Autumnal Real Estate Update 2023

High nitrate levels in freshwater and coastal habitats can damage protected sites by encouraging the excessive growth of certain plants and algae via a process called ‘eutrophication’. This harms water quality, thereby causing die-offs of other plants and impacting on the animals and wider ecosystems linked to that water.  Under the  Conservation of Habitats and Species Regulations 2017 , local planning authorities are tasked with assessing the environmental impact of planning applications and local plans which may affect these protected sites.  They can only approve new residential development if it can achieve ‘nutrient neutrality’, which is when the nutrient loads within the additional wastewater and surface water which will be created by the development are mitigated as part of the scheme, by for instance creating new wetlands to strip nutrients from water or establishing buffer zones along rivers and other watercourses.  This requirement is said to have had a significant negative impact on the number of homes granted planning permission. 

In August, the Government announced that it planned to introduce an amendment to the Levelling Up and Regeneration Bill that would remove this requirement in order to allow for the delivery of more than 100,000 new homes.  It would then expand the Nutrient Mitigation Scheme run by Natural England, doubling investment to £280 million.  However, this amendment has been rejected by the House of Lords, leaving developers frustrated with the uncertainty that they now face.

That may not be the end of the story, however.  There have been recent suggestions that the Government, unbowed, are considering a new Bill to address nutrient neutrality requirements.  It remains to be seen whether that does, in fact, come to pass.

The Government has recently consulted on the possible introduction of a new onshore fund vehicle, the "Reserved Investor Fund (Contractual Scheme)" (RIF).  The RIF would be transparent for tax on income and not subject to tax on gains, with transfers of its units being free from stamp taxes. The basic position is that investors would only be subject to gains tax when they dispose of their units, but the Government is concerned that this could lead to loss of tax from non-residents and so is proposing potentially restricting the situations where the basic position would apply.

The eligibility criteria for RIF status would include that it is both a “collective investment scheme” and an “authorised investment fund” (AIF) for regulatory purposes, and that it either (i) is not closely held, (ii) is only closely held due to the presence of certain institutional investors, or (iii) meets requirements to be widely marketed and made available to certain categories of investors.

As the RIF will be unauthorised (although its manager will be subject to the AIF regulations), it should be flexible and easy to use. This, combined with the generous tax treatment being proposed, should make it attractive for investors in UK real estate. However, it will be important that in its (understandable) desire to address loss to the Exchequer, the Government does not add undue complexity which is not present in rival offshore structures (such as the JPUT) to ensure that the attractiveness of the RIF is not undermined.

Under the proposals the RIF would be available to professional investors, as well as those who invest at least £1m (or have already invested in it). 

Following on from changes to the REIT regime made in April 2022 and 2023, in July, the government published draft legislation (for inclusion in the next Finance Bill) for a further batch of reforms.  The measures are generally aimed at making the regime more attractive, for example:

I. Making it possible, when applying the exemption from the close company condition for "institutional investors", to trace through intermediate holding companies; and

II. extending the REIT's tax exemption for gains on disposals of interests in UK property rich companies to apply to disposals of interests in UK property rich Co-ownership Authorised Contractual Schemes (CoACS).

However, the proposals also include provisions restricting the ability of certain funds to benefit from the use private REITs unless those funds either (i) meet the "genuine diversity of ownership test" or (ii) are not closely held (or are only closely held because of the presence of an institutional investor).

In June 2023, the Competition and Markets Authority (the "CMA") published information about the actions it has taken to protect supermarket shoppers by securing agreements from Sainsbury’s and Asda to stop using unlawful anti-competitive land agreements, such as placing restrictions on land they own to stop it being used by a rival supermarket, or negotiating restrictions to stop their landlords granting leases to competing stores in the same vicinity as their existing supermarket.  These activities breach the Groceries Market Investigation (Controlled Land) Order 2010 (the "Order") which was introduced in order to stop supermarkets imposing new restrictions that stop rivals from opening competing stores nearby.  Sainsbury’s has agreed to remove the outstanding restrictions the CMA identified from its land agreements, and Asda has already removed the offending provisions from its land agreements.

The CMA stated that it is enforcing these rules so that shoppers have more choice and so benefit from a wider range of groceries and access to cheaper prices.  This is a good reminder for retailers and their landlords that exclusivity provisions (whereby a landlord agrees with a retail tenant not to allow another retailer to operate from the same site, or to otherwise restrict or limit the sale of certain goods from the site) or other restrictive agreements that could prevent, restrict or distort competition could breach the Order in the context of supermarkets and grocery retailers, and/or could breach general competition law rules (and therefore be void) in the context of other categories of retail.

In June, the Supreme Court handed down its judgment in the case of Merton LBC v Nuffield Health [2023] UKSC 18.  This case concerned sub-sections 43(5) and (6)(a) of the Local Government Finance Act 1988, which specifies that local authorities must give 80% relief from non-domestic rates in relation to premises which are occupied by a charity and used wholly or mainly for charitable purposes.

Nuffield Health acquired Merton Abbey Gym on 1 August 2016, when it bought the business of Virgin Active.  It applied to the London Borough of Merton Council (“the Council”) for mandatory and discretionary rate relief.  The Council initially granted mandatory relief but then withdrew it because it decided that the membership fees were so high that people of modest means would not be able to access the gym, and that therefore it was not being wholly or mainly used for charitable purposes because the requirement for public benefit was not satisfied. 

The High Court and the Court of Appeal agreed with Nuffield Health and decided that the charity is entitled to the mandatory 80% relief from non-domestic rates in respect of Merton Abbey.  The Council then appealed to the Supreme Court, which agreed with the previous decisions.  The Supreme Court considered that the activities at Merton Abbey were directly for the fulfilment of Nuffield’s charitable purposes of promoting health through exercise, and spelt out that section 43(6) of the Local Government Finance Act 1988 should be analysed in two stages:

1.      First, is the ratepayer a charity?  If an entity is a registered charity, like Nuffield, then it is assumed that its various activities, when looked at in the round, are charitable, rather than having to examine what it does on each site on which it operates.

2.      Secondly, is the hereditament being used for the purposes of the charity?  This is a factual question rather than a legal one.

Even if the cost of membership at Merton Abbey was too high for those of limited means, Nuffield's activities were charitable as those of limited means were not excluded from its overall activities.  The decision confirms that registered charities that operate several premises will be able to get rates relief without having to show that the activities on each site would have qualified as a charity when viewed individually.

Meanwhile, the British Property Federation (“BPF”) has released new evidence showing that less than one in ten empty shops is re-occupied within six months and almost a third lie empty for more than two years.  They say that this demonstrates the extent to which the current 3-month empty rates relief does not reflect current market conditions, and has called on the Government to extend the period of business rates relief for empty properties from 3 months to 12 months and to reintroduce a 50% rate cut for long-term empty stores.

The Building Safety Act 2022 overhauls the existing health and safety regulations for residential buildings and is intended to give residents more rights, powers and protections.  Here, we remind you of two aspects of this new regime:

4.1.1 The Building Safety Levy

Clause 58 of the Building Safety Act 2022 is expected to be brought into force this Autumn. This will implement the Building Safety Levy, also sometimes referred to as the "Gateway 2 Levy". This will be payable by developers of new residential buildings in England that are 18 metres or more in height or at least seven storeys tall (unless excluded) and must be paid during the pre-construction stage.

4.1.2 The register of higher-risk buildings

Occupied higher-risk buildings (or those that could be occupied) must be registered with the Building Safety Regulator ("BSR") by 1 October 2023, and it is an offence to allow residents to occupy an unregistered building after this date.  When new buildings are completed after 1 October 2023, they must be registered before residents can occupy them.  Registration must be done by the Principal Accountable Person ("PAP") for each building, or someone authorised by them.  A PAP can be an individual or an organisation, and if the latter then the contact details of a single point of contact must be provided so that the BSR can get in touch with a named individual who has authority or duties relating to the safety of the building.  The PAP can authorise someone else in writing to register the building for them, such as a managing agent or a lawyer.

Higher-risk residential buildings are those which are at least 18m high or have at least seven storeys, and contain two or more dwellings.  Hotels; secure residential institutions; and military barracks/ other living accommodation provided by the MoD are excluded.  Care homes and hospitals are included within the definition during their construction phase but fall outside the regime once they become "occupied", which is when people are living in more than one residential unit in the building.

If you would like to read more about this obligation, read our briefing here.  If you would like help with registering relevant buildings with the BSR, or with ongoing compliance with the requirements of the Act, please contact our head of Construction and Engineering, Ed Colclough.

The Renters' (Reform) Bill was introduced in Parliament on 17 May 2023.  The Bill was first announced in the 2019 Conservative manifesto, and implements the reforms set out in the white paper entitled "A fairer private rented sector", dated 2 August 2022.  There has therefore been disappointment from tenant communities that the Bill has not been included in the current parliamentary session.  It is not known when its second reading will be scheduled.

Amid widespread concern about the workings of the housing market in the UK, in February 2023 the CMA launched a consumer protection project into the rented housing sector, alongside a separate market study into housebuilding, discussed at section 1.3 above.  Whilst acknowledging that some of the problems in the rented housing sector are not within its remit, it has stated its intention to ensure that ineffective competition or unfair business practices do not increase costs, limit choice or reduce quality for tenants.  Following an initial three month period of engagement, the CMA has published an update report into the rental housing sector which summarises the feedback it has received from a wide variety of stakeholders, and identifies the four areas on which it intends to focus in the next stage of its project.  As discussed in more detail in our briefing, the key issues on which it intends to focus are:

4.4.1 Reviewing current practices on exit and other event fees in retirement homes - The CMA's report states that, late in their stakeholder engagement process, they were told about concerns that event fees in the retirement homes sector are impacting on the rights and financial well-being of residents and their dependants. The CMA has said that it proposes to review practices in the sector with a view to considering whether further undertakings or guidance are necessary.

4.4.2 Updating the CMA's guidance for letting agents - The CMA's report describes various problems encountered by tenants in the current housing market, including: a lack of information available to consumers about landlords and properties in order to help them choose between properties; problems with asking a landlord to carry out repairs; inadequate improvements to the energy efficiency of older housing stock; hardship caused by "no fault" evictions; problems with deductions from deposits; difficulties experienced by vulnerable tenants; and the inadequacy of the redress schemes operated by many letting and managing agents.  It therefore intends to review and revise the guidance for letting agents that it issued in 2014, in order to reflect recent changes in the law and to ensure that landlords, agents and tenants understand that some market practices, which may reflect conditions of supply and demand, are contrary to consumer protection law.

4.4.3 Investigating potentially problematic practices in the rental market - The practices it intends to investigate in more depth, and take enforcement action against if needed, include:

(i) zero-deposit schemes, which are at present unregulated, and the CMA is concerned about some aspects of how they are being used, such as landlords or letting agents failing to give tenants enough information about how they work, using pressure-selling tactics and not disclosing any commissions they receive from the scheme provider;

(ii) Sham licences: the CMA has been told that some landlords tell their tenants that their rental contracts are licences to occupy whereas they are, as a matter of law, tenancies. This is apparently most commonly encountered where property is let on a ‘per room’ basis.

(iii) Unlawful discrimination: the CMA is concerned that the processes of choosing tenants can lead to unfair and sometimes unlawful discrimination, whether direct discrimination (whereby landlords automatically rule out a class of people such as people on benefits or those with children or pets or who have certain needs as a result of a disability) or indirect (such as discrimination against families, which although it may not directly engage with a protected characteristic, may indirectly discriminate against women).

(iv) The scope of guarantees: concerns have also been expressed that requiring tenants to provide guarantees may disadvantage those who are less well-off or who lack a support network. The CMA has also been alerted that the terms of some guarantees are excessively wide, for instance in student accommodation a guarantor might be required to guarantee the obligations of all the tenants of a flat, not just the particular student to whom they are connected.

The Government has appointed an independent Older People’s Housing Taskforce, which has been commissioned to look at the options for housing older people, with the goal of exploring how more choice, quality and security could be provided for seniors housing.  The chair is Professor Emerita of Nursing, Julienne Meyer, and the taskforce includes representatives from the charity sector, local authorities, investors, housing providers and developers, retirement living specialists, academics and an MP.  The taskforce will produce an independent report to the Department for Levelling Up, Housing and Communities and Department of Health and Social Care by May 2024.

Speaking at the Laing Buisson Retirement Housing Conference in September, Meyer indicated that the Taskforce's recommendations are likely to include the following proposals:

• Older people’s housing should be given due consideration and prominence in the forthcoming revisions to the National Planning Policy Framework;
  
  
• Every local authority should produce an older people’s housing strategy that identifies the estimated level of required supply for age-exclusive and specialist housing for older people and how it will be delivered;
  
  
• a new regulatory framework for older people's housing should be developed in order to secure greater consumer protection for the sector;
  
  
• new terminology should be developed for the sector and then used consistently, to aid with consumer protection; and
  
  
• a range of fiscal measures should be put in place to boost the provision of specialist housing for older people.