Yearly Archives: 2021

Following up on September’s post, New Rent Debt Ring-Fencing Legislation, (which looked at the Government’s intention to set out legislation to deal with commercial rent arrears built up during the pandemic), this post looks at the Government’s much-anticipated draft Bill to address this issue.

The Bill (expected to come into force in England and Wales from 25 March 2022), introduces a binding arbitration procedure for landlords and tenants who cannot reach an agreement on how to deal with the rent arrears.

There has been lots of hype and commentary surrounding the Bill. This post sets out the key points from the Bill. Note that this is subject to change as the Bill progresses through Parliament.

Commercial landlords should be aware of the proposals as these are likely to impact negotiations with a tenant and what enforcement action a commercial landlord may consider in the future.

The Arbitration Procedure

1. Once the Bill becomes law, there will be a six-month window within which either party can refer the matter to arbitration.
2. One party states their intention to refer the matter for arbitration to the other (which is to be supported by a proposal for how to resolve the debt). The corresponding party then has 14 days to respond. Upon receipt of a response (or at the end of 28 days from notifying the respondent), the first party may refer the matter for arbitration which must be accompanied by a formal proposal for how to resolve the debt.
3. The arbitrator will consider the matter and make a binding award which may:
– Write off the whole or part of the debt;
– Give the tenant time to pay (up to a period of 24 months from the date of the award);
– Allow the tenant to pay by instalments; and/or
– Reduce the interest which has accrued, or which may be written off.
4. The arbitrator may dismiss the referral if the tenant’s business is not viable (or would not be viable even if an award were made), or the debt in question is not a ‘protected rent debt.’
5. In making the award, an arbitrator is required to follow certain principles and may consider certain factors which are set out in further detail in the new Code of Practice (which is discussed below).
6. The arbitrator must make their award within 14 days of a hearing, or as soon as reasonably practicable.
7. Each party must incur their own legal fees. The initiating party must pay the arbitrator’s fees, but once an award is made, the cost may be split between the parties unless decided otherwise by the arbitrator.

Protected Rent Debts

1. A matter can only be referred to arbitration if it relates to a ‘protected rent debt’, which means the debts arose because of the closure of and/or severe restrictions placed on businesses during the pandemic.
2. The period of closure starts from 21 March 2020 and ends on the earlier of:
a. 18 July 2021 (England) and 07 August 2021; or
b. The last day on which the relevant business was subject to restrictions (these are set out in the new Code of Practice). Periods in between where businesses were allowed to trade are to be included.
3. Principal rent, interest, service charge, and VAT can be protected rent debts.

Temporary Moratorium

This Bill is due to commence from 25 March 2022 to coincide with the expiry of the current moratorium on forfeiture proceedings and restrictions on the exercise of Commercial Rent Arrears Recovery (CRAR). There will be a temporary moratorium, which means landlords will not be able to:

1. forfeit the lease;
2. exercise CRAR;
3. serve a winding-up petition;
4. serve a bankruptcy petition;
5. issue debt claims; and/or
6. draw-down on the tenant’s deposit,

in relation to protected rent debts until an award has been made by the arbitrator, or until the six-month window has passed and no arbitration has been sought.

A key point to note is once the Bill becomes law, if a debt claim was made for protected rent debts on or after 10 November 2021, either party can request that the claim be stayed. If a judgment was made (for protected rent debts) on or after 10 November 2021, it will not be enforced.

New Code of Practice for Commercial Property Relationships Following the COVID-19 Pandemic

A new code of practice (which replaces the current code) now applies to negotiations between landlords and tenants dealing with rental arrears. The code also sets out a framework for the arbitration process and how this will work once the Bill becomes law. The code is not binding, but the Government strongly advises that the parties follow it.

This post is a high-level summary and only covers the key issues. A link to the code can be found here.  The Bill can be found here.

The Government is also asking people who have expertise or a special interest in the Bill to submit their views to the House of Commons Public Committee. A link to the consultation can be found here. The consultation closes at 5.00pm on 16 December.

We will continue to monitor the progress of the Bill through Parliament and will publish further updates as and when necessary.

When the Covid-19 pandemic began, thousands left their workplaces behind and began working from home. Over the past 18 months or so, working from home has not only become commonplace but now, as employees return to their normal places of work, it has become the preference for many. Working from home has made the long-elusive work-life balance much easier to strike. In many cases, working conditions are more comfortable and convenient, common workplace annoyances are reduced or even removed, and according to some studies, productivity rates have improved (in the interests of balance, however, it should also be noted that there are those who say the opposite).

Whatever the productivity merits, there are some employees who have become so attached to working from home that – according to a recent opinion piece in The Guardian (available here) – they are prepared to accept pay cuts to continue working at home instead of returning to the office. The merits of this approach warrant their own discussion, which we will save for another time. What is important, though, is that if greater numbers of employees are likely to make a permanent switch to working from home, some formalities that might have been overlooked in the scramble to lockdown last year must be addressed.

One of those formalities is copyright and intellectual property more broadly. The default position on copyright ownership is that works created by employees in the course of their employment belong to their employer unless there is an express agreement to the contrary (for example, a provision in an employment contract). In the case of self-employed consultants, the default position for commissioned copyright works is that the creator of the work is the owner, unless it is agreed otherwise in writing. Whether a commissioned work is assigned to the commissioning party or merely licensed to them should be dealt with in the contract.

So far so good. What happens, though, when an employee is working from home and creates something outside of their normal working hours, using their own computer?

Penhallurick v MD5 Ltd

Earlier this year, the High Court considered a case in which a former employee of MD5 Ltd, Mr Penhallurick, had developed a piece of software for use in forensic computers along with a graphical user interface and a user guide. Much of the work had been done outside of Mr Penhallurick’s normal office hours, at home, and using his own computer. The court nevertheless held that MD5 Ltd owned the copyright in the works in question.

A key factor in this decision was the fact that Mr Penhallurick’s normal job duties entailed the creation of the same kind of software. Consequently, there was a “strong and primary indication” that this work, even though it was outside of his normal hours, undertaken at home, and using his own computer, nevertheless formed a part of the course of Penhallurick’s employment.

“…in my view the place where the employee chooses to do the work will not generally make any difference. The same applies to the ownership of the tools the employee chooses to use.” – Judge Hacon

It is also important to note that the work in question was undertaken several years ago, long before the massive growth in working from home caused by the pandemic. If this reasoning applies to work undertaken at home under “normal” circumstances, then one would arguably expect it to be even more likely to apply to work undertaken at home under “new normal” circumstances. (Author’s note: Sorry, you knew we were going to say “new normal” somewhere here, didn’t you?)

With this in mind, then, whether you are dealing with an employee or taking on a contractor, it is important to consider copyright ownership from the beginning, particularly where the individual concerned will be creating some form of copyright works for you. Ensure that a proper contract is in place which clearly defines the individual’s role and duties and, if necessary, addresses copyright ownership and any other applicable IP rights.

If working from home is set to remain a preferred and more common way to work, be it fully or partly with time divided between home and the office, it is even more important to be clear on what constitutes “work in the course of employment”. Working from home is inherently flexible. In many cases, it makes little difference to an employer or to the resulting work whether it is done at 3pm or 11pm. If an employee’s previous office hours were 9am to 6pm, however, there is potential for confusion unless their contract of employment is amended accordingly.

Last year, we witnessed a proverbial stampede for the exit as employees left their offices behind and set up shop on the sofa with a laptop, clad in their finest pyjamas. Understandably, there was insufficient time (not to mention considerable panic and uncertainty over what damage the virus might do to businesses and the global economy as a whole) to get the formalities and legalities in order. Now, however, it is time to take a step back and get things sorted out.

New Legislation to Ringfence Commercial Rent Debt Accrued During the Pandemic

The Government has announced that they will introduce new legislation to deal with the commercial rent arrears which have built up as a result of the Covid-19 pandemic.

The legislation is expected to be introduced before the end of the moratorium on forfeiture proceedings for non-payment of rent (25 March 2022).

The key proposals are as follows:

• To ringfence commercial rent arrears that built up since March 2020 (due to business closures), until restrictions for their sector were lifted. Once the arrears are ringfenced, landlords will not be able to forfeit the lease for non-payment of these arrears or take insolvency proceedings against the tenant for this debt.
• To encourage landlords and tenants to negotiate in good faith and reach a solution where possible, using the principles set out in the revised Code of Practice (referred to below).
• Landlords are expected to “share the financial burden with tenants” and “defer or waive entirely an appropriate proportion” of those ringfenced arrears.
• Where the parties can’t agree on how to settle the rent arrears, the last resort will be for the parties to undertake a binding arbitration.
• The voluntary Code of Practice introduced last year will be revised and strengthened to set out the principles that the parties and arbitrators should follow, and the revised Code will become mandatory by putting it into legislation. If parties don’t negotiate in good faith, they may be penalised.
• To ensure that tenants should pay any rents which accrued before the pandemic and any rents payable since the restrictions were lifted. Now that all restrictions have been lifted, tenants in England should be paying their rents henceforth.

At this stage, the Government has only made an announcement and the finer details of the proposed legislation are not yet known. Many questions remain unanswered, for example:

• How will the ringfencing of rents work in practice?
• When are the restrictions deemed to have been lifted?
• The restrictions were not continuous, so how will the Government treat those periods where lockdown was eased for a few months?
• Will those businesses which were not forced to close, but which have been indirectly affected by the pandemic be able to benefit?
• Precise details of how the arbitration process will operate in practice are also not yet known.

Both parties will have to wait for further details to find out exactly what is proposed under the legislation. Tenants should continue to pay their rent where they are able to do so. Where tenants cannot pay their arrears, the Government is encouraging the parties to come together to negotiate in good faith and find solutions as soon as possible.

Changes to the IR35 rules came into effect on 6 April 2021. This has caused quite a commotion but why, and should you be concerned? In this post, we will explore the latest changes and their impact.

Media coverage of the impact of the changes

Much of the media coverage over the past months about the IR35 rules has concentrated on the effect of the changes to the rules rather than the IR35 regime as a whole. Various commentators have been emphasising that not only freelance individuals but also their business clients need to consider the impact of the changes on them. In particular, the media have quite rightly focused on whether and how freelancers and their clients are affected by the rule changes, and what action they need to take in response.

If you have seen some of that coverage, you might be forgiven for concluding that the changes will affect all freelancers and their clients from 6 April 2021. We wonder whether the media coverage has focused too much on where the rule changes do impact on the world of freelance work without also clarifying those who won’t be affected.

To redress the balance, we invite you to consider the following situations in which, although the IR35 regime does or might apply, the rule changes themselves will not have any impact on a freelancer and/or their clients.

To keep things simple for our present purposes, we will look only at private sector clients. (Other rules apply to public sector clients.)

Where do the changes not impact on freelancers and their business clients?

If, as a freelancer, you only work for a client as a self-employed individual but do not provide your services to them through a personal services company (“PSC”) or other intermediary company, IR35 rules (pre- or post-April 2021) do not impact on how you have to be paid by a client. In short, IR35 will not apply to you or your client at all if you do not use any type of intermediary company. You will, however, still need to satisfy yourself and HMRC that you are genuinely self-employed, and not in law an employee of a client in order to be paid gross by your client.

So, do IR35 rules apply to a freelancer and/or their client where the freelancer does work for them through a PSC? Possibly. The IR35 rules both pre- and post-6 April can, but do not necessarily, still apply to them. However, there is a distinction between the pre- and post-April situation, as follows.

The new rules only relate to the mechanics of determining a freelancer’s status

The rules both pre- and post-April are concerned with the status of the freelancer, namely whether or not they are to be treated as if they were employed rather than self-employed, and the consequences to how they are to be paid where they have to be treated as if employed. The effect of the 6 April rule changes is to add to that pre-April regime an additional layer of rules which apply in some cases. The changes are not about whether the freelancer is to be treated as if employed or self-employed, but instead on how that status is to be ascertained. In some cases – outlined below – but only in those cases, instead of the PSC having to determine that status, it is the client’s responsibility to do so, where so required by the changes.

This switch in responsibility to the client only applies where it is “medium” or “large”. Factors such as size, turnover, etc. of the individual freelancer and their PSC (and any other intermediary companies) are not relevant for this purpose.

The key test of whether the rule changes affect the freelancer or the client is whether the client is “small”. If it is, the PSC has the legal responsibility to determine the freelancer’s status vis-à-vis that client, just as the PSC did before 6 April. As you will see from the test outlined below, many of our customers and other readers will be “small” business clients, or they will be freelancers or PSCs working for business clients who are “small”. In that case, the changes do not affect them in relation to a work engagement. A client is small if it is in the private sector and at least two of the following apply to it:

• its annual turnover is less than £10.2 million;
• its balance sheet total is less than £5.1 million;
• its employees number less than an average of 50 in the year.

Does IR35 apply at all if the client is exempt as “small”?

Where the exemption applies, it only has the effect of releasing the client from the duty under the post-April IR35 rules to determine the freelancer’s status. In other words, the “exemption” does not take the IR35 regime out of the picture altogether. This means that even if the client is “exempt”, the pre-April IR35 rules will still apply where they require the freelancer to be treated as if employed, with the result that the client has to pay the PSC less PAYE deductions.

Conversely, if the exemption does not apply, it is the client under the post-April IR35 rules that has to determine the freelancer’s status under the pre-April IR35 rules. However, if the client then determines that the freelancer is to be treated under the pre-April IR35 rules as self-employed, the client can make gross payments, i.e. it will not have to pay the PSC less PAYE deductions.

In short, whether the client is exempt and what the freelancer’s status is are two separate questions. The freelancer’s status has to be determined in each case according to the same criteria, and the question of exemption is only relevant to ascertain whether it is the client or the PSC which has to determine the freelancer’s status.

Conclusion

Views about the IR35 regime as a whole cover a broad spectrum. Many who are in favour of the IR35 regime (including the new rules) may hold that view because they are not themselves freelancers, PSCs, or clients of either, and they are not burdened with its direct effects. They simply see IR35 as a good and effective measure to prevent tax avoidance by freelancers. At the other end of the spectrum, many freelancers using PSCs and their clients see IR35 as an unfair set of measures, and would gladly abolish IR35 completely.  Freelancers and their clients alike see IR35 as creating an unacceptably high tax bill for freelancers and a heavy administrative burden for freelancers, PSCs, and their clients.

IR35 and self-employment template documents and guidance notes

We have a wide range of materials on our website which can help you with IR35 and self-employment issues. We recommend that you read our business information pages which you can see here: Business Information pages on Employment and Self-employment and here: Business Info on IR35 and that you also look at our guidance notes and range of template documents that you can use to create forms of agreement between a client and a freelance worker or intermediary company which you can see here: Self-Employment and Freelancer Contracts and here: IR35 And Other Company Contracts. These templates also include a form of IR35 Status Determination Statement template which is designed to save time when a client has to complete a status determination statement to comply with the post April 2021 IR35 rules.

The Renting Homes (Amendment) (Wales) Bill gained Royal Assent on 07 April 2021 (‘the Amendment Act’). The Amendment Act amends certain provisions of the Renting Homes (Wales) Act 2016 (‘the 2016 Act’). The 2016 Act (when it comes into force) will significantly reform housing law and practice in Wales. No date has been set for when the 2016 Act will come into force, but it is expected to come into force early 2022.

The Amendment Act gives residential tenants in Wales greater security. Residential tenancies in Wales will change to give tenants:

• A minimum 12-month contract;
• Minimum notice periods to evict tenants will be extended from two to six months in the case of “no fault evictions” (section 21); and
• Landlords will only be able to serve an eviction notice six months after tenants have moved in (as opposed to four months).

A tenant will therefore be able to move in and spend a year in a property before the landlord can take possession.

When the 2016 Act comes into force, it will simplify and standardise tenancy agreements to make them easier to understand and reduce legal costs. Some of the key provisions of the 2016 Act are as follows:

• Create a new model written statement, a “standard occupation contract”, modelled on the present assured shorthold tenancy (AST);
• Many licences will be converted into occupation contracts;
• The occupation contracts will include certain terms that cannot be varied unless the variation improves the tenant’s or licensee’s position; and
• It will introduce a new tenancy deposit scheme which will apply to all occupation contracts.

Consultation

The Welsh Government has the power to prescribe model written statements and has now launched a consultation seeking views on:

• The draft Renting Homes (Model Written Statements) (Wales) Regulations; and
• The draft Renting Homes (Explanatory Information for Written Statements) (Wales) Regulations

Any interested parties can respond to the consultation and views are being sought on the design, structure, and order of the draft model statements and explanatory information. The terms of the statements are pre-determined (by the 2016 Act). You can read the consultation document and respond online here. The consultation closes on 16 June 2021.

The aim of the 2016 Act is to streamline the housing process in Wales; however, opinion is divided with some stating that these changes will significantly inhibit a landlord’s ability to recover possession even from a problem tenant. This is likely to have a negative consequence for the wider sector with landlords leaving the market when demand for lettings is high.

The Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020 (‘the Regulations’) require landlords in England to have the electrical installations in their properties inspected and tested by a person who is qualified and competent, at least every five years. Landlords have to provide a copy of the electrical safety report to their tenants and to their local authority, if requested.

Most tenancies are caught by the regulations, although a number of tenancies, including long leases, tenancies granting a right of occupation for a term of seven or years or more, social, or resident landlords, care homes, and licences for lodgers (where the occupier is sharing accommodation with the landlord) are excluded.

The Regulations came into force on 1 June 2020, requiring all landlords who took on new tenants from this date to have all fixed electrical installations inspected and tested by a qualified person before the start of the tenancy.

Landlords of existing tenancies (signed before the Regulations came into force on 1 June 2020) must now also ensure that all fixed electrical installations in their properties are inspected by 1 April 2021. It does not appear that this deadline will be extended, despite the complications caused by the current pandemic. Landlords who fail to comply with the Regulations are liable to face fines of up to £30,000.

Since the Regulations came into force, the Government has issued guidance for landlords on these Regulations which can be found here.

Due to Covid-19, it is more complicated for Landlords and agents to enter properties and carry out inspections, tests, and any remedial work. Landlords and agents should ensure that they have taken all reasonable steps to comply with the Regulations as well as complying with the Government’s safety guidelines for people who work in other people’s homes. Landlords and agents should keep a paper trail of all documentation and correspondence they have had with tenants and electricians regarding these works, and any responses they receive.