claims for extension of time, should COVID-19 continue to spread.
Delay events
A building contract or development agreement will usually specify certain circumstances which, if they occur, entitle a contractor to claim an extension of time to complete the works.
However, the JCT standard forms of building contract do not specifically list disease, epidemics or pandemics in the list of delay events.
In the absence of a contractual provision dealing with delays caused by pandemics or epidemics, a contractor is likely to turn to other specified delay events in a building contract. What might these be, and what is the likelihood of such a claim being successful?
Force Majeure
Force majeure is a contractual term that provides for the award of an extension of time if works are delayed due to the occurrence of circumstances beyond the control of the parties.
There is no universal definition of force majeure however, and despite the JCT forms of contract listing “force majeure” as a delay event, these contracts don’t expand on what this term actually means.
So, would an outbreak of COVID-19 constitute a force majeure event?
There is no definitive answer to the question, but the success or otherwise of a contractor’s claim citing force majeure for COVID-19 is likely to depend on three key variables:
the scale of the outbreak;
whether there are any express provisions in the building contract or development agreement which specifically treat epidemics or pandemics as a force majeure event; and
what measures the contractor might reasonably be required to take to mitigate the effects of the delay; the JCT Design and Build contract, for instance, requires a contractor to “constantly use his best endeavours to prevent delay…however caused”.
The English courts have tended to take a restrictive approach to interpreting clauses in construction contracts which purport to excuse a contractor from performing its obligations due to supervening events. Where a contract such as the standard form JCT does not identify specific events of force majeure, then in the event of a localised outbreak the courts may still refuse to treat such an event as force majeure and may require a contractor to draft in additional resource from outside of the affected area as a means of mitigating against the delay.
It is worth noting that many of the events which are commonly associated with force majeure are already identified in the JCT contract as a delay event. A Society of Construction Law paper from February 2012 (“Force Majeure and Construction Contracts” by Adrian Williamson QC) notes that considering all the other delay events which are already listed in the JCT, “it would be a bold contractor who sought an extension of time under a JCT contract for force majeure”. The lack of force majeure-related cases under JCT contracts that have come before the courts suggests this is right.
However, it is by no means out of the question that a virus outbreak may, in certain circumstances, amount to a force majeure event. The FIDIC Yellow Book form of contract specifically lists shortages caused by an epidemic as a delay event entitling a contractor to an extension of time. The NEC4 suite of contracts does not identify epidemics as force majeure events, but in a recent publication (“Clause 60-Compensation Events” 25 February 2020), NEC uses a virus outbreak as an example of an event that would be “so unlikely that it would not be sensible to allocate risk to the contractor” and could therefore constitute prevention of performance under the contract.
In any scenario, the onus will be on the contractor to establish that an outbreak constitutes a force majeure event. A contractor would need to show how the outbreak impacted on the completion of the works, and to demonstrate that it took all measures it reasonably could have in the circumstances to mitigate against the effects of the delay.
Government intervention
An alternative and perhaps more fruitful ground for an extension of time claim may be government intervention, which the JCT treats as a separate delay event.
This ground would likely cover a scenario in which the government, a public body or local authority passed emergency legislation which affected the ability of workers or goods to travel in the event of an outbreak.
The government has already issued The Health Protection (Coronavirus) Regulations 2020. Should the current outbreak worsen, further preventative measures restricting the movement of goods and people could be implemented at short notice and without much time for contractors to prepare. Clearly, the outbreak would already have become (or have threatened to become) sufficiently severe for the government to take such measures.
A contractor’s claim for an extension of time under these circumstances might be more likely to succeed.
Moving forward…
Historically we have not seen many construction contracts which have been amended to deal specifically with the risk of epidemic or pandemic. However, in the light of COVID-19, we would expect contractors to become increasingly insistent on negotiating provisions in construction contracts which deal specifically with the consequences of these events. In the meantime, Forsters is continuing to monitor how the construction industry responds to the impact of COVID-19.
Richard is a Senior Associate in our Construction team.
The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.
