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HCR Law Events

21 November 2022

Real estate issues in the education sector

The Real Estate Disputes team at HCR focuses on advising clients on how to avoid, manage and resolve real estate issues and disputes. We only use court proceedings, arbitration or references to independent experts or mediation where appropriate, and cost effective, to achieve the client’s goal.

Given the ongoing stressful economic environment, parties to real estate documents, especially leases, are focusing on how to minimise or avoid liabilities. On the other hand, they may be seeking to maximise income and/or capital returns, oftentimes resulting in issues, if not disputes, between the relevant parties.

The types of hot issues on our desk in the current climate include the following:

Exercising break clauses to terminate a lease early

Issues that can arise are whether the break is conditional, and how and when the conditions need to be satisfied. Further, is the break notice valid and effective and has it been served on the correct parties and in accordance with the lease provisions. The exercise of a lease break is seen by the courts as a privilege, and the terms of the break provisions will be interpreted strictly, giving little or no room for error, which can be a very expensive mistake if the lease continues to run for many more years. If your school is considering entering into a lease, you should consider the requirements set out in the break clause and seek advice to ensure effective notice.

Claims for breach of the tenant’s repair covenants at lease expiry.

In broad terms, landlords will be prone to exaggerating the claim for disrepair and tenants tend to understate it. What is required is a proper analysis of what disrepair exists at the premises and whether it properly falls within the tenant’s repair obligation, what works of repair are reasonably required to remedy the disrepair and their cost.

Where appropriate, and to take advantage of statutory caps on damages payable for breach of repair obligations, there should also be a calculation undertaken of whether the value of the landlord’s property interest has actually been diminished as a result of the tenant’s disrepair, and the tenant’s liability will be capped to that diminution in value figure.

For example, if the cost of repairs is £75,000 but the diminution in value as a result of that disrepair is £20,000, the maximum damages recoverable from the tenant will be £20,000. Similarly, using the same example but if the diminution in value is £0, no damages will be recoverable. Furthermore, if, for example, the landlord at or shortly after the lease expiry intends to carry out works which would render valueless the repair works to be undertaken, then no damages for those repair works will be recoverable. An extreme example: if the landlord intends to demolish and redevelop the premises, no damages for disrepair are likely to be recoverable.

Another consideration is whether the tenant will want to carry out the repair works themselves – is there sufficient time remaining under the lease to be able to undertake those works? – at, most likely, a lower cost than the landlord doing so instead. Alternatively, the tenant might prefer to forgo the hassle of organising and undertaking the repair works and seek to negotiate a payment to the landlord in full and final settlement (to be properly documented) of the repair obligation.

Separate from repair obligations could be a liability for the tenant to reinstate and make good the premises before the lease expiry in respect of alterations undertaken by the tenant many years previous. Is the obligation to reinstate only triggered if the landlord requires reinstatement? If so, what is the deadline for this? How long will it take to undertake the reinstatement works, including preparation of specifications for those works, a tender process and then a chosen builder’s availability to do the works? How much time is left before the lease expires to undertake them?

Statutory lease renewals

We are also seeing harder fought statutory lease renewals, with tenant’s seeking break clauses, rent-free periods and restricted rent reviews to be incorporated in the new lease in addition to a low rental figure.

What is important, whether in respect of lease breaks, disrepair, reinstatement, or lease renewals, is for schools to ensure that there is sufficient time available before the contractual lease expiry or break date to assess properly the best route forward, and there being sufficient time to implement the chosen option. In broad terms, a review of the situation about 18 months before lease expiry or a break date is generally prudent. A late review could result in the best option no longer being available, there now being insufficient time to implement it, resulting in increased amounts being payable and/or permanent loss.

If schools have any specific queries or concerns in relation to real estate, they should get in touch.

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About the Author
Andrew Walker, Partner, Head of Real Estate Dispute Resolution

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