Scanning the Real Estate horizon: Out with the old, in with the new

The Building Safety Bill

The Building Safety Bill is now due to have its report stage and third reading in the House of Commons, and is expected to be enacted in 2022. The Bill is intended to ensure that there is greater accountability and responsibility for fire and structural safety issues throughout the lifecycle of buildings. It will do this by:

• establishing a new Building Safety Regulator in England to improve building safety and performance standards in all buildings;
  
  
• enabling residents to have a stronger voice in the construction of homes, and establishing additional protections for leaseholders in relation to financing remediation works, as well as increasing access to redress through the Defective Premises Act 1972;
  
  
• strengthening the Fire Safety Order; and
  
  
• providing a stronger and clearer framework for national oversight of construction products.
  
  

The Building Safety Levy

The Building Safety Bill will also give the Secretary of State powers to impose a new Building Safety Levy in England, the proceeds of which will contribute towards the Government’s costs for remediating historical building safety defects. This will apply to developers making an application to the Building Safety Regulator for building control approval in respect of higher-risk residential buildings in England.

Residential Property Developer Tax

From 1 April 2022, companies or groups of companies undertaking UK residential property development with annual profits in excess of £25 million will be subject to a new a 4% tax on their profits over an annual allowance. As with the levy above, the proceeds of this tax will be used for remediating historical building safety defects.

Unsafe cladding plan of action

On 10 January 2022, the Secretary of State for Levelling Up, Housing and Communities, Michael Gove, wrote a letter to the residential property developer industry requiring them to agree a plan of action to deal with the remediation of buildings with unsafe cladding and the costs associated with this. His intention is that developers and building owners will agree to cover the costs of this, and that there may be a requirement to do so imposed on some companies if their annual profits exceed a certain threshold. There may also be new laws imposed if the solution proposed by the industry is deemed insufficient by the government. We can expect to see more developments on this in the coming weeks and months.

The Commercial Rent (Coronavirus) Bill is currently being scrutinised by a Public Bill Committee and is expected to be enacted in 2022. As we described last month, it will temporarily prevent landlords from exercising some of their remedies in relation to certain ring-fenced rent arrears from the date when the legislation comes into force until (a) a settlement has been reached (either through negotiation or through the arbitration system, when the time to appeal an arbitration decision has passed), or (b) the timeframe for application to the arbitration system (6 months from the date of the legislation) has passed without an application being made. 

The Government is also protecting commercial tenants from i) debt claims issued against them for rent from 10 November 2021 onwards ii) enforcement of outstanding County Court judgments and High Court judgments for rent arrears accrued during the pandemic and iii) bankruptcy petitions issued against them in relation to rent arrears accrued during the pandemic.

The Bill will protect arrears of rent, service charge and insurance rent which relate to:

• tenants which were mandated to close their premises or cease trading (in whole or in part) under regulations made under the Public Health (Control of Disease) Act 1984 during the COVID 19 pandemic;
  
  
• tenants which lease their premises under a business tenancy, as defined by Part II of the Landlord and Tenant Act 1954; and
  
  
• a ringfenced period from 21 March 2020 to the last date restrictions.

The arbitration process is expected to come into force from 25 March 2022.

The Government has announced that new homes and buildings such as supermarkets and workplaces, as well as those undergoing major renovation, will be required to install electric vehicle charge points from 2022. It is thought that this will mean that up to 145,000 extra charge points per year will be installed across England, in the run up to 2030 when the sale of new petrol and diesel cars will end in the UK. 

The Environment Act 2021 was given Royal Assent in November 2021, but it is likely to be in 2022 that we start to see the framework provisions translate into secondary legislation with real impacts for businesses. The Act:

• established a new green watchdog for England and NI, intended to hold public authorities to account, called the Office for Environmental Protection;
  
  
• obliged DEFRA to set legally binding targets for air quality, biodiversity, water, resource efficiency, and waste reduction;
  
  
• introduced conservation covenants (voluntary, binding agreements between a landowner and a responsible body to protect natural environment or natural resources, land or assets), capable of binding future landowners;
  
  
• requires developments where planning permission has been granted to demonstrate biodiversity gain, which may involve minimising the adverse impacts of the development, or purchasing biodiversity credits under a scheme already piloted by Natural England; and
  
  
• ensures that the entirety of England is covered by a local nature recovery strategy which defines biodiversity priorities and opportunities for recovering or enhancing biodiversity.

The Leasehold Reform (Ground Rent) Bill 2021 will restrict ground rents on most newly established leases of houses and flats, with a term over 21 years, to a token one peppercorn per year.  It will also prohibit charging administration fees in relation to those rents.  Exemptions will include:

• long residential leases of single dwellings where the leaseholder does not pay a premium for the grant of the lease;
  
  
• Business leases where the use of the premises as a dwelling significantly contributes to the business purposes, and the parties exchange written notices in the required form before the lease is granted;
  
  
• Statutory lease extensions of houses or flats;
  
  
• Community housing where it is a community housing lease and certain conditions are met; and
  
  
• Home finance plan leases.

The Bill is now due to undergo its report stage and its third reading in the House of Commons and is expected to be enacted early in 2022.  The new rules will not apply to leases of retirement homes before 1 April 2023. 

The UK's new National Security & Investment Act (NSI Act) came fully into force on 4 January 2022. The aim of this new regime is to enable the UK Government to intervene in a wide range of transactions on national security grounds. It creates a hybrid mandatory and voluntary regime, meaning, in short, that transactions which have closed since 4 January and which now close could potentially fall within the scope of the new regime. For transactions falling within the scope of the mandatory regime, this will mean that completion cannot take place until clearance is received from the Government's new review body, the Investment Security Unit (ISU).

In terms of its impact on real estate transactions, the regime is targeted at share rather than asset transactions in specified sectors (including civil nuclear, communications, data infrastructure, defence, energy, military and transport).  However, any acquisitions of entities or assets which give rise to national security concerns may be called-in for review by the Government or voluntarily notified by the parties.

In 2022 we will discover the outcome of the appeal in the case of Fearn and others (Appellants) v Board of Trustees of the Tate Gallery (Respondent) [2020] UKSC 56 which was heard by the Supreme Court on 7 and 8 December 2021.  The Court was asked to consider whether the Court of Appeal erred in holding that:

• private nuisance, in the context of section 6(1) of the Human Rights Act 1998, is not capable of providing a remedy against overlooking from neighbouring land; and
  
  
• allowing the public to watch the appellants in their flats from the Tate's viewing gallery does not infringe the appellants' rights under Article 8(1) of the European Convention on Human Rights (ECHR) to respect for their private lives and their homes.

The Court of Appeal had reasoned that it would be difficult to apply an objective test in nuisance for deciding whether there had been a significant interference with the amenity value of the overlooked property, and that there are already other ways to protect landowners from being overlooked (particularly the planning system) and from an invasion of privacy (such as the Human Rights Act 1998) which are unconnected to property law.  They therefore decided that it would be more appropriate for Parliament to implement any further legislative protection that is required, rather than the courts extending the law of private nuisance via caselaw.

From April 2022, the UK will have a new tax efficient vehicle – the qualifying asset holding company (or QAHC). This is a key change in the UK’s tax strategy for asset management, designed to enhance the UK’s attractiveness to the sector.

Essentially, QAHCs will be normal unlisted UK tax resident investment companies that are at least 70% owned by “good” investors (“Category A investors”), such as investment funds and various types of institutional investor (e.g. most pension funds and many insurance businesses). In addition to allowing Category A investors to invest tax efficiently in shares, debt and overseas land, the QAHC regime will include benefits that apply to the tax position of the individuals managing them (with provision of returns in capital (rather than income) form being facilitated and, for non-domiciled managers, the availability of the remittance basis of taxation being extended). We anticipate QAHCs being used in a number of situations, including in credit fund structures and as master holding companies.

The Product Security and Telecommunications Infrastructure Bill was introduced to Parliament in November, and is expected to be enacted in 2022.  It contains a number of provisions which are intended to improve the relationships between landowners and telecoms operators, including:

• measures to encourage the parties to use arbitration instead of litigation to settle disputes;
  
  
• more detailed measures setting out an operator's rights to upgrade and share apparatus;
  
  
• amendments which will entitle operators to renew expired agreements and obtain new Code rights;
  
  
• provisions to apply the same valuation mechanism under the Code to renewals of expired pre-2017 agreements which are protected under the Landlord and Tenant Act 1954 as are used for more recent renewals; and
  
  
• the introduction of a new process which will enable operators to obtain Code rights where the landowners or occupiers of land do not engage with them.

The scope of the Trust Registration Service ("TRS") was significantly extended in 2020 as part of the UK’s implementation of the Fifth Anti-Money Laundering Directive, in order to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system. The rules are complex but broadly, unless they fall within an exclusion, the trusts that must now be registered include all UK express trusts; all non-UK express trusts that are liable to pay UK tax; all non-UK express trusts where one or more trustee becomes the registered proprietor of freehold or leasehold land in the UK; and all non-UK express trusts that have at least one trustee resident in the UK and enter into a “business relationship” with a regulated UK entity (such as a bank or a letting agent) of at least 12 months’ duration.

A number of the exclusions are relevant to the real estate sector, including the following trusts, provided they are not liable to UK tax:

• trusts created when professionals hold client money;
  
  
• trusts created in the course of providing professional services, such as acting as an escrow agent or as a trustee of an authorised unit trust scheme;
  
  
• charitable trusts that are registered or exempt charities;
  
  
• trusts arising during the registration gap, when a seller holds the legal title on trust for the buyer pending its registration as proprietor;
  
  
• trusts holding tenants’ service charge contributions arising under section 42 of the Landlord and Tenant Act 1987;
  
  
• co-ownership arrangements where the trustees and beneficiaries are the same, such as where two or more persons hold property for themselves as “tenants in common” or where spouses hold as joint tenants; and
  
  
• trusts created to enable or facilitate transactions effected for genuine commercial reasons where the use of the trust is incidental to the principal purpose of the transactions, such as in a syndicated loan arrangement.

The sorts of real estate arrangements that may therefore require registration with the TRS include express bare trusts, nominee arrangements, and co-ownership structures where the trustees and the beneficiaries are not the same entities. The deadline for registration of non-taxable trusts is 1 September 2022.

On 1 September 2020, the Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020 came into force. These made material changes to the previous use classes order, including:

• revoking use classes A1 to A5 (which were uses commonly found on the high street including shops, cafes and takeaways), D1 (non-residential institutions) and D2 (assembly and leisure); and
  
  
• inserting new classes E (commercial, business and service), F1 (learning and non-residential institutions) and F2 (local community).

A group called Rights: Community: Action Ltd ("RCA") challenged these changes, along with some alterations to the General Permitted Development Order in 2020 which allowed both the construction of one or two additional storeys above a single house or commercial buildings and the demolition of blocks of flats and some commercial buildings for replacement by residential buildings. 

RCA brought a judicial review application in which they argued that the correct legal processes had not been followed in relation to three of the statutory instruments that were enacted as part of this new planning regime. Their key ground was that the Government should have undertaken a strategic environmental assessment under Directive 2001/42/EC. On 20 December 2021 the Court of Appeal decided against them. 

This means that in 2022 we will start to see the impact of these planning changes. In particular, the new Use Class E is a wide-ranging use class which enables occupiers to move between retail, professional services, restaurant and business use without obtaining planning consent. They will still need to obtain planning consent for any facilitating works to the premises and, if occupying as a tenant, any consents required under their leases. At present, most leases still refer to the previous use class order, so it will be interesting to watch the extent to which tenants can begin in 2022 to make use of the new planning freedoms to change use. For more discussion on this topic, see our reflections here.