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Tenant Fees Act 2019 – Greater Protection for Tenants in England in the Private Rented Sector

As part of the Government’s drive to make renting fairer and more affordable, and to improve transparency and affordability in England’s residential lettings market, the private rented sector in England faces further changes in the shape of the Tenant Fees Act 2019 (‘the Act’) which comes into force on 1 June 2019.

This Act prohibits landlords and letting agents in the private rented sector in England from charging certain fees to a tenant. Financial penalties apply for non-compliance and, for repeat offences, further fines and a possible criminal conviction. Landlords and letting agents will not be able to evict a tenant using the section 21 eviction procedure until they have repaid any unlawfully charged fees or returned an unlawfully retained holding deposit.

It is important that residential landlords and letting agents are prepared for these changes and should ensure that their business models, internal practices and procedures are compliant with the Act when it comes into force on 1 June.

Which Tenancies are Affected?

Assured shorthold tenancies, licences to occupy (excluding social housing), and student lettings in England granted on or after 1 June 2019 will be affected. If a tenancy was granted before 1 June 2019, payments which may be prohibited under the Act can still be charged but only until 31 May 2020.  From 1 June 2020, all tenancies and licences (previously referred to) will be caught by the Act.

What Payments are Permitted Under the Act?

A tenant can be charged:

  • Rent.
  • A refundable tenancy deposit (capped at five weeks’ rent if the yearly rent is less than £50,000, or six weeks’ rent if the yearly rent is £50,000 or more).
  • A refundable holding deposit (capped at no more than one week’s rent); strict time frames have been introduced for repayment.
  • Certain ‘default’ fees, which must be written into the tenancy agreement – payment for a lost key and interest for late payment of rent (if the rent is unpaid for more than 14 days). The rate of interest must not exceed the rate of 3% above the Bank of England base rate.
  • Utilities / Communication services / TV Licence / Council Tax (only the billed amount).
  • £50 fee for the landlord’s consent to vary a tenancy agreement as requested by the tenant.
  • An early termination fee (in the event the tenant wishes to terminate early, but not where the tenant is exercising a break clause).

What Payments are Prohibited?

Landlords, or letting agents on their behalf, are prohibited from charging tenants any fees which are not permitted payments (described above).

For example, letting fees (such as administration fees, obtaining references, preparation of inventories, credit checks) cannot be passed on to a tenant and must be fronted entirely by the landlord.

A common clause in a tenancy agreement requiring a tenant to pay for a professional clean at the end of the tenancy is now a prohibited payment. It is permissible to require a tenant to clean to a professional standard, but not to pay for a professional clean.

What are the Penalties and Consequences for Non-Compliance?

Landlords and letting agents can be subject to a fine of up to £5,000 for a first offence. If a further offence is made within five years of the first, this will be a criminal offence and a landlord or letting agent could be liable for an unlimited fine. Some local authorities may impose a financial penalty of up to £30,000 as an alternative to prosecution.

To find out more about the Tenant Fees Act, why not take a look at our all new Guidance Note? This new document is available here.

As a result of the wide impact the Act will have on the private rented sector in England, several of our template documents on the Property portfolio are being updated, most notably the Assured Shorthold Tenancy (AST) Agreements. These updates will be published before the Act comes into force.

In related news, the Renting Homes (Fees etc.) (Wales) Bill, has passed through the Welsh Assembly and is awaiting Royal Assent. Similar provisions to the Tenant Fees Act 2019 are proposed under this Bill. We will produce further guidance and updated documents once this Bill has passed into law.

As a landlord or letting agent do you believe these legislative changes will necessitate an increase in rent (even if this is a negligible increase) and therefore preferable to a tenant being charged up-front fees? Is Buy-to-Let less attractive now? Your comments are, as ever, welcome!

Important Changes to IR35 Coming in 2020

HMRC Sign

Are you a freelancer who works through a Personal Services Company (“PSC”), or do you engage freelancers who do so? If so, you need to be aware that the tax position will be changing in April 2020.

Proposed Changes to Off-Payroll Working Rules (IR35)

The Government issued a Policy Paper and Consultation Document on 5 March 2019 (“Off-Payroll Working Rules From April 2020”). If you would like to read the paper in full, you can find it by clicking here. The consultation runs until 28 May 2019, but it is clear that the Government does not intend to make any significant changes to its proposals as a result of feedback it receives to this consultation.

A Finance Bill will be published in the summer and, once it is passed into law, it will implement changes to how the IR35 regime works. Although details of the proposed changes will not be known until the Bill is published, the points covered in the Government’s March 2019 consultation indicate the nature of the changes that will come into effect in April 2020. In this post, we consider some of the proposed April 2020 changes set out in the consultation.

Background to the Changes

Working via a PSC (or some other form of intermediary) is often referred to as “off-payroll working”, and the tax rules that apply to it are usually referred to collectively as “IR35”. IR35 does not alter or dictate the employment law position either as to workers’ rights or as to whether someone is employed as opposed to self-employed. Nor does IR35 alter the general tax law establishing the amount of tax liability.

As it currently operates, and as it will operate from April 2020, IR35 is only, in effect, a means to aid collection of the full and correct amount of tax and National Insurance (“NI”) to be paid in respect of certain payments where a freelancer works through a PSC. To find out more about IR35, check out our guidance notes IR35 as background to the latest changes to IR35 being proposed by HMG. You can find our guidance notes here and our information pages here.

Operation of IR35 from 2000, and Recent Developments

The operation of IR35 depends on identifying where a freelancer working for a client through a PSC is, in substance not form, an employee of that client. When IR35 was originally introduced, the rules required the PSC itself to identify whether use of the PSC to receive gross payments from a client in any instance was “disguised employment” by the client and to arrange payment of tax and NI under PAYE if that was the case.

Freelancers (and sometimes family members) are usually the only directors and/or shareholders of a PSC. Perhaps unsurprisingly, the Government found that PSCs could not be relied upon to implement the IR35 rules. PSCs commonly paid dividends to the freelancer (as a shareholder of the PSC) rather than a full (or any) salary to the freelancer. As a result, PSCs did not pay the tax or NI that would have been paid had they paid a salary derived from the gross payments made by clients.

Consequently, under a change in the law in 2017, the Government began to implement anti-avoidance measures. Since April 2017, where the client is a public sector entity, the burden of assessing the tax status of freelancers shifted on to the public body concerned, so that it, not the PSC, is responsible for identifying such “disguised employment” situations. Where the public sector body does so in any case, it must operate PAYE and make net payments to the PSC. Many, including IPSE (the Association of Independent Professionals and the Self Employed), think that these changes have had damaging effects on the public sector, and that any extension of these changes to the private sector will be also be damaging for all concerned.

The April 2020 Changes to IR35

Since late 2017, the Government has indicated its intention to extend similar changes to the private sector, although the April 2020 changes will differ in some respects from the measures that currently apply to the public sector. From April 2020, the private sector client will be responsible for determining whether the freelancer is a “disguised employee” and therefore to be treated as if an employee. If the entity in the labour supply chain which pays the fees to the PSC is not also the client of the PSC, then the fee payer will be responsible for operating PAYE. If the client determines that IR35 does not apply, then the client or the fee payer will pay the PSC gross.

However, these new rules will not apply to all private sector clients. The legislation will provide that clients which are “small” entities will not be involved in having to determine freelancers’ status and, whether or not the client is also the fee payer, the fee payer will not need to operate PAYE. For this purpose, “small” means that if the client is corporate, the rules will not apply to it if it falls within at least two of the following:

  • Its annual turnover does not exceed £10.2 million;
  • Its balance sheet total does not exceed £5.1 million;
  • The number of its employees does not exceed an average of 50 in the year.

If the client is non-corporate and it is “small”, the rules will similarly not apply to it. The criteria for “small” have not yet been made clear, but they will fairly closely follow the criteria for corporate entities.

This means that where a client in the private sector is “small”, the responsibility for determining the freelancer’s status will remain with the PSC as at present.

Before deciding whether IR35 rules apply, are they even relevant to you?

These 2017 and 2020 changes to how IR35 operates only impact on any case where IR35 is relevant, i.e. where a PSC is involved. If a freelancer does not work through a PSC but through some other type of entity (e.g. an agency or managed service company), then other rules will or might apply, so it is important to understand what amounts to a PSC for the purposes of IR35.

So, if you engage a freelancer working for you directly as opposed to working through a PSC, you will not be affected by IR35. However, as a consequence of normal tax law (not IR35 rules) applicable in these cases, you will still need to decide whether they are an employee rather than a sole trader or contractor. If they are an employee, you will have to operate PAYE.

Determination of a Freelancer’s Status

Although clients will need to apply the normal employment status tests (based on case law – see our helpful tips, here) to decide whether someone is a “disguised employee”, it can be difficult to do so, and that difficulty is aggravated by the fact that HMRC’s view of status in a case cannot necessarily be regarded as correct. Where HMRC has contested the status of contractors in tax tribunals, it has lost a large percentage of them.  HMRC provide a tool, the Check Employment Status Tool (“CEST”), which clients may (but do not have to) use to assess employment status. CEST’s reputation has unfortunately become somewhat sullied due to many public sector clients finding that it is biased towards finding that an individual is an employee. This has not inspired confidence amongst freelancers or their clients. HMRC has said that it will enhance CEST to make it more suited to the private sector.

New Information Requirements

Currently, where the client is in the public sector, it must tell the entity it contracts with of its determination of the freelancer’s status. From April 2020, the Government intends to introduce new IR35 rules that will require private sector and public sector clients to inform both the entity they contract with and the freelancer or PSC of their determination and, if requested, the client’s reasons for it.

HMRC also intends the rules to require all intermediary recipients of the determination (i.e. those in the chain other than the client and the freelancer or PSC) to pass it and, if requested, the reasons for it, to the person with whom they contract.

Status Determination Disputes and Anti-Avoidance Measures

The proposed new rules for the private sector are likely to include mechanisms for challenging decisions as to whether or not a freelancer is within IR35, and a means for resolving such disputes. Where a party is initially liable to determine status and does not do so, or does so without reasonable care, or if it does not fulfil any other IR35 obligation, it will be made liable for tax and NI even if it is not the fee payer. Where a party is liable for tax and NI but in the event it cannot be collected from that party, the rules are likely to have the effect of moving liability to the next entity in the labour supply chain.

Impact of Changes on Your Business and Action Needed Now

The changes might have an effect on you if you are a freelance business or your business engages freelancers. The effects might include an increase in the burden of administration work, the cost of that extra work, practical difficulties in operating within the changed rules, and the commercial and financial impact on your business.

With less than a year to go before new rules come into effect, it is very important that you start now to take steps to prepare for the new IR35 rules if you do engage any freelancers through intermediaries. There are numerous steps that should be considered. It is recommended that you begin by identifying those freelancers working for you through intermediaries and the labour supply chain in each case, and then implementing processes to determine freelancers’ status. Further steps are likely to be advisable, and we recommend that you seek advice or guidance on these from suitable advisers or sources.

As always, if you would like to share your thoughts as to whether and how you think these proposed changes will impact you or others with whom you deal, we would be glad to hear from you in the comments, below.

Proposed Mandatory Requirements for Landlords to be Members of a Redress Scheme

Houses with red doors

Earlier this year, the Government gave its response to the consultation on ‘Strengthening Consumer Redress in the Housing Market’.

This consultation ran for two months at the beginning of last year and considered the current procedure for addressing complaints and disputes in the housing market and whether the process could be improved.

The Government wants to focus on empowering tenants, ensuring that tenants in both the private rented sector and social housing have confidence in renting. Complaints and disputes should be dealt with fairly and in a timely manner, and tenants will be compensated where due. The current mechanism for resolving disputes is seen to be confusing, complicated, and cumbersome. The Government is also looking to move the resolution of disputes away from the courts and hopes that these measures will achieve this.

The Government has announced that they will be introducing legislation in England to address the following:

  • All private landlords, including private providers of purpose-built student housing and park home site operators must belong to a redress scheme. Failure to belong to a redress scheme will result in a financial penalty of up to £5,000. These measures reflect the requirements introduced in 2014 for all letting and managing agents in England to become a member of a redress scheme.
  • A ‘New Homes Ombudsman’ for developers of new-builds. It is proposed that developers of new-builds will need to be members of this Ombudsman by 2021 if they wish to participate in the Government’s landmark Help to Buy scheme.
  • Establish a working group (to be known as the Redress Reform Working Group) to develop a ‘Housing Complaints Resolution Service’. This resolution service is intended to be a one-stop-shop for housing complaints. It is intended to be used by tenants and leaseholders (social and private rented sector) as well as purchasers of new-build homes and users of all residential property agents.
  • The working group is also to review the current standards of resolving disputes with a view to creating a single ‘Code of Practice’ on complaint handling across all tenures, to ensure consistency and to raise the standard of service consumers should expect when they seek help.

No date has been set for the introduction of the new rules, but the Government has said that they will bring forward legislation at the earliest possible opportunity (once parliamentary time allows).

Government Plans to Abolish s21 Eviction Procedure

bad news

The Government has outlined plans to consult on new legislation to abolish Section 21 evictions in England. Similar plans have also been announced for Wales.

Under the current law in England, landlords can evict tenants (giving them eight weeks’ notice) at any time after the fixed-term contract has come to an end, without specifying a reason. This procedure is known as a s21 eviction procedure and is often referred to as a ‘no-fault eviction’.

If this procedure is abolished, landlords would need to rely on the Section 8 eviction procedure (under which landlords need a legitimate reason) to seek possession of a property. This is seen by many as being a costly and lengthy procedure which can take an average of 22 weeks to resolve.

Along with the abolishment of the Section 21 eviction procedure, the Government has announced an intention to amend the Section 8 eviction procedure to allow for a landlord to regain possession of a property where they wish to sell it or move into it.

The Government has also promised extra resources and changes to the court process to ensure that cases are expedited and run smoothly through the courts.

The Government’s aim is to protect tenants; the official press release stated that the Section 21 eviction procedure is one of the biggest causes of family homelessness. With more than four million people in private rented accommodation, the Government argue that more needs to be done to ensure that tenants have greater certainty and security in the housing market.

There is concern that the Government’s proposals will result in renting being more expensive as landlords face increasingly costly eviction procedures, or as a result of a decrease in supply if landlords cease renting out their properties altogether. There is also speculation that landlords may prefer to rent out their properties as holiday lets.

No dates have yet been announced for the consultation. In the meantime, the current Section 21 procedure can still be used.

As a landlord, what impact would the abolishment of the Section 21 eviction procedure have on your business? Your comments are, as ever, welcome!

RICS Professional Statement on Service Charges in Commercial Property

Commercial property agents who are members of the Royal Institute of Chartered Surveyors (RICS) or who are regulated by RICS (RICS’ Agents) will need to comply with the RICS Professional Statement ‘Service charges in commercial property (1st edition)’ (‘the Statement’) which came into force on 01 April 2019.

The Statement replaces the RICS Service Charge Codes which were previously only guidance around best practice for the operation of service charge in commercial properties occupied by more than one tenant. The Statement imposes mandatory requirements on RICS’ Agents which are supported by core principles.

RICS’ Agents who fail to comply with the mandatory requirements could face legal and/or disciplinary action, such as negligence claims, if they commit a repudiatory breach of these requirements. A RICS’ Agent can only depart from these requirements for justifiable reasons.

In short, the Statement aims to make service charge costs transparent, hold agents to account, and ensure that service charge budgets and end of year demands are issued in a timely manner.

Nine Mandatory Requirements

(1) All expenditure to be recovered from tenants must be in accordance with the lease;
(2) Owners and managers must not seek to recover more than 100% of the proper and actual costs of the services;
(3) Each year owners and managers must be provided with service charge budgets, including appropriate explanatory commentary;
(4) Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
(5) Interest earned on these bank accounts must be credited to the service charge account (after any necessary deductions have been made);
(6) Owners and managers must ensure that an approved set of service charge accounts (which have been certified by an appropriately qualified person) are provided annually to tenants;
(7) Owners and managers must ensure that a service charge apportionment schedule is provided annually to tenants;
(8) In respect of disputes when acting for a tenant, the manager must advise the tenant that if money is being withheld, it is only the amount in dispute which is being withheld; and
(9) In respect of an accounting error when acting on behalf of the landlord, managers must inform the landlord that the service charge has been raised incorrectly and will be adjusted without any undue delay.

The Statement vs the Lease

The Statement does not override the service charge provisions of an existing lease, however; the Statement is to be read in conjunction with the terms of an existing lease. The purpose of the Statement is to help to identify the best approach in interpreting a lease and is likely to assist in resolving disputes that may arise in relation to service charge management.

If a landlord will be engaging a commercial property agent to manage the service charge and they are a RICS’ Agent, then the lease should be compliant with the Statement and service charge provisions in new leases or renewal leases should be drafted by reference to the Statement.

The Statement may cause increased administration for landlord and RICS’ Agents who may need to make changes to their current accounting procedures. However, these changes are likely to be well received by tenants who are likely to benefit from increased transparency and communication as a result of these changes.

Are you a commercial landlord/property agent and do you welcome these changes? Your comments are, as ever, welcome!

Mandatory CMP Schemes for Letting Agents and Property Managers

The Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations came into force on 01 April 2019.  Under these regulations, all private sector letting agents and property managers in England who hold client money are required to be members of a government approved Client Money Protection Scheme (CMP Scheme) from the 01 April 2019 or face fines of up to £30,000.

Client money does not include tenancy deposits, which are protected under an approved tenancy deposit scheme.

These regulations give landlords and tenants the confidence that their money is safe, and that they will be compensated in the event of the monies being misappropriated or if the agent becomes insolvent. This is one of several legislative changes being introduced to protect customers against rogue letting agents and to regularise this industry.

These regulations only affect agents operating in England. Letting agents and property managers in Wales are already required to be a member of a CMP Scheme before they can obtain a license to operate in Wales.

Agents who belong to a professional body such as ARLA will already be members of a CMP Scheme.

In order to comply with the regulations, agents must:

(1) Be a member of an approved or designated CMP Scheme;
(2) If they’ve been provided with a certificate from the scheme administrator:
(a) Obtain a certificate confirming membership of the CMP Scheme;
(b) Display the certificate at the agent’s premises and on their website; and
(c) Produce a copy of the certificate to any person who may reasonably require it, free of charge;
(3) Notify all clients within 14 days if their CMP membership is revoked, or they change to a different approved CMP scheme; and
(4) Notify all clients of the name and address of the CMP scheme.

Financial Penalties for Non-Compliance and Right to Appeal

Every local authority in England is under a duty to enforce these requirements.

In respect of a breach of point 1 above, an agent can be fined up to £30,000.

In respect of a breach of points 2-4 above, an agent can be fined up to £5,000.

An agent can appeal against a decision to impose a penalty and the amount of the penalty.

Only one financial penalty may be imposed on the same property agent in respect of the same breach unless:

(1) the breach continues after the end of 28 days after the final notice is served and the agent hasn’t appealed the final notice within that period; or
(2) the breach continues 28 days after an appeal is finally determined (excluding the day on which the appeal is decided).

At the time of writing there are five government approved CMP Schemes:

(1) UK Association of Letting Agents (UKALA);
(2) Money Shield;
(3) Client Money Protect;
(4) Propertymark; and
(5) National Approved Lettings Scheme (NALS).

Agents will be required to pay an annual membership fee to join a CMP Scheme. The amount of the membership fee will vary depending on the sum of money that the agent holds from time to time.

Requirements vary from scheme to scheme, but the current approved schemes all require agents to:

(1) show that they have a designated client account in which to place client monies which is separate from their business account;
(2) Professional Indemnity Insurance; and
(3) Bank statements for the designated client account.

Are you already a member of a CMP Scheme? Have you had any problems joining a CMP Scheme?  As a letting agent/property manager operating in England, do you welcome these changes? Your comments are, as ever, welcome!

Updated ‘Fitness for Human Habitation’ Standard – Homes (Fitness for Human Habitation) Act 2018

The Homes (Fitness for Human Habitation) Act 2018 (‘the Act’) comes into force on 20 March 2019.

The Act introduces a new implied covenant in tenancy agreements (whether written in the agreement or not) that social housing landlords, private residential landlords, and agents acting on their behalf, must ensure that the property is fit for human habitation both at the beginning and throughout the tenancy.

These obligations extend to the property and all parts of the building (including any common or shared areas) in which the landlord has an estate or interest.

The Act gives tenants a direct cause of action against the landlord if the landlord fails to do the necessary maintenance. Prior to the Act, a tenant would have to rely on local authorities to challenge a landlord about the condition of their rented property.

Whilst the Act extends to England and Wales, its practical changes only affect properties in England.

The Act applies to any lease of a property of less than 7 years made on or after 20 March 2019.

The Act will initially only apply to new or reserved fixed term tenancies. It will apply to all periodic tenancies from the 20 March 2020.

Is Your Property ‘Fit for Human Habitation’?

It is ultimately for the courts to determine whether a property is fit for human habitation.

The question put to the courts is whether the property is so far defective in one or more of the following matters that it is not reasonably suitable for occupation:

  1. 1. Standard of repair;
  2. 2. Stability;
  3. 3. Freedom from damp;
  4. 4. Internal arrangement;
  5. 5. Natural lighting;
  6. 6. Ventilation;
  7. 7. Water supply;
  8. 8. Drainage and sanitary conveniences;
  9. 9. Facilities for preparation and cooking of food and for the disposal of waste water; and
  10. 10. Hazards prescribed in the Housing Act 2004.

Exemptions from the Implied Covenant

A landlord will not be held liable for breach of this implied covenant where a property is in an unfit state arising from certain instances including:

  1. 1. A tenant failing to use the property in a tenant-like manner;
  2. 2. The property is damaged as a result of a natural disaster (fire, storm or flood); or
  3. 3. Consent for works was requested but not obtained from a third party (i.e. superior landlord).

Consequences of Breach

This legislation is unlikely to affect most landlords who are already providing dwellings which are fit for human habitation; however, it is important that landlords ensure that they comply with these obligations as their tenants can now sue them directly if they don’t comply.

If the property is not fit for human habitation, the tenant has the right to bring a claim against their landlord for breach of contract and issue court proceedings against their landlord. It is possible that landlords could potentially be sued for damages for the entire length of the contract.

Next Steps

In order to ensure that you don’t fall foul of these obligations, the following best practices should be adopted by both landlords and letting agents:

  1. 1. Take photographic inventories at the start of the tenancy, during the tenancy (mid-term inspection), and at the end of the tenancy on check-out;
  2. 2. Landlords or agents should consider whether more frequent inspections are required to ensure the property remains fit for human habitation;
  3. 3. Keep a paper trail of all correspondence with the tenant relating to the repair and condition of the property (and use photos where possible to evidence the repair and condition);
  4. 4. Respond quickly and thoroughly to any requests, issues, or reports made by the tenant regarding the state of the condition of the property; and
  5. 5. In respect of common areas or other shared parts of the building owned by a third party, the landlord and/or letting agent should make sure these areas are kept in a state fit for human habitation.

Are you a landlord or letting agent? Are you concerned about the new powers the Act gives to tenants to sue landlords for breach of contract? Are there any steps or internal procedures that you will be adopting to ensure you do not fall foul of these obligations? Your comments are, as ever, welcome!

Brexit Notes: What Will a No-Deal Brexit Mean for Your Commercial Contracts?

No-Deal Brexit

As at the time of writing, the UK is due to leave the European Union on 29 March 2019 (as a result of having served a formal notice under Article 50 of the Treaty on European Union to terminate its membership of the EU), but whether this will be delayed or will take place in a ‘no-deal’ scenario it is still not clear. For the purposes of this post, we assume there will be an exit in a no-deal scenario, but this is a fluid situation that could change rapidly.

General Impact on Contracts of No-Deal

This note looks at the potential impact of a ‘no-deal’ exit on your existing and future commercial sales, purchases, or other contracts. (Note that it does not cover any contracts that you have with consumer customers.) Since contract terms will differ from contract to contract, and the subject matter and circumstances of each contract will also differ, it is impossible to provide any specific guidance or advice. We can, however, highlight some areas that you might need to focus on and so this note concentrates on a few issues that you should be considering.

Consider the Effect of No-Deal on Each of Your Contracts

In relation to an existing or a future contract, you will need to form a view as to whether Brexit might have an adverse impact, and whether that impact might be on you or on the other party to the contract. Whilst Brexit itself will have limited impact on contract law (except in relation to agency and other specialist types of contract), Brexit might have an effect in relation to the parties’ obligations set out in a contract.

Brexit might give rise to greater expense being incurred in order to perform the contract; for example, costs might rise due to new or increased (import or export) tariffs or customs checks applying to trading between the UK and the EU, due to currency exchange rates fluctuating, or due to there being restrictions on the free movement of people. In each case, this could affect the overall costs of buying or selling goods, products, or materials.

Brexit might make it more difficult or even impossible to perform the contract, or it might be that performing it will be commercially unattractive or that it will produce a different outcome from that required or expected by one or both parties. If a party is unable to perform a contract due to Brexit, it could find itself in breach of contract, and, as a result, liable for that breach.

Taking Steps to Mitigate Any Problems

We suggest that you consider firstly those contracts which will still be in existence when Brexit occurs (either on 29 March or any later date on which it is to occur), and secondly, contracts yet to be entered into either before or after it occurs.

Existing Contracts

Taking existing contracts first, if you conclude that a particular contract will be more onerous or expensive due to effects of Brexit, you might decide that you cannot afford to continue with it as it stands, or that, if possible, you would like to mitigate the adverse effects of Brexit on that contract.

What are your options, if any? If the contract has a termination clause allowing you to terminate in stated circumstances which include Brexit, you could use the clause to end the contract, but this will only be an option if the stated circumstances clearly cover Brexit.

You might instead consider renegotiating the contract if the other party is willing to do so.

If they are not, then you would do well to examine the contract to see if it is possible for you to unilaterally take some other step.

If you are seeking to be excused from performance of the contract and your contract includes a ‘material adverse changes’ clause (“MAC”), you might be able to demonstrate that a no-deal Brexit or its effects is an event or amounts to circumstances falling within the terms of the MAC clause, but all will depend on the precise wording of the MAC clause. If in effect you are looking to the MAC clause for relief from financial hardship due to Brexit, you would need to consider whether the MAC clause provides that relief. It might not allow relief where the relevant event (i.e. Brexit) was an anticipated one.

Many contracts contain ‘force majeure’ clauses which excuse performance where it is prevented or delayed by a cause beyond the reasonable control of the party relying on the clause, but it is more likely that you could make use of a MAC clause than a force majeure clause for several reasons.

Unlike a MAC clause, the scope of wording of a typical force majeure clause is confined to a case where it is not possible to perform obligations under the contract, not merely where it is more expensive or onerous to do so. In order to make use of a force majeure clause, a party would first have to show that when properly interpreted it clearly covered a no-deal Brexit, and that it covered Brexit as an event having a permanent, not temporary effect. Furthermore, a typically drafted force majeure clause would only allow reliance on it if a no-deal Brexit were not reasonably foreseen and the affected party could not reasonably have taken steps to avoid the adverse effect of it. It would seem very difficult to argue that Brexit could not be foreseen unless perhaps the relevant contract was entered into many years before it became apparent that it might occur. However, if the effect of Brexit were to make it impossible to perform the contract (a relatively rare case), it might be possible to make use of a force majeure clause. Where the clause does apply, you need to consider what relief it applies, for example, it might suspend the requirement to perform the particular obligation for a period or indefinitely, or it might give a right to terminate the contract.

Where the contract is incapable of being performed, it is possible, but very unlikely, that the doctrine of ‘frustration’ under the law of contract would apply. Where it does apply, the doctrine would have the effect of rendering the contract void. However, it is a very narrow doctrine and for it to apply, it would require the very purpose of the contract to have been removed by the occurrence of Brexit (i.e. the obligations would have to have been transformed by Brexit into something radically different or performance of the contract would have to be commercially sterile) or it would be physically impossible or illegal to fulfil the contract. Further, the relevant event (Brexit) must have been unforeseen by the parties as a possibility at the time of entering into the contract, and not covered by a term of the contract catering for the impact of Brexit. Although context will be important, then, only in quite rare cases will there be ‘frustration’.

Where there is no ‘frustration’ and there is no term written in the contract which helps in the circumstances, is it possible to argue that as a matter of law, a term is to be implied in the contract whose effect is to provide relief against some adverse impact of Brexit on the contract? This is very unlikely given the strict approach that the courts take when interpreting commercial contracts.

Future Contracts

Turning to contracts yet to be signed, if you conclude that carrying out the obligations under a proposed contract would or might be negatively impacted by Brexit, you might first consider the above points about existing contracts. If you reach the conclusion that you need to provide for some relief from certain effects of Brexit, then you would be well advised to include provisions in the contract catering for your needs. For example, you might insert a clause specifically referring to Brexit allowing for rapid termination of the contract upon its occurrence, or dealing with certain stated consequential effects of it. It might provide that no liability will arise from termination, or it might provide for financial adjustments to be made on termination. Alternatively, you might decide to include a MAC clause which states that it comes into play upon Brexit. If relevant, the MAC clause could provide a mechanism to adjust prices where tariff, customs, or exchange rate changes arise from Brexit. You might decide to include a force majeure clause which very specifically deals with Brexit.

It is worth emphasising, however, that the task of identifying what a Brexit clause should cover and then drafting it in a way that is effective to meet the particular requirements identified is not likely to be an easy one.

A possible option might be to enter into only a very short-term contract, but it might only mitigate and not necessarily avoid a problem arising on occurrence of Brexit.

It is also worth bearing in mind that one party (or even both parties) might not accept that Brexit should have any legal effect on the contract or give rise to any relief in relation to obligations under the contract. If that is the case, then, even if nothing in the contract states or suggests that Brexit might have an impact on the contract in any way, it would be prudent to include suitable wording in the contract whose effect is to make clear that Brexit will not have any effect on the contract.

Food for Thought

This is a complex subject, and we can only offer suggestions as to what you might need to address. A Brexit clause in a contract will not solve all Brexit-related problems. Your particular circumstances and the nature, subject matter, and terms of contracts will dictate what you should consider and what you might do, and as always, you should take professional legal advice in relation to existing and future contracts.

Brexit Notes: What will a No-Deal Brexit Mean for the Property and Real Estate Sector?

In answering this question, this post – the latest in our series of ‘no-deal’ Brexit Notes – will consider the impact of a no-deal departure from the EU on the legislative framework governing property ownership and transactions, as well as taking a brief look at the commercial impact on the property market.

Impact on the Legislative Framework

There has been minimal intervention from the European Union on the laws which govern how property is held in England and Wales. In short, leaving the EU will have little impact upon the legislation governing property ownership and transactions in England and Wales.

Some EU law does impact upon the way in which property is held in England and Wales, most notably the Energy Performance of Buildings Directive 2010 and the Energy Performance of Buildings (England and Wales) Regulations 2012 (EPB regulations), which implemented the EU Directive on the energy performance of buildings.

There will be a review of legislation which implements EU directives following our departure from the EU. It is unclear to what extent the UK government will depart from the EPB regulations and it is arguable whether indeed any change will be made to these regulations after Brexit. If any change is made it is unlikely to be made for some time whilst the UK Government addresses other more complex issues following Brexit.

Feeling Frustrated?

One other aspect that sellers or landlords need to be aware of, is whether Brexit is a ground upon which a buyer or tenant can argue frustration of a contract. If a contract is frustrated, it is incapable of being performed due to unforeseen events and consequently becomes void. A party to that contract would have to argue that at the time the lease or contract was signed, they had no idea that the UK would leave the EU and that the whole basis of their business and the contract was based upon the UK being an EU Member State.

There may be several reasons why a contract and/or lease cannot be performed as a result of Brexit.  This could be for regulatory, staffing, and/or financial reasons.

Individuals may also seek to get out of assured shorthold tenancies (ASTs) on the grounds of Brexit if, for example, their jobs cease to exist.

Commercial Impact on the Property Market

It is hard to predict what the impact will be on the real estate market due to the ongoing uncertainty of what Brexit will look like and the terms of our departure, which are to be agreed with Europe. There is likely to be some volatility. There is also a risk that a potential relocation of businesses from the UK to other countries is likely to affect supply and demand, which will impact upon pricing, and the property market will surely be affected by how the wider economy fares following our departure from the EU.

In summary, until there is some certainty as to the what the terms of Brexit will actually be, the impact upon the property market remains to be seen. There will be little impact upon the legislation governing property ownership and transactions in England and Wales, save for any regulations implementing EU directives, such as the EPB Regulations. What, if any, changes will be made to these regulations remains to be seen.

Are you a landlord or estate agent? Perhaps you are concerned about the potential impact of a no-deal Brexit on your commercial property? How are you preparing for Brexit? Your comments are, as ever, welcome!

Brexit Notes: No-Deal & Company Law

The UK is scheduled to leave the European Union on 29 March 2019 by virtue of having served a formal notice under Article 50 of the Treaty on European Union to terminate its membership of the EU.

At the time of writing, it is still not clear whether this departure will be delayed, accompanied by a ‘deal’ smoothing the exit through a transition period or whether the UK will leave the EU in a ‘no-deal’ scenario.

This note focuses on the potential company law impact to UK private limited companies of exiting the EU in a no-deal scenario. It is important to remember that this is a fluid situation with events changing rapidly; however, the good news for UK incorporated private limited companies is that whilst many other legal areas may be subject to quite significant change, UK company law is not expected to be immediately affected even in the event of a no-deal exit.

The Companies Act 2006

The key legislation governing and regulating English and Welsh companies is the Companies Act 2006. This includes the types of companies that can be incorporated, their liability, the role of Companies House, directors’ duties, and the rules on accounts and audit. Whilst some parts of the Companies Act 2006 are derived from EU Directives such as shareholder rights, the majority of English company law is not derived from EU legislation. The Companies Act 2006 will, therefore, continue in force as at present and no-deal will not of itself change the legal status of UK incorporated companies. However, the company law form of a European Company (‘Societas Europaea’) will no longer be available in the UK.

Third Country Companies

Notwithstanding the expected limited effect on private limited companies, it is worth noting that following Brexit, UK incorporated companies will become ‘third country’ entities as far as European law is concerned. The significance of this is that Member States will not be obliged to recognise the legal personality and limited liability of companies which are incorporated in the UK but have their central administration or principal place of business in another EU Member State. There may be recognition by individual Member State’s national laws or under international law, but this is a point of uncertainty.

UK companies being considered third country entities will also affect a UK company’s ability to undertake a cross-border merger within the EU and rely on group company account exemptions if it has an EU parent. Similarly, UK incorporated companies with branches in other EU Member States will no longer benefit from favourable rules applicable to branches of third country companies. These are, however, issues that will most likely affect large companies or listed PLCs, rather than SMEs operating solely within the UK.

Trading and Commercial Impact

As the legal impact (at least initially) is expected to be limited, probably the biggest issue that UK private limited companies face is the commercial uncertainty that Brexit and particularly a no-deal Brexit may bring.

As yet, no one knows the trading terms that will take effect post-Brexit, and this could lead to both broader economic uncertainty within the UK as well as specifically impacting certain companies whose business model and strategy is more vulnerable to certain goods and exchange rate fluctuations. This is of course not something that anyone can yet predict with any certainty.

UK companies can therefore only adopt a ‘wait and see’ approach whilst trying to be aware of the vulnerabilities that their companies may face in the light of a potential no-deal Brexit.

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