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Keeping It Real Estate

News and Trends in UK Real Estate, Disputes and Planning Law

Posted in Planning

Healthy Buildings – Planning and Wellbeing

The link between good planning and good health is unequivocal. The quality of the built and natural environment has a significant impact on health and wellbeing. Occupiers and developers are becoming more aware of how happy and healthy employees (and customers) drive profitability and there is now industry recognition that a building can affect how well we feel. The launch of the WELL Building Standard is further proof of this and aims to advance health, happiness and productivity.

New innovations are being devised at a rapid rate. Healthy buildings can now include: biophilic planting; highly sensitive temperature, light, clean air and noise control systems which allow individuals to modify their own working or living environment; rooftop cinemas and relaxation rooms.

Considering the health implications of a particular development is not new to the planning world. National guidance, the London Plan and a number of local plans already encourage the submission of “health impact assessments” as part of the planning process. However, there has been a noticeable shift in attitude recently as climate change and wellbeing are taken seriously at a national and global level.

Improvements to air quality are high on the political agenda, particularly following the controversial legal battle resulting in the publication of the Government’s draft air quality plan.

EU Directive 2014/52/EU obliged the UK to address health in environmental impact assessments, which may be required as part of a planning application. The new legislation, which came into effect on 16 May 2017, adds human health to the list of environmental factors to be considered as part of the assessment.

Some buildings are already leading the way in air quality, visual acuity, acoustics and psychology within the working environment. There is also a focus on the connection of facilities and services to the internet. This not only revolutionises the building management system, but also provides invaluable data on what users want and where future investment can be focused.

The introduction of cutting edge sustainability and well-being measures into developments should ensure that our minds, bodies and buildings are all in better shape.

An earlier version of this article appeared in the summer 2017 EG London Investor Guide

Posted in Real Estate News

There and back again: boundary disputes bill restarts its journey in House of Lords

Boundary disputes are a messy business.  Once neighbours become embroiled in a dispute over the position of a boundary or the extent of a right of way, it seems that nothing short of a court order will put the matter to rest.

In order to prevent boundary disputes going through the courts, the House of Lords had been considering a private members’ bill which proposed that expert determination of such disputes should be mandatory.  Back in July 2015, we blogged about the first reading of the Property Boundaries (Resolution of Disputes) Bill which signalled the start of the bill’s journey through the House of Lords.  You can read our original blog here.

The bill seemed to be making good progress through the House of Lords, surviving a second reading in December 2016 with a date for the Committee stage expected in mid-2017.  However, the general election then intervened.

On 13 July 2017, the bill was reintroduced in the House of Lords.  The second reading to debate all aspects of the bill has yet to be scheduled.
The main amendment to the bill is the introduction of a set procedure for the Royal Institution of Chartered Surveyors (RICS) to issue a Code of Practice which specifies best practice in the preparation of plans and documents under the bill.  The draft Code must be approved by the Secretary of State and Parliament before coming into force.

Otherwise, the bill appears to be largely the same.  It seems that a prescriptive procedure in the form of the Code of Practice was sufficiently vital to warrant introducing it into the bill, yet the potential problems which we discussed in our previous blog have not been addressed.  Despite the Ministry of Justice’s concession that “mediation seems to be quite successful where it is used and may be capable of wider use“, the bill still doesn’t permit any other forms of ADR, nor does it take into account the possibility that a complex boundary dispute may require a detailed review of documents which are outside the remit of a surveyor.  It remains to be seen whether these issues will be resolved as the bill progresses to the second reading and Committee stages, or whether the bill as currently drafted can, or should, last the distance.

Posted in Real Estate News

Government proposes to abolish residential ground rents

Following a number of recent reports of scandals involving leasehold properties, the Rt Hon Sajid Javid MP, Secretary of State for Communities and Local Government, yesterday issued a consultation paper entitled “Tackling unfair practices in the leasehold market” with the aim of addressing particular issues.  You can read the full paper here.

We highlighted some of these issues back in February 2016, when we described the doubling ground rent issue at a flat in Solihull (see our blog post “Beware the hidden costs of ground rents“) and in May we blogged about Nationwide’s announcement that it would no longer provide mortgages on leasehold properties with similar doubling ground rents (see our blog post here).

The consultation paper confirms the government is minded to limit ground rents in new leases to a peppercorn (i.e. nothing), subject to certain exceptions.  However, they are seeking views on whether that is appropriate, or whether a more “reasonable” ground rent regime could be introduced.  This question covers the initial ground rent payable, but also the basis for any increases during the term of the lease.  For example, they refer to Nationwide’s suggestion that ground rent increases could be linked to RPI increases.

The paper also covers a number of other leasehold issues, and in particular seeks views on whether the government should limit the sale of new leasehold houses (as opposed to flats).  We’ll be covering some of these issues shortly, so watch this blog!

The consultation period runs for 8 weeks from 25 July.  The proposals are potentially very radical, so if you have views – whether you are a landlord, leaseholder or developer – follow this link and share your views with the Rt Hon Sajid Javid MP.

Posted in Real Estate News

Killing two birds with one brick: one dispute yields two useful Party Wall Act decisions

Party wall disputes may be common, but it is uncommon for them to reach the High Court. Despite the lack of clarity for which the Party Wall etc. Act 1996 (PWA 1996) has often been criticised (as alluded to in my previous blog on this Act here), it is quite rare that a case emerges under the Act which helps to clarify things.

Two decisions in the Technology and Construction Court arising from the dispute between Lea Valley Developments Ltd and Mr Thomas Derbyshire, which concerned neighbouring properties in Muswell Hill in North London, have provided clarification on not one, but two separate points.

The PWA 1996 provides an entire regime for the resolution of any dispute that falls within the ambit of the statute, which typically culminates in the party wall surveyors making a binding award which governs: conduct of the works; any compensation payable to the adjoining owner; allocation the costs of the statutory process; and any other matter arising out of or incidental to the dispute.

The dispute between Lea Valley and Mr Derbyshire related to the basis for calculating the amount of compensation payable to Mr Derbyshire in circumstances where the works carried out by Lea Valley caused so much damage to his property that the proper economic solution was for it to be demolished and rebuilt, rather than just repaired.

The first question for the court was whether it had the necessary jurisdiction to make that decision.  O’Farrell J held that the court has an inherent jurisdiction to make a declaration about a matter covered by the PWA 1996 regime, and it would take very clear wording in a statute for it to oust the inherent jurisdiction of the courts.  Unlike section 1 of the Arbitration Act 1996 (a statute passed in the same year), the PWA 1996 contains no such wording.

So, as well as the ability to deal with an appeal under section 10 of the Act, or to grant an injunction when a neighbour has failed to comply with the Act, the court has inherent jurisdiction to grant declaratory relief too.

As to what the correct measure of damages should be in the present case, Mr Adrian Williamson QC decided in the second case that the common law basis should apply. That is, the injured party should be restored to the position they would have been in had the damage not been caused. The value attributable to that was the cost of reinstating the building to its original condition, which in this case involved demolishing the existing building and rebuilding it.

In arriving at that conclusion, Mr Williamson QC drew parallels with the law of nuisance, reasoning that the cause of the damage was an action which (but for the operation of PWA 1996) would have constituted a legal nuisance, but emphasised that there is no hard and fast rule which can be applied in all cases.  The comparison might have been apt to the facts in this case, but I am not sure that the court would necessarily come to the same conclusion in every case. A different set of facts, especially about the type of property that was damaged (and the condition it was in), might have yielded a different decision.

A full copy of the case report can be found here.

This blog is based on a blog first prepared by Tim Reid for practicallaw.com.

Posted in Real Estate News

Money Laundering Regulations 2017: government rush threatens a teething period for property auctioneers

New money laundering regulations could prove to be a headache for property auctioneers until those affected get to grips with the changes, according to leading figures in the industry.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “Regulations”), as laid in Parliament on 22 June 2017 and coming into force just four days later on 26 June 2017, replace the previous regulations (the Money Laundering Regulations 2007 (MLR 2007) and the Transfer of Funds (Information on the Payer) Regulations 2007) and are intended to improve upon and plug certain gaps in the MLR 2007. The Regulations transpose the EU’s 4th Anti Money Laundering Directive into UK law and impose (amongst other changes) more rigorous due diligence demands on all those affected, including property auctioneers, requiring them to conduct more thorough due diligence to verify the identity of buyers and sellers, and to check the source of buyer’s funds.

There should normally be a minimum of 21 days between such statutory instruments being laid and coming into effect but, due to the general election, the government was forced to rush through the Regulations in order to meet the EU deadline of 26 June and avoid incurring fines if that deadline was not met.

As a result, auctioneers are having to get to grips with the new demands over a short period of time. The auction market is likely to be impacted particularly by the more stringent client due diligence (CDD) checks as, to date, auction houses have often only asked for a person’s ID once a bid has been accepted. Guidance just published by HMRC indicates that the new minimum CDD requirements include: completing customer due diligence on all customers and beneficial owners before entering into a business relationship or occasional transaction; and identifying and verifying a person acting on behalf of a customer, such as a person bidding at an auction on another’s behalf (including verifying that they have authority to act).

Despite the frustrations that auctioneers and their customers could face in the short-term, the RICS Real Estate Auction Group (RREAG) has commented[1] that transparency and a commitment to anti-money laundering is essential in the industry, and RREAG is consulting with HMRC on how the Regulations will be implemented and complied with going forward.

It is also hoped that HMRC will take into account the short amount of time businesses have had to acclimatise when assessing compliance whilst the Regulations are in their infancy.

In addition, as noted in HMRC’s consultation document, elements of the 4th Anti Money Laundering Directive were reopened following terrorist attacks in Europe and the leak of the “Panama papers” and those negotiations are still ongoing. The government intends to separately consult on the amended directive once it has been published in the Official Journal of the European Union and has come into force. Further changes may therefore be on their way.

As for Brexit, until exit negotiations are concluded, the UK remains a full member of the European Union. During this period, HMRC has confirmed that the government will continue to negotiate, implement and apply EU legislation.

[1]               See “Letter to the Editor”, EGi, 04/07/2017

Posted in Real Estate News

ESOS – Lessons Learned and Looking to the Future

Large businesses will remember the challenges of trying to comply with Phase I of the Energy Savings Opportunity Scheme (ESOS) in the run up to Christmas 2015. “Trying” was the operative word because “lead assessors” (who are key in assessing and signing off on a business’ ESOS compliance) proved to be in such short supply during the last minute rush of Q4 2015 that the Environment Agency had to extend the notification deadline of 5 December 2015 by six weeks.

ESOS operates on a 4 yearly cycle, so the submissions that were made in December 2015/January 2016, or since then, were in respect of Phase 1.  Phase 2 has now started, with a compliance deadline of 5 December 2019, by which time further audits must have been carried out and compliance reports submitted by businesses that are required to participate.  As with Phase 1, a business must participate in Phase 2 of ESOS if it is either (a) a UK company that (i) employs 250 or more people or (ii) has an annual turnover of more than €50m and an annual balance sheet total of more than €43m or (b) an overseas company with a UK registered establishment which has 250 or more UK employees paying income tax in the UK.  A corporate group must participate as a whole if one or more of the companies in it is large enough to fall within the Scheme.  ESOS does not distinguish between property investors, developers, occupiers or funders, so any business that is large enough to meet the qualification criteria is required to participate in it.

Given the difficulties that participants had in the lead up to the Phase 1 deadline in finding lead assessors, and auditors to carry out their audits, the Environment Agency is wisely encouraging businesses to start work on their Phase 2 energy audits well in advance of 5 December 2019.  An Environment Agency newsletter issued to participants in June says:

“If you know that you will qualify for Phase 2, there is no reason why you shouldn’t start doing your energy assessments now.  You will not be able to carry out the assessment of your ‘total energy consumption’, as this has to include the qualification date of 31 December 2018. However, where you know that an energy supply will be included in your ‘significant energy consumption’, you can do the audit work on this supply.”

In June this year, the Environment Agency also published the results of their analysis to date of the Phase I submissions. Hundreds of businesses could be fined as much as £50,000 if they incorrectly claimed that they did not qualify for the scheme by 29 April 2016, which was the ultimate deadline for Phase 1 of ESOS (allowing for late submission after the (extended) December 2015 deadline).  The highlights of those results are as follows:

  • Of the Environment Agency’s initial estimate of about 14,000 participants (which was revised down to about 10,000 in 2016, and then again in 2017 to an unconfirmed number given the complexity of corporate groups) about 6,800 had submitted compliance notifications by the end of January 2017.
  • Approximately 1,500 businesses that the Environment Agency had thought might have to participate in ESOS had not contacted the Environment Agency at all. The Environment Agency has issued 300 enforcement notices to businesses in this group and confirmed to another 500 that they do not need to comply.  It expects to issue more enforcement notices to businesses in this group by the end of this year.
  • Approximately another 1,000 businesses contacted the Environment Agency to say that they did not need to comply; the Environment Agency has disagreed with “a number” of these businesses and will be issuing enforcement notices to them as well.
  • The Environment Agency audited 200 of the 6,800 ESOS compliance notifications received, and found only 16% of them to be fully compliant.  75% undertook remedial actions when asked to do so, which then made them compliant as well.  This does raise a concern over the quality of the audits and auditors that were engaged by participants, which had previously been flagged by some lead assessors advising businesses on Phase 1.
  • Of the remaining 9% of the sample, 4% were found to be from businesses that did not qualify for ESOS and 5% were non-compliant and did not undertake remedial actions.

Given the concerns about the quality of some of the audits that were undertaken in Phase 1, we encourage businesses to start thinking now about their strategy for compliance with Phase 2 of ESOS, and in particular to engage now with the auditors and lead assessors that they would like to instruct while those individuals still have capacity to undertake the necessary work.  A last minute rush in Q4 2019 is perhaps inevitable, but businesses that can get ahead of it should get better quality audits and allow themselves plenty of time to ensure that they have complied in full, especially where careful analysis of complex corporate group and/or property ownership structures are required to ensure that they have complied in respect of the correct group entities and properties.  There is always the possibility of implementing sooner something that may actually save energy and money, too.

Despite previous speculation about the immediate future of ESOS, which stemmed both from its inclusion in the 2015 Government review of energy efficiency taxes and the Brexit vote (given that the Scheme is the UK’s implementation of Article 8 of the European Energy Efficiency Directive), the Environment Agency confirmed last month that the Scheme will continue to operate as planned, effectively putting an end to such speculation. We previously blogged here on a potential expansion of ESOS as part of a replacement of the Carbon Reduction Commitment Energy Efficiency Scheme but, as nothing further has been heard on this, we assume that it won’t be happening any time soon.  So for now, businesses will need to think about compliance with the next Phase of the CRC, too, as the qualification year for that started in April this year.

Posted in Real Estate News

EMI and Frankenstein: Not dead yet

Last year, we blogged here on the case of EMI Group Limited v O&H Q1 Limited.  EMI was a case in which an assignment of a lease was rendered void, as it offended the provisions of the Landlord and Tenant (Covenants) Act 1995 which require tenants and guarantors to be released on assignment.  The Court confirmed that a tenant could not assign its lease to its guarantor.  It rejected the idea that the guarantor could take the benefit of the lease without the tenant covenants (a “Frankenstein’s monster” of a tenancy).  Instead, the Court decided that the entire assignment was void. In doing so, the case highlighted the “unattractively limiting and commercially unrealistic effect” of previous Court decisions which have in many circumstances hampered a tenant’s ability to assign its lease intra- group.  To the frustration of many, these restrictions on the tenant’s ability to assign apply even where all parties are prepared for and fully advised of the consequences.

The EMI case has now settled and will not go to appeal. The opportunity for the Court of Appeal to revisit, and perhaps clarify, this area of the law has, for the time being, been lost.  There is however some hope for those frustrated by the, perhaps, unintended consequences of the 1995 Act.  The Property Litigation Association (“PLA”) has submitted proposed amendments to the 1995 Act to the Law Commission, with the support of the British Property Federation, the British Retail Consortium and the Property Bar Association.  Details of the proposed amendments can be found here.  These reforms address the difficulties currently faced with intra-group assignments, along with a suite of other issues that have arisen as a result of the 1995 Act. The PLA proposes, amongst other things, to allow guarantors to give repeat guarantees in intra-group scenarios and specifically tackles the issue that arose in EMI by proposing to allow a guarantor to take an assignment of a lease.

The Law Commission will shortly announce its projects for the Thirteenth Programme of reform and many hope to find the 1995 Act on the list.

Posted in Real Estate News

Government pushes ahead with ban on residential letting fees

The government has announced that it will bring forward proposals to ban letting agent fees in England.  The measures, announced in the Queen’s Speech, will be implemented through a new Tenants’ Fees Bill.

The government had already targeted upfront fees in the 2016 Autumn Statement with a promise to ban fees “as soon as possible”; a promise which was reiterated in the conservative party manifesto. An eight-week consultation was published in April of this year and closed on 2 June. The government has yet to publish the results of that consultation. The measure is likely to pass into law, as all the main parties included similar commitments in their election manifestos.

With figures indicating that the average fee for each tenancy is £223, the government’s key measure will be to ban landlords and agents from requiring tenants to pay such costs as a condition of their tenancy. The government hopes that this will increase transparency and make renting fairer and more affordable for millions of tenants. Of course, the cost of renting will only become more affordable if the charges are not ultimately passed onto tenants in other ways, such as rent hikes.

Although the draft Bill is expected to ban any conditional payments for a tenancy there will be exceptions: rent; a capped refundable security deposit; a capped refundable holding deposit (to take the property off the market); and tenant default fees. Holding deposits will be capped at no more than one week’s rent and security deposits at no more than one month’s rent.  Although no reference is made to service charges this was flagged up as an exception in the consultation and we would expect them to be dealt with in the Bill.

Measures are also expected to be introduced to enforce the ban with provision for tenants to be able to recover unlawfully charged fees but it is not clear whether this would be retrospective or only apply to fees charged after the legislation comes into effect.

Until the draft Bill is published, the exact extent of the proposals will remain unclear but the message that the government has chosen to promote is that it is firmly grasping this particular nettle to take the sting out of letting fees for tenants.

Posted in Real Estate News

Removing the limits – a new class of real estate investment vehicle

UK limited partnerships have been go-to investment vehicles for United Kingdom real estate for many years.  Their attraction lies principally in their tax transparency, contractual flexibility and the limited liability protection they are able to offer investors.  They have not been without their issues, however, and, from 6 April 2017, investors and fund managers are able to make use of new legislation that has created a more flexible and simplified class of vehicle – the ‘private fund limited partnership’ (PFLP).

The legislative reform is designed to modernise, simplify and amend the existing legislation on UK limited partnerships in order to ensure that they remain competitive, particularly in light of newer tax efficient vehicles offered by major offshore jurisdictions.

All UK limited partnerships (both existing and new) that meet the PFLP conditions can apply to become PFLPs. The principle changes introduced by the PFLP regime relate to:

(a) The inclusion of a “white list” of activities that a limited partner can undertake without jeopardising its limited liability status.

(b) Increased flexibility in how PFLPs are funded by limited partners and in how limited partner capital is returned.

(c) The removal of other administrative burdens.

A non-exhaustive “white list” of limited partner actions

If a limited partner in a UK limited partnership participates in the management of the partnership’s affairs, it risks losing its limited liability. As a result, the introduction of a “white list” of safe harbours for limited partners in PFLPs provides some welcome clarity.

The white list proposals align PFLPs with a number of offshore jurisdictions regularly used in real estate investment structures (including Jersey, Guernsey and Luxembourg), which already provide safe harbours for limited partner involvement in decision making.

The white list includes: amendments to the PFLP agreement and the PFLP’s business; approving valuations of the PFLP’s assets; approving the PFLP’s accounts; extending the life of the PFLP; and deciding who will run the PFLP’s day-to-day business (all of which are matters that are usual for investors to carry on).  In addition, a limited partner of a PFLP will be allowed to be a director or shareholder of the general partner and to appoint representatives to a limited partner committee.

The white list is not exhaustive nor is it prescriptive; it will be a matter of commercial negotiation and agreement between the partners as to whether limited partners will be entitled to carry on any of the listed activities.

Relaxation of capital requirements

On the administrative side, the requirement to make a capital contribution will be removed for new PFLPs set up after 6 April 2017 and there will be no need to declare capital contributions at Companies House.  If any (optional) capital contributions are made to these new PFLPs, they will be capable of withdrawal. The current law will continue to apply, however, to capital contributions that were made to existing UK limited partnerships before they opted into the PFLP regime.  This means that although such capital contributions can be withdrawn, the limited partners may be required to return them.

The dual approach will ensure that any creditors will not be prejudiced by a UK limited partnership’s subsequent reclassification as a PFLP.

How to qualify as a PFLP

To qualify, the UK limited partnership must satisfy the following conditions:

(a) it is constituted by a written partnership agreement;

(b) it is a “collective investment scheme” for the purposes of the Financial Services and Markets Act 2000, which includes those that would qualify as collective investment schemes were it not for one of the statutory exceptions.

Registration

UK limited partnerships that qualify may opt into the PFLP regime:

(a) if registered on or after 6 April 2017, immediately upon registration (or they can opt in at a later date); or

(b) if registered before 6 April 2017, at any time after 6 April 2017.

Once a UK limited partnership becomes a PFLP, however, it will not be able to return to its ordinary limited partnership status.

Going forward

The creation of the PFLP regime is a welcome step and the conditions for qualification as a PFLP are straightforward.  We expect that the PFLP is likely to be the default choice for investors using UK limited partnership structures going forwards.

An earlier, expanded version of this blog appeared in our Real Estate Quarterly Spring 2017 edition.

Posted in Real Estate News

Nationwide announces position on onerous ground rents

Nationwide announced recently that it will not lend on new build residential leasehold properties if the amount of ground rent is more than 0.1% of the purchase price.

This change has been introduced by Nationwide in part to protect the marketability of the property from what Nationwide describes as “unreasonable multipliers”, such as ground rents doubling every five, ten or 15 years.

As many of our readers will be aware, ground rents are annual rental payments made to the freeholder under a long lease of a house or flat.  The amount payable can range from practically nothing (a “peppercorn” rent) to a significantly greater sum.  Last year, we blogged about the dangers of a ground rent which doubled every 10 years in the lease of a flat, which theoretically resulted in the annual ground rent ending up as millions of pounds.

Nationwide’s announcement brings welcome transparency to the type of ground rents that lenders will consider to be onerous.  This is helpful for occupiers, but also for developers, many of whom will factor future ground rent income into their viability assessments when planning developments.

Nationwide’s view is that escalating ground rents should be index linked, such as to the Retail Prices Index (RPI).  Index linked increases are seen as fairer than a doubling or other fixed % uplift ground rent, but they are no less complex, and bring their own issues.

Future rent payable is uncertain (and could end up being more than 0.1% of the value of the property).  Careful attention must be paid to the way in which the provisions are drafted, otherwise the unwary can fall into traps (such as compounding RPI increases).  And of course the provisions must cater for future changes in the way in which the RPI is calculated, or even if it is abolished (less likely for a 10 year lease, much more likely for a 999 year lease!)

Whatever the merits of increasing ground rents, as the doubling ground rent scenario demonstrates, any increase in rent should be drafted in a way that is clear and transparent, so that it can be more easily understood by both leaseholders and landlords.