Real Estate Briefing May 2023
At the start of the 2023/24 financial year, we focus on 5 focal points of interest to the real estate sector: regulatory change, updates to real estate taxation, some proposed changes to the planning regime, ongoing reform to construction law and some caselaw reports from real estate disputes.
The Minimum Energy Efficiency Standards regime ("MEES") was brought into effect by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. Until 31 March 2023, the MEES rules required landlords granting a new lease of a commercial premises to produce an energy performance certificate ("EPC") for the property, showing a rating of E or above, unless they have registered an exemption. Landlords are prohibited from granting a new lease of commercial properties with an EPC rating of F or G.
From 1 April 2023, it became unlawful for a landlord to continue to let a commercial property with an F or G rating unless (1) they have carried out all the cost-effective energy efficiency improvements prescribed for it in its EPC, and the EPC still shows a rating of F or G, or (2) one of the exemptions applies.
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Download PDFFollowing the Government's 2021 consultation, it is anticipated that the next step in the Government's plan to achieve net zero by 2050 is that all the minimum requirements for landlords letting commercial property will shift to C by 2027 and B by 2030. The real estate sector hoped that the Government would reduce uncertainty for commercial property owners by announcing the details of this trajectory on Green Day in March 2023, but the Powering Up Britain statement did not refer to this issue.
The Register of Overseas Entities ("the Register") launched on 1 August 2022 and the transitional period ended on 31 January 2023. As we described in our previous briefing, pursuant to the Economic Crime (Transparency and Enforcement) Act 2022, overseas entities which own a freehold or grant a lease of more than 7 years in England and Wales are obliged to register on the Register and thereby disclose their registrable beneficial owners. An Overseas Entities ID is issued upon successful registration. If they fail to do so, submit false or misleading information, and/or do not submit annual updates, they could incur criminal liabilities. An overseas entity planning to acquire a qualifying interest in land (i.e. a freehold or a lease of more than 7 years) must register before applying to the Land Registry for registration as proprietor, and although a purchaser/tenant is not committing an offence by entering into a transaction with a non-compliant overseas entity, increasingly UK entities are unwilling to complete without sight of the Overseas Entities ID because they will in most cases, be unable to register their new property interest at HM Land Registry without it.
From 1 April 2023, regulation 30A(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 was widened to include the Overseas Entities Regime. This means that regulated persons (such as lawyers, accountants and property agents) are required to report to Companies House any discrepancies between the information they hold about the beneficial owners of overseas entities (such as data gathered as part of their KYC processes) and the information recorded by Companies House on the Register. The reporting requirement will be an ongoing duty, although it will only apply to "material discrepancies" defined as something that, by its nature, and having regard to all the circumstances, could be linked to money laundering or terrorist financing, or intended to conceal details of the customer's business.
The sorts of discrepancies that could be within scope include:
At present, trustees of charities are subject to a number of restrictions when they sell, let or mortgage their land, including:
Compliance with these requirements can lead to significant professional costs and can also delay land transactions. In 2017, the Law Commission published its report "Technical Issues in Charity Law" which made a number of recommendations to maximise the efficient use of charitable funds whilst ensuring proper safeguards for the public. The recommendations included giving charities more flexibility to obtain tailored advice when they sell land, and removing unnecessary administrative burdens.
This report culminated in the Charities Act 2022. Sections 17 to 23 of the Charities Act 2022 are expected to come into force this Spring. These will:
The most recent revaluation of business properties for business rates came into effect on 1 April 2023, based on property values as at 1 April 2021. It is 6 years since a revaluation took place, and this revaluation is in accordance with the Government's Review of the business rates system in 2021.
Various measures were announced in the Autumn Statement in November 2022 to reduce the burden of business rates which the Government says will provide targeted support worth £13.6 billion over the next 5 years, including:
In addition, the Government has confirmed that the previously announced Improvement Relief (to ensure ratepayers do not see an increase in their rates for 12 months as a result of making qualifying improvements) will be introduced from April 2024 and will be available until 2028, at which point the Government will review the measure.
In the March 2023 budget, the Chancellor announced full expensing of qualifying capital expenditure incurred in the next three years, with the intention of making this permanent afterwards. This means that 100% of any qualifying expenditure on main rate expenditure will be deductible in the year it is incurred, giving immediate relief in 25 pence in the pound. This is significantly more generous than the UK's previous system of capital allowances, which only allowed 18% of the expenditure to be deducted each year on a reducing balance basis, giving tax relief at 3.4p in the pound in the first year, and lower in following years, though gives similar relief to the "super deduction" which was available from 2021 to 2023. For "special rate" expenditure, a 50% first-year allowance will be available, with the balance being deducted at 6% a year on a writing down basis.
The Chancellor noted in the budget speech that this would give the UK the most generous capital expenditure relief regime in the G7 and the joint most generous regime across advanced economies in the world. It will cost the Exchequer £9 billion a year but the OBR expects it to increase investment in the UK by 3% a year. As well as giving generous tax relief, this will significantly reduce compliance burdens in calculating capital allowances and maintaining sufficient records to establish their availability. You can read more about the Spring Budget here.
As part of the Government's ongoing review of UK fund structures, it has announced three changes to the rules relating to real estate investment trusts (REITs) to enhance their attractiveness and flexibility. First, as previously trailed as part of the Edinburgh Reforms in December last year, the requirement for a REIT to hold at least 3 properties will not apply if the REIT holds a single commercial property worth at least £20 million.
The general tax exemption for the sale of a property is turned off for a REIT who sells a property within 3 years of development work being undertaken. Currently, for the exemption to be disapplied the development work has to exceed 30% of the fair value of the property when it was acquired or when the company became a REIT. The second announced change, also previously trailed, is to allow REITs to use the market value at the time development commenced, which ensures that REITs are not penalised for properties that have grown significantly in value since they were acquired.
Thirdly, and unexpectedly, the Government also announced a welcome change to the withholding tax treatment of property income distributions (PIDs) from REITs when they are paid to partnerships. Currently, all partners in a partnership must qualify for a tax exemption from PIDs for that partnership to be able to be paid a PID without withholding. The announced change will enable the REIT to look through to the underlying partners in a REIT and withhold on the PID only to the extent the underlying partner would have had withholding had they invested directly. This will be particularly important for funds as, since 1 April 2022, it has been possible for widely-held funds to incorporate subsidiary "private REITs" that do not need to be listed on a stock exchange. Where those funds are themselves constituted as partnerships this change will ensure that the fund structure does not itself give rise to any UK tax leakage that would not have arisen had the ultimate investors invested in the real estate portfolio themselves.
In addition to the REIT-specific changes, the definition of "charity" for UK tax purposes will be amended to remove EU and other foreign charities, so that only UK charities will fall within that definition. Amongst its other effects this will have an impact on who can be counted as an "institutional investor" for the purposes of the REIT and the qualifying asset holding company (QAHC) rules, although there are saving provisions which exempt those who already hold shares in a REIT or QAHC on 15 March 2023.
These measures underline the Government's commitment to ensuring new development is sustainable and protects the environment. However, with so many new initiatives being introduced by a range of different bodies, the challenge will be ensuring that they complement one another and work in tandem with new development projects. For now, there is some scepticism with the Climate Change Committee recently warning of the inconsistent application of national planning policy, emerging policies for biodiversity net gain and management of green and blue space.
The Town and Country Planning (Development Management Procedure) (England) (Amendment) Order 2023 has been published, and amends the Town and Country Planning (Development Management Procedure) (England) Order 2015 (SI 2015/595) (DMPO 2015). It adds Active Travel England as a statutory consultee for certain planning applications made on or after 1 June 2023, including those with more than 150 dwellings. According to its website, Active Travel England will lead the delivery of the Government’s strategy and vision for creating a new golden age of walking and cycling where half of all journeys in towns and cities are walked and cycled by 2030.
Applicants should be mindful of the practical effect that the addition of a further statutory consultee may have on the determination timeframes for applications, and the need for early and meaningful engagement to elicit supportive responses. In particular, this will lead to increased scrutiny of proposed travel measures for new developments, and necessitate careful consideration, from the masterplanning stage, about how best to integrate sustainable travel solutions within the proposed scheme design. Measures proposed will need to effectively interact with surrounding sites where appropriate.
It has been generally agreed for some time that this area of planning law is in need of modernisation. The Law Commission carried out a project in this area in 2003/4 but its recommendations were not implemented in full. This new project will involve a review of the current law on compulsory purchase, focussing on:
3.3.1 the procedures governing the acquisition of land through compulsory purchase orders; and
3.3.2 the system for assessing the compensation awarded to parties in relation to such acquisitions.
The Government has published a consultation on the revised National Planning Policy Framework and its proposed approach for preparing National Development Management Policies. The consultation closed on 2 March 2023. One of the more controversial proposals is that local planning authorities with an up-to-date local plan will no longer need to continually show a deliverable five-year housing land supply. We have a briefing on this consultation, in so far as it refers to retirement housing, here.
Changes of the nature proposed in the consultation were considered by the Government to be better framed as revisions to the NPPF, rather than being introduced through new legislation such as the Levelling Up and Regeneration Bill which is currently passing through Parliament. That may reflect a perception that the path towards introduction via national policy may be less perilous. However, elements of the proposals have provoked strong feelings from consultees. This is particularly true of the proposed housing land supply and plan-making changes, with many perceiving that these will exacerbate the housing crisis. As such, it will be interesting to see whether the proposed changes survive intact to form part of the revised NPPF that eventually emerges.
On 17th March, the Government published a new consultation into the design of a new infrastructure levy to be paid by developers to fund affordable housing and local facilities such as GP surgeries, transport links and schools. Its key features are as follows:
The proposal is quite radical and represents a brave move by Government to tackle a complex issue. Sensibly, there is a recognition that such a significant overhaul will, inevitably, create some teething troubles as people grapple with its introduction. As a result, the Government will adopt a 'test and learn' approach (as opposed to 'trial and error'!) with a phased introduction over the course of a decade and a minority of LPAs being introduced to it initially.
The consultation will run for 12 weeks, closing on 9 June 2023, and the Government anticipates that it will consult further on proposed regulations, when the responses to this consultation have been fully considered. A link to the consultation is here.
In Primavera Associates Ltd v Hertsmere Borough Council [2022] EWHC 1240, the High Court held that:
This judgment is a useful reminder that a negligence claim by a developer against a local planning authority is unlikely to be successful.
The Building Safety Act 2022 received Royal Assent in April 2022. It impacts on the design and construction of all buildings, and the operation of higher-risk residential buildings. It establishes a new safety regime which will be overseen by a new Building Safety Regulator, and imposes safety-related duties that will apply throughout the whole lifecycle of a building. The key themes of the Act are as follows:
There have been some recent changes to the fire safety regime. Our briefing in January 2023 focuses on the new Fire Safety (England) Regulations 2022, and there have also been some other amendments to the Regulatory Reform (Fire Safety) Order 2005 via the Fire Safety Act 2021, in particular making it clear that the regime applies to the structure, external walls (including cladding and balconies) and individual flat entrance doors between domestic premises and the common parts of a multi-occupied residential building. The Government's guidance is here.
The Government has published the final version of the contract it has been negotiating with developers who have signed its Building Safety Pledge, committing them to remediating unsafe buildings in England with which they are associated. Once the deadline of 13th March 2023 passed, 11 developers were placed on a non-compliance list, the implications of which are that they would not be able to carry out any new developments. Subsequently, at least one of those developers has entered into an amended version of the contract, recognising that their buildings have never had any cladding or fire safety issues.
The contract follows on from the Pledge that developers were obliged to sign in 2022, and contains the following developer covenants:
In the case of Abbey Healthcare (Mill Hill) v Simply Construct (UK), the Court of Appeal decided that collateral warranties could, depending on their precise wording, be construed as construction contracts which would mean that adjudication under the Construction Act will apply to disputes under the warranty. This is a useful reminder of the benefit that collateral warranties provide.
Read more about the benefits of collateral warranties for building projects.
In MUR Shipping BV v RTI Ltd, the Court of Appeal held that a party's reasonable endeavours obligation to overcome a force majeure event required it to accept payment in a different currency to that specified in the contract. Our briefing here considers the case, which has clear application to the construction industry.
In Buckingham Group v Peel L&P Investments the High Court held that the LADs provisions in this contract were enforceable, despite the lack of clarity in the drafting. The decision confirms that the courts will be reluctant to find a provision of a contract void for uncertainty and that its preference shall be to try and find an interpretation that gives effect to the parties' intentions.
In Mulalley & Co. Limited v Martlet Homes Ltd the High Court held that under a construction contract the contractor was liable for both the remediation cost of defective cladding and for the 'waking watch' costs. This is the first High Court judgement on claims concerning fire safety issues following the Grenfell Tower fire in June 2017 and is a key decision for the housing sector which has seen significant costs incurred from 'waking watches' being used as preventative measures until dangerous cladding is removed.
There are two recent cases of interest examining aspects of the law on nuisance:
In Barton v Morris, the Supreme Court held that, although there was an oral agreement between Foxpace and Mr Barton under which Foxpace would pay Mr Barton £1.2 million if he introduced a purchaser for Nash House at a price of £6.5 million, when Mr Barton's purchaser bought it for £6 million, he was not entitled to any payment under the contract. He was entitled to a payment that the court regarded as reasonable of the service he provided, which was £437,000. This is a good reminder that the courts will not step in to interfere with the terms of a commercial agreement, even if the outcome appears unjust.
There have been two recent cases regarding service charge disputes: Aviva Investors Ground Rent GP Ltd v Williams where the Supreme Court held that a service charge clause which required the tenant to pay service charge at a fixed percentage or a proportion to be reasonably determined by the landlord was valid, and Sara & Hossein v Blacks where the Supreme Court held that the service charge certificate is conclusive as to what is required to be paid by Blacks following certification, but payment of the certified sum does not preclude Blacks from later disputing liability for that payment. It is a ‘pay now, argue later’ regime!
