The UN describes “access to justice” as “a basic principle of the rule of law”. While an adaptable term, it most commonly invokes the need for access to the courts and the ability of all citizens and corporates to exercise their legal rights.
It is probably fair to say that the concept is not one which most of those who operate in the real estate sector, including lawyers, ever had much reason to contemplate. Tenants had the right to operate businesses from properties they had legally rented. Equally, parties to property contracts which were breached could take various types of legal action.
Covid-19 response
All of that changed in March 2020 when the UK government implemented its legislative and procedural response to the Covid-19 crisis. That response seriously restricted most commercial tenants’ ability to operate businesses from property they had rented and also limited the remedies available to both commercial and residential landlords against defaulting tenants, including forfeiture for non-payment of rent, the ability to pursue claims for possession of land, and the ability to serve statutory demands, present winding-up/bankruptcy petitions and to exercise commercial rent arrears recovery.
The British Property Federation articulated concerns that there were no incentives for tenants to pay rent or agree concessions, and also that decreased rent collections could result in widespread breaches of landlords’ borrowing covenants (with no legal obligation requiring lenders to exercise forbearance). The BPF warned that such issues could ultimately impact investor sentiment in the UK.
Fortunately, the worst of those projections did not materialise. Nonetheless, for nearly two-and-a-half years (the last of the legislative interventions only expired, in effect, in September 2022), the sector endured unprecedented restrictions, in one form or another, on its stakeholders’ ability to access justice.
At the very least, that shared experience has opened a debate about the critical (and often-neglected) importance of access to justice in real estate and what can be done to improve it so the sector can continue to prosper.
Business lease renewals
Where business lease renewals are unopposed, parties tend to be able to negotiate and agree terms of the renewal lease without taking legal action. However, in some cases parties do need to rely on the established court procedure to have the terms of the renewal lease determined by the local county court. That process is often neither quick nor efficient. A programme of closures of many county courts, case volume levels, cuts in legal aid and the way in which lease renewal claims are case-managed mean that it can take over a year for an unopposed lease renewal claim to reach trial. Even then, a specialist property judge may not hear the claim at trial.
To address those issues, a pilot scheme was launched in 2018 by which unopposed commercial lease renewals issued in the County Court at Central London would be transferred to the First-tier Tribunal (Property Chamber) for determination. The Property Chamber is one of seven specialist chambers structured around particular areas of law. Claims are managed by a compressed directions timetable and heard by specialist judges.
The pilot received positive feedback and is now permanent. It is an example of how specialisation and innovation can be utilised to improve access to justice in the sector.
Litigation funding
Litigation funding involves a third-party investor funding a claim, or portfolio of claims, in return, usually, for either a share of the proceeds of the litigation or a fixed return. It has various benefits.
First, it takes all litigation costs off balance sheet: the funder pays the claimant’s legal fees and procures an insurance policy for the claimant to insure against having to pay an opponent’s costs if the claim fails. Secondly, it monetises an asset (the proceeds of the claim), which may otherwise never be realised due to the costs and financial risks of pursuing litigation. Thirdly, funders have sophisticated underwriting procedures (and, usually, high success rates). If they agree to fund a case, it suggests the underlying merits of the case are strong.
Litigation funding secures effective access to justice. Lord Neuberger, the former president of the Supreme Court, has described the funding of litigation as “the life-blood of the justice system”.
There have been substantial inflows of capital into the UK litigation funding market. However, it has not yet penetrated the real estate sector. In many respects, that is something of an anomaly, particularly given that litigation involving real estate is both varied and widespread.
For example, a purchaser unable to sue for specific performance of a sale contract due to lack of funds or a “David” unwilling to sue a “Goliath” following an unambiguous breach of a property contract due to fear of being out-spent would both benefit from single-case funding arrangement.
Equally, an institutional landlord, who routinely makes sub-optimal decisions when settling dilapidations claims due to fear of pursuing those claims and thereby tying up too much capital via legal fees, which could otherwise be better invested in its core business, would benefit from a portfolio-funding arrangement.
In the stage of the economic cycle which the UK has now entered, more property contracts are likely to be breached while pressure on cashflow and corporate and personal insolvencies in the sector are likely to increase. Any decline in capital values and/or downward pressure on yields will precipitate the need to move quickly to sustain, or at least stabilise, returns on investment.
The ability to pursue property-related claims, while limiting downside risk, and to monetise otherwise unmonetised assets (legal claims), could be a focal point. Again, this underscores the importance of innovation and access to justice in the sector, and is one factor which may contribute to driving or sustaining investor returns even in the face of economic headwinds.
Richard Bartle is a partner and Ian Whitehead is an associate at Pinsent Masons LLP
