Last year was full of surprises (and not just in planning!), so we thought that we would share our thoughts on some of the big planning changes that are due to take place this year.
We were expecting the Housing White Paper to be issued yesterday, but heard rumours last week that this was being stalled and may not be published until March. The delay also pushes back the government response to the CIL review and the amendments to the National Planning Policy Framework which are expected once the White Paper is out.
More details on starter homes and permissions in principle are expected later this year as well as the new dispute resolution procedure for section 106 agreements.
Next month the controversial ‘Hopkins Homes’ case will be heard by the Supreme Court and we wait to see what implications this will have for housing development.
See our top ten here and let us know what you think.
With an unusually warm 25th December forecast this year, the prospect of a white Christmas looks slim, but with the government’s Housing White Paper due in early 2017, The Year of the Rooster, we’re wondering what we might expect to find when we finally unwrap it in the new year.
The Housing White Paper is going to set out the government’s strategy for building new homes. With last week’s controversial Ministerial Written Statement on neighbourhood planning branded by some as a government U-turn on housing delivery, anticipation is building as to the contents of the White Paper.
With hints from the Housing Minister about anti “land-banking” initiatives, increased planning fees and changes to the plan-making process, we make a number of predictions as to the possible contents of the Paper here.
It will be interesting to see which of these make it into the published version and whether there are any big surprises in store. With such contentious topics, it is perhaps unsurprising that the government has taken its time over this one.
We do not yet know exactly when in 2017 the White Paper will be published, but in the great words of Muhammad Ali, “A rooster crows only when it sees the light”.
Many a switched-on landlord will already be familiar with the perils of the Construction Industry Scheme. The Scheme, designed rather like PAYE to place the burden of tax collection on those employing building contractors, casts its net sufficiently wide that contributions made by landlords to the cost of works carried out by tenants will often be caught. When this happens, any payments made by the landlord (for CIS purposes, the “contractor”) to the tenant (the “subcontractor”) must be made subject to a withholding of tax, unless the tenant is registered under the Scheme for gross payment, and save where the payment in question is considered to be an “inducement”.
Commercial landlords will often be aware that (in broad terms) if their average annual spend on construction works is in excess of £1m they will be “deemed contractors” for the purposes of the Scheme. They may dutifully apply the Scheme when, under Agreements for Lease, they are contributing to the cost of tenant’s works which go beyond fit-out – such as when a tenant agrees to carry out Category A works on the landlord’s behalf. Equally, they may know that the likes of the frequently-given contributions to carpets and floor boxes will tend to be regarded as inducements – thus falling outside the scope of CIS (and also VAT).
It is critical to note, however, that for carpet and floor box contributions to qualify as inducements the landlord must not be getting anything ‘in return’, beyond the tenant’s agreement to enter into the lease. If the lease being granted includes an obligation requiring the tenant to yield up with the carpets or floor boxes in place, or contains rent review provisions which seek to rentalise their presence, that can be enough to preclude inducement status. The effect then is that – even in the absence of an Agreement for Lease – the Scheme must be applied, the tenant’s registration status verified with HMRC and the carpet and floor box contributions paid subject to the appropriate deduction. VAT will also be payable.
HMRC’s approach to the Scheme and landlords remains an area to watch, but in the absence of specific dispensations or revised guidance, getting this wrong can result in painful penalties and compliance issues for the landlord. It pays to be alert to the full reach of the Scheme – and certainly not simply to brush it under the carpet.
Hogan Lovells hosted the Reading Real Estate Foundation Breakfast Forum (RREF) on 8 December 2016. RREF is a registered charity that provides support for real estate and planning education at the University of Reading.
The event featured presentations by:
• Alison Nimmo, Chief Executive at The Crown Estate;
• Craig McWilliam, Chief Executive at Grosvenor Britain & Ireland; and
• Peter Freeman, Director at Kings Cross Argent.
The topic discussed was: Top Hats and Baseball Caps: Old vs New Estates in the Battle for London.
Alison Nimmo gave a brief summary of The Crown Estate along with a history of its formation. Alison went on to discuss what she believes to be key elements of successful estate management. These included taking an active and long term approach to management and development and ensuring a balanced mix of uses and tenants.
Craig McWilliam also focussed on what he believes to be important factors of successful estate management. Chris reiterated Alison’s points, but also commented on the importance of creating neighbourhoods to attract people to both live and work within estates.
Peter Freeman outlined his views on the advantages of being a new estate over an old estate. These included the ability to include modern architecture and large modern floor plates in buildings, a greater control over pedestrianisation and a varied use of the public realm. Peter also commented on the advantages of being an old estate, such as the established brand of these estates and the classical period architecture of their buildings.
Key themes to emerge from all presenters were the importance of taking a long term view to estate management and planning and to create estates which are a magnet for talent and investment.
The Mayor of London has revealed his plans for his “shake up” of affordable housing and viability. He has published his draft guidance on the topic, which is open for consultation until 28 February 2017.
The good news for the Build to Rent (BTR) sector is that the Mayor is keen to encourage growth in this relatively new sector and has emphasised the need for local planning authorities (LPAs) to recognise the “distinct economics of the sector” compared to traditional housing.
The Mayor has devised a new affordable housing regime for BTR which he calls his planning “pathway”. Instead of requiring BTR developers to meet a 35% affordable housing threshold, he says that BTR should be assessed on its own viability. This does not necessarily mean that provision under 35% will always be acceptable, but LPAs are encouraged to consider a different approach to profits, sales, marketing, risk and rate of disposal when reviewing BTR viability appraisals.
The draft guidance includes a new definition of BTR:
• 50 units or more;
• 15 years plus;
• Self-contained and separately let;
• Single ownership and management;
• Professional on site management; and
• Longer tenancies – ideally three years plus.
S.106 agreements will record the requirement to continue the BTR operation during the 15 year covenant period. Use which does not accord with the criteria (such as selling off individual units) could trigger an affordable housing “claw back”. The S.106 agreement could also require a review of the viable level of affordable housing at various stages of the development. This can have a significant impact on profit and timing of delivery, as extra on-site affordable housing maybe required.
The Mayor wants BTR to showcase best management practice and design. His draft guidance includes a raft of key management standards which he will expect BTR developers to follow. These include formula linked rent reviews, advertising on the GLA’s portal and six month break clauses as standard.
Find out more here.
The UK government continues to use the real estate sector as its “go to” source of tax revenue. Following the extension of corporation tax to non-residents trading in UK land in July this year, we now have the proposal announced in the Autumn Statement, to bring non-resident landlords into the charge to corporation tax (rather than income tax) on their UK income profits. This fits with the government’s approach of broadening the scope of UK corporation tax to include the profits of non-residents arising from UK land.
At one level it is good news as the non-residents would benefit from the falling corporation tax rates and be able to deduct loan relationship expenses in accordance with their accounting treatment. We might even see the end of the withholding tax regime under the non-resident landlord scheme to be replaced by corporation tax self-assessment rules.
However, on the other hand, there is a clear indication that the government intends that the interest restriction rules (and carry forward of loss relief rules) would apply to non-resident investors in UK land. This is likely to have a significant impact on the measure of UK taxable profits of a non-resident’s property business because such businesses are typically heavily leveraged with shareholder debt.
In other words, non-residents would be likely to suffer higher UK tax on their UK property business profits. It feels like it cannot be long before the UK government takes the final step and extends the scope of corporation tax to include capital gains realised by non-UK residents disposing of UK commercial property. That would mark the end of any fiscal incentive for non-residents to invest in UK land.
At Budget 2017, the government will consult on the case and options for implementing this change.
What do residential landlords need to know about before renting out their property? One thing that every landlord should be aware of is the “Right to Rent” regime which we blogged about earlier this year. In basic terms, the regime requires landlords to carry out checks to ensure that they are not renting their property to a disqualified person (an illegal immigrant).
However, from 1 December 2016, landlords will commit a criminal offence if they knowingly rent out their property to a disqualified person, or have reasonable cause to believe that the tenant is a disqualified person. The offence attracts an unlimited fine (previously a maximum fine of £3000) and up to 5 years in prison.
A landlord may have a defence where it takes reasonable steps to terminate the tenancy within a reasonable time of becoming aware of the true status of their tenant. The Home Office has issued guidance for the courts when deciding whether or not the defence applies. The guidance states that a “reasonable time” is the period needed by the landlord to end the tenancy by mutual agreement with the tenant or by taking steps to end it. As for the “reasonable steps” a landlord needs to take, it will depend upon the nature of the tenancy agreement and the relevant statutory provisions that apply, but a court should take into account all of the circumstances.
If the landlord does not have a right to evict the tenant, there is now a statutory right to terminate the tenancy following receipt of a notice from the Secretary of State that the tenant is a disqualified person. The landlord can serve a prescribed form of notice on the tenant which will allow the landlord to recover possession of the property as if it were an order of the High Court. This will make it easier for landlords to legally evict disqualified persons. However, it goes without saying that a landlord risks criminal liability if it receives one of these notices from the Secretary of State and doesn’t take steps to evict the tenant within a reasonable time.
It remains to be seen how the courts will apply these sanctions in practice, but a relatively minor fine will probably be imposed on most landlords who fall foul of the regime, particularly where the breach has been inadvertent. In more serious cases involving repeat offenders or landlords who deliberately ignore the regime, tougher punishments including imprisonment will be on the cards.
Anyone who thought that the Bribery Act 2011 might not impact real estate should pause for thought. Whilst most companies have put strict policies in place to govern corporate entertaining, recent events show that property companies must carefully govern procurement and tendering processes. According to Crispin Rapinet, head of our Global Investigations, White Collar and Fraud practice “property development involves interactions with government officials and a clear risk in some jurisdictions of people who want to line their pockets in return for permission“.
Why does the Act have such a bite? For starters, the Act radically overhauled the UK’s corruption legislation and introduced a much more stringent and far-reaching regime. Under the Act, the usual burden of proof is reversed, meaning corporates can only avoid conviction if they can prove “adequate procedures” were in place to prevent bribery. Demonstrating adequate procedures will show that the incident was a one-off anomaly rather than the result of institutional management failure.
The Act also introduced the strict liability offence of failure of a commercial organisation to prevent bribery. As such, there is no requirement for the prosecution to prove intention or knowledge on the part of a company’s senior management. Where a bribe is paid by anyone acting on the company’s behalf and for the company’s benefit, the company will automatically be guilty of a criminal offence, subject to the “adequate procedures” defence.
Also unprecedented is the jurisdictional scope of the Act. Not only is the Act applicable to UK individuals and companies and conduct taking place in the UK, but also to any foreign company which carries on business in the UK. In the case of the corporate offence, liability will arise even if the bribe took place in an overseas jurisdiction, by a foreign agent or subsidiary and with no connection to the UK. These ramifications are far reaching, particularly when coupled with the increasingly diligent approach to enforcement by UK authorities.
The consequences of falling foul of the Act can be very serious. Lord Justice Thomas has signalled that the financial penalties imposed by the English courts ought to be consistent with those imposed in the US, which can run into the hundreds of millions of dollars, clearly illustrating the extent of the risk.
For corporates, concerns naturally stem from how corporate hospitality will be interpreted in line with the Act. While the lavishness of the hospitality relative to common market practice will be taken into account, some comfort can be taken from the Secretary of State for Justice’s view that “no one wants to stop firms getting to know their clients by taking them to events like Wimbledon and the Grand Prix“. However, corporates should not become complacent in merely treating industry norms as acceptable if they are at risk of not being considered to be reasonable and proportionate. As a result of this, many corporates struggle with determining an acceptable level of corporate hospitality, which they often deem to be well below the price of a day at the tennis or the races.
With the impact of the Act becoming increasingly clear, corporates are advised to review their compliance programmes, so that they can demonstrate “adequate procedures” are in place to prevent bribery. Compliance programmes should cover a wide range of areas and go beyond written policies. Practical training, financial controls, due diligence on third parties and reporting and investigation procedures will all stand corporates in good stead in demonstrating compliance has been adequately addressed.
The UK is one of the world’s most advanced digital economies, with 12.5% of our economy activity now conducted online – a figure that will only increase. Consequently UK businesses are particularly vulnerable to hacking, cyber-crime and cyber-terrorism. Indeed, last year a government survey estimated that 90% of large corporations and 74% of small businesses suffered a cyber-breach, with the average cost of a breach being estimated at between £1.46m and £3.14m for a large business. And property businesses are by no means immune. On the contrary, property owners face some unique challenges when it comes to cyber-security, particularly in relation to their Building Management Systems.
Potentially vulnerable BMS are now found in many buildings. A 2015 paper published by QinetiQ listed systems including lighting (deactivation of lights may cause safety and productivity issues including public panic), access control (remote release of secure doors resulting in unauthorised access, erasure of access logs to cover criminal activity), HVAC (activation or deactivation of heating or cooling causing plant/equipment shutdown or malfunction), CCTV (increased situational awareness for intruders), lifts (denial of service, overriding lift access control) and tenant billing as being possible targets for everyone from terrorists through to bored teenagers.
Such concerns are emphatically not just a futuristic nightmare. In China in 2014, Jesus Molina found that he could easily take control of the thermostats, lights, TVs and window blinds in all of the St. Regis Shenzhen hotel’s 250-plus rooms. Recently, a member of the Free Software Foundation discovered much the same thing at the hotel he was staying at in London. Fortunately for the hotel owners, neither hacker’s intent was malicious. But with those involved in installing and managing BMS tending not to have security expertise, new systems are often connected into wireless networks without adequate security. As a result, a malicious attack may well be a matter of “when” rather than “if”. For example it is all too easy to imagine a hacker gaining access to a property’s BMS and holding a building owner to ransom. And the risk is not merely theoretical. As recently as Tuesday, three NHS hospitals fell victim to a cyber attack affecting the hospitals’ computer systems and forcing the cancellation of all appointments and operations for two days.
And what might the implications for a landlord in a multi-let building be in this scenario? Almost certainly, leases do not address the issue head on, either with express provisions or through the service charge and insurance clauses. Following the government’s launch of the National Cyber Security Strategy built on three core pillars of defend, deter and develop, perhaps the time has come for the industry, owners and occupiers, to give this issue some serious thought.
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