On the brink of collapse: insolvencies in the construction industry

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Insolvency in the construction sector

The pandemic has placed the construction industry under considerable pressure, with it accounting for 17% of all UK corporate insolvencies in May 2021. Now that restrictions have lifted, it’s hoped that many companies will be able to survive moving forward. However, sector leaders should ensure they understand the insolvency process – whichever side they’re on.

The challenge ahead

Even before the pandemic, the construction industry was facing a number of challenges, including wafer thin profit margins and materials and labour shortages. This left many businesses in vulnerable positions, particularly in the wake of the May 2020 construction boom.

The complexity of construction supply chains often means that one problem can have widespread repercussions, so it’s important to be aware of warning signs that things may be going wrong

Understanding the signs

There are often distinct warning signs that indicate that a project is headed for trouble, these include:

  • Problems contacting subcontractors, employers or site teams
  • Unexpected changes in management
  • Subcontractors suddenly removing plant and equipment from the site
  • Unexplained reductions in productivity or resources

In the event these tell-tale signs appear, it’s time to take action.

Next steps

The first course of action should be to review your contracts and documentation, which will help you to understand the risk and who carries it. A plan can then be formulated.

If the financial position is worsening, it’s important to maintain lines of communication with key stakeholders, including the team ‘on the ground’. Staying close to site activity will provide a greater insight into any future problems.

If the financial problems evolve into something more serious, there are things that can be done to manage the risk. Communication is vital, so take advice and engage with major stakeholders and funders as soon as possible. Getting key suppliers on board at an early stage may also help in the long run.

Law of Property Act (LPA) receiverships

Administrations and liquidations, where a business is placed under the control of insolvency practitioners, are still common. However, not all insolvency situations are equal and there is a growing number of distressed projects being placed into LPA receiverships. Here, a receiver  is instructed by a lender to take charge of discreet assets (usually a property) and sell them to recover the debt.

This option is particularly beneficial for construction projects as it is quicker, cheaper, and often means the project will be seen through to completion.

The director’s role

Directors and owners must be aware of their responsibilities and personal risk during an insolvency. Although it may be tempting to walk away from a struggling business, assisting administrators or LPA receivers could result in a better outcome.

Legal provisions such as The Corporate Insolvency and Governance Act 2020 are also in place to provide directors with time to consider all of their options.

As the pressure facing the construction industry increases, insolvencies will inevitably happen. Ensuring directors and senior leaders know how to spot the danger signs, could prevent further problems down the line.

Get in touch to find out how our  restructuring and insolvency team can help.

As development sites begin to re-open, significant challenges are rising to the surface causing further disruption to house builders.

In this webinar, we discuss the position with contracts and supply chains, employment contracts and workforces, and a practical look at how you can get your site back up and running with minimum delay.

Get In Contact

Frank is recognised as an expert in restructuring and insolvency law, and one who provides decisive practical solutions.

In any situation when things take a turn for the worse, our corporate restructuring and insolvency team work closely and quickly with clients to assess options deliver the best possible commercial outcomes where possible.

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Renewal of Telecoms Leases: New Case from the Upper Tribunal

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New Telecoms Leases Tribunal Case

 

EE Ltd & H3G UK Ltd v Stephenson & AP Wireless (II) UK Ltd [2021] UKUT 167 (LC)

Just in time for Summer, we have another telecoms ruling in relation to the New Telecoms Code from the Upper Tribunal. This time, its primary consideration was whether Telecoms Operators can seek to replace existing agreements with an entirely new agreement upon renewal.

Background to the Telecoms case

The Operators, EE and H3G, applied for the termination of its Telecoms agreement following its contractual expiry, and requested that the Tribunal replaces the existing Code agreement with a new agreement on its standard terms.

The proposed new agreement included wider sharing provisions, an unfettered ability to upgrade and a substantially lower annual rent of £250 per annum.

The Tribunal was required to consider the following as preliminary issues:

  • Whether the Operators could, in principle, seek a complete replacement of the current telecoms agreement in circumstances where a site-specific requirement for such a change was not put forward; and
  • If the Operators’ application for a replacement agreement failed, the Operators were unable to then seek an alternative remedy, such as varying an existing agreement (to change or add new terms).

The landowner Respondents’ main defence was that the Operators were not entitled to replace the current telecoms agreement with the operator-friendly standard agreement without first seeking to justify a departure from the terms of the current agreement.

The landowners sought to rely on the decision handed down by the Lands Tribunal for Scotland in the case of EE Limited and Hutchison 3G Limited v Duncan (“the Duncan Case”) made on 23 September 2020. In this case the Lands Tribunal inserted a “high bar” where a telecoms operator would be required to show there is a site specific need to replace or modify an agreement in the first place.

What the Tribunal Decided

The Tribunal decided in favour of the Operators and accepted that there is no requirement for telecoms operators to put forward any site specific need or business justification to terminate a current agreement and replace it with a new agreement.

The Tribunal followed the judgment handed down in the appeal of the Duncan Case on 7 May 2021 which removed the “high bar” imposed by the previous decision of the Scottish Lands Tribunal.

The Tribunal also reviewed its approach when considering a renewal of a telecoms agreement and confirmed that the general presumption against a change to the terms of an existing agreement does not apply under the New Telecoms Code (commonly known as the “O’May Principle”).

It was also determined that where an Operator has served a notice seeking a termination of an existing agreement, it would not then be able to request the Tribunal to order an alternative remedy. In other words, an Operator could not then seek a variation of the current agreement.

An Operator would therefore be required to start the renewal process again. However, the Tribunal did state that it would have the discretion to make an alternative order if requested by the Respondent.

 Takeaway points from the ruling

Whilst this ruling may generally favour Operators, there are some important key points that landowners can take away from this case:

  • This determination related to preliminary issues only – the Trial is yet to take place and this does not mean that the Telecoms Operators will succeed fully in their application for more preferential terms such as unfettered upgrading or the reduced rent sought.

     

  • Whilst it was held that the “O’May Principle” would not apply to the renewal of telecoms agreements under the New Code, such a principle would apply to the renewal of telecoms agreements under the Landlord and Tenant Act 1954 (”the 54 Act”). As such, if an Operator sought a departure from the terms of a 54 Act Telecoms Lease upon renewal, arguably they would be required to justify the same pursuant to the O’May Principles.

     

  • Whilst it was held that the “O’May Principle” would not apply to the renewal of telecoms agreements under the New Code, such a principle would apply to the renewal of telecoms agreements under the Landlord and Tenant Act 1954 (”the 54 Act”). As such, if an Operator sought a departure from the terms of a 54 Act Telecoms Lease upon renewal, arguably they would be required to justify the same pursuant to the O’May Principles.

     

Get in contact

If you have been approached by an Operator to renew your telecoms agreement, we can advise you on your legal position, as well as the best strategy and approach for you taking into account the type of agreement you have in relation to your land.

For expert support or advice, get in touch with our property litigation team today.

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Guides & Advice

Commercial Real Estate Continues to Transition | Lockdown 3.0

In an earlier blog, we considered the impact of Lockdown 2.0 on the commercial real estate market.

One of the trends we anticipated was expecting businesses to adapt by further trimming back their space requirements which were likely to be matched by a greater move to businesses taking short term flexible agreements, and a shift to serviced office space which can often be handed back at short notice.

Lockdown 3.0 - What now?

It is expected these trends will continue well into 2021 and beyond due, at least in part, to the uncertainty created by the further, possibly more open-ended lockdown 3.0. We’re already seeing, various flexible alternative types of space being made available by savvy landlords and taken up by increasingly agile tenants.

These flexible arrangements can take different forms. At one end of the spectrum, tenants are taking virtual desks (where companies may pay to have their registered office and post sent to etc) without a particular physical footprint. This is enabling companies to benefit from being registered at prestigious postcodes/locations without the hefty prime office rents. We see many commercial landlords offering this service. Universities are also offering their flexible working spaces and conference facilities adapting to the market and seeking to take advantage of the benefits of co-working spaces.

Moving along the range of options to actually taking physical space, this can involve renting hot desks, private offices, serviced offices.

We are also now seeing the rise of so called “managed offices”. This is taking the concept of serviced offices one step further and can include landlords working with landlords actively working with tenants to create and provide bespoke fully fitted out offices/collaboration space as specifically required by the tenants in return for monthly payments. This goes beyond simply providing a “plug and play” service. In addition, these providers, including a number of new entrants to the market, are competing to provide ever greater facilities ranging from cafes/bars to gyms and roof terrace relaxation space.

In short, there are many opportunities for both landlords and tenants to overhaul and modernise their working spaces and there is real merit in exploring the market now and seeking to seize those opportunities.

What else can we expect?

The Government has announced that a review of the commercial landlord and tenant legislation will be launched this year. It seems that there is a growing acknowledgement that the longstanding legislation does not always reflect or work as well as it should do in the current environment.

This review will consider potential changes to how commercial leases are governed with a view to helping ensure our high streets and town centres survive and thrive after the pandemic, as well as looking at how commercial landlords and tenants can collaborate more effectively and efficiently to “keep their finances stable, protect jobs and build back better”, according to Business Secretary, Alok Sharma

We will have to wait and see as to whether any proposed changes will be beneficial (and to whom) but for now the review does create more uncertainty in the market, not least as security of tenure of business tenants will be up for consideration. We will be monitoring this closely.

Contact us

For further advice on the options available to you as a landlord or as a tenant, please contact James Fownes or another real estate team in your local office.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

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Sending in the bailiffs… no longer an option for landlords

Updated 15 September 2020 | Sending in the bailiffs… no longer an option for landlords

On 15 September 2020, the government announced further measures to protect commercial tenants from recovery action by restricting the ability of landlords to recover unpaid rent by utilising the Commercial Rent Arrears Recovery process (“CRAR”).

The British Property Federation have reacted with disappointment, as some businesses are taking advantage of the crisis by refusing to pay rent - despite them having the funds to pay. However, this announcement will no doubt be very welcome news for those tenants who have struggled to rebuild their businesses since the national lockdown earlier in the year.

What has now changed?

On 24 April 2020, the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (“the 2020 Regulations”) came into force and restricted the use of CRAR, unless 90 days’ of rent remained unpaid.

In June 2020, the government extended the law so that CRAR could only be utilised if 189 days’ of rent remained unpaid.

Now, a further amendment has been made, which will come into force on 29 September 2020, and the law provides that:

A. CRAR can only be utilised between now and 24 December 2020 if there is 276 days’ of unpaid rent; AND
B. CRAR can only be utilised after 25 December 2020 if there is 366 days’ of unpaid rent.

What does this mean for me now?

This effectively means that landlords can only utilise CRAR between now and 24 December 2020 if a tenant has not paid 276 days’ worth of rent. This equates to the rent that was owed for the March, June and September 2020 quarters.

The law then goes further and states that if landlords wish to utilise CRAR on or after 25 December 2020, then there must be 366 days’ of unpaid rent owing. This equates to a further 90 days of rent and essentially means that landlords will also be unable to utilise CRAR if the December 2020 quarter rent remains unpaid.

If you are a landlord

If you are a landlord, CRAR may no longer be an effective recovery method available to you for unpaid rent from March 2020. However, you may be able to utilise CRAR if there are larger sums of unpaid rent which pre-date March 2020.

Further, remember that there are alternative remedies that landlords can utilise to seek recovery of rent and other sums if your tenants are not engaging with you. Our real estate disputes team can advise and guide you through the options.

If you are a tenant

If you are a tenant, you should carefully review any Notice of Enforcement that is served upon you, as these are now likely to be invalid. It appears CRAR will be an ineffective method of recovery until March 2021.

We can advise you on any Notice of Enforcement you receive and your options. We have developed a tailored fixed fee service to guide you in this process – so please get in touch with a member of the team.

Contact us

We can help and advise you in these difficult situations but time is of the essence.  We have developed a tailored fixed fee service to guide on your options.

Please contact Martin Edwards or Justine Ball for further information on another member of the property litigation team in your local office.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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