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Keeping It Real Estate

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

Posted in Real Estate News

Real estate: the “go to” source of tax revenue?

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.

Posted in Real Estate News

Residential Landlords: Don’t Fall Foul of Right to Rent!

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.

Posted in Real Estate News

UK Bribery Act – keeping to the rules

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.

Posted in Real Estate News

Cyber security and real estate – the time is now

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.

 

Posted in Real Estate

Rights of Light – A new dawn?

On 25 October 2016, the Hogan Lovells Real Estate team hosted a panel debate: Rights of Light – A New Dawn? The panel of industry specialists debated topical issues including:

(a) the likelihood of adjoining owners obtaining an injunction to prevent interference with rights of light;

(b) whether recent developments in case law mean that developers need to adjust their strategy for addressing rights of light;

(c) the role of insurance; and

(d) the impact of the new section 203 of the Housing and Planning Act 2016.

The consensus amongst the panel was that recent case law, such as Coventry v Lawrence [2014] and the very recent Court of Appeal decision in Ottercroft v Scandia Care [2016], has made clear that the courts have a broad discretion in deciding whether to grant an injunction to prevent interference with rights of light and that this may make the outcome of any claim more difficult to predict. It is also clear that the conduct of the parties will be put under close scrutiny – developers who fail to engage properly with their neighbours, even in respect of minor infringements, could find themselves faced with an injunction. On the other hand, well-advised developers who engage openly and reasonably from an early stage perhaps have some cause to feel more confident when it comes to defending injunction claims from adjoining owners seeking a ransom payment.

The panel felt that the current uncertainty has brought into focus the role which insurance has to play in any rights of light strategy. Fraser Pratt, Head of Rights of Light and Legal Indemnities at PIB Insurance, commented that the insurance market has moved on considerably over recent years to provide products which fit within the current legal landscape and that developers would be well advised to engage with insurers at an early stage in the process.

The panel agreed that the powers of the local planning authority also have a key role on large schemes. The local authority’s powers to override rights of light under section 237 of the Town and Country Planning Act 1990 have been replaced by section 203 of the Housing and Planning Act 2016. The panel felt that the new powers were likely to be the same in scope as the previous powers under section 237, despite some changes in the wording. However, Oliver Law, Founding Director of The Chancery Group, commented that local authorities may take time to get used to the new powers and may be more cautious in exercising them in the interim.

Overall, the panel agreed that a key aspect of successfully addressing rights of light claims was to put together a joined-up strategy from day one, involving not just rights of light surveyors but also the legal team, insurers and planning consultants.

The panel comprised of:

Jonathan Karas QC – Barrister, Falcon Chambers
Greville Healey – Barrister, Falcon Chambers
Oliver Law – Rights of Light Surveyor and Founding Director, The Chancery Group
Fraser Pratt – Head of Rights of Light and Legal Indemnities, PIB Insurance
Paul Tonkin – Senior Associate, Hogan Lovells

Chair: Mathew Ditchburn – Partner, Hogan Lovells

Posted in Case Updates

A costly lesson in consent

When a tenant wants to assign its lease but needs the landlord’s consent, the law (if not the lease) prevents the landlord from acting unreasonably.  The landlord may want to withhold consent or impose conditions, but how does it know whether that is considered reasonable?

Earlier this month the High Court considered this question in No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd.   The landlord refused consent to assign unless:

  1. the proposed assignee provided bank references;
  2. the landlord was permitted to inspect the premises and recover its costs of doing so (£350 plus VAT); and
  3. the tenant provided an undertaking to pay the landlord’s costs of dealing with the application in the sum of £1,600 plus VAT.

The Court said that if the landlord had imposed only the first two conditions, then the tenant’s failure to agree them would have provided reasonable grounds for refusing consent.  A landlord is entitled to see whether a proposed assignee is going to be able to meet its obligations under the lease.  Landlords should also be able to examine the premises to ascertain whether the tenant has breached any of its lease covenants.

However, the Court found that the landlord’s decision really turned on the third condition, which was unreasonable because the sum of £1,600 was excessive in the circumstances.  Furthermore, the unreasonableness of that condition cancelled out the other two reasonable conditions.  The tenant was therefore free to assign without consent.

The landlord in the case may have fared better if it had followed the Alienation Protocol, which offers practical tips for landlords and tenants on how to manage the process of applying for and either giving or withholding consent.  Every case will turn on its facts, of course, but following the best practice and helpful guidelines set out in the protocol should help minimise the risk of landlords and tenants falling foul of needless and avoidable disputes in future.

Posted in Real Estate News

Business rates – VOA guidance published

In 2015, the Supreme Court held that an occupier of separate floors in an office block which were not contiguous (sharing a common border) or interconnected, and could only be accessed via common parts, were separate units or “hereditaments” for ratings purposes. Previously the Valuation Office Agency had suggested that the tenant at the top of a multi-let building could have all of its contiguous floors treated as one hereditament.  However, the VOA has now formally endorsed the Supreme Court’s approach and provided a number of examples in order to illustrate the position.

The key principles are as follows:

  1. a tenant who is the sole occupier of a whole building will have one assessment for ratings purposes;
  2. a tenant of a number of floors in a multi-let building will have a separate assessment for each floor (where they are accessed by communal areas);
  3. an owner of a building who leases out one floor will have a separate assessment for each floor (where they are accessed by communal areas) and the tenant will have an assessment for its floor;
  4. a tenant of a number of floors in a multi-let building will have one assessment where the floors are self-contained, for example where they are accessed by private staircases; and
  5. a tenant of two adjacent but unconnected units separated by a communal yard will have a separate assessment for each unit.

No doubt the guidance has clarified what constitutes a hereditament; however, the real question is what impact this will have in practice.

A business which occupies more than one floor in a multi-let building is likely to be hit with separate bills for the different areas and possibly an increased overall rates bill (unless the floors are self-contained). The same is true for an occupier of two adjacent, unconnected units. However, the VOA has failed to confirm when the revaluations are to take place and so businesses can’t yet be certain what the increased liability will amount to or when to expect it.

The changes are set to have retrospective effect. The VOA confirmed that any change in assessment will be backdated to the more recent of (i) 1 April 2015 in England or 1 April 2010 in Wales and (ii) the date of occupation. This will be of concern to many businesses, many of whom may not have made provision for these increased liabilities.

The VOA has stated that a business need not do anything unless it hears from them; however, businesses need to be able to prepare for future increased liabilities and to devise a plan to deal with any backdated costs. Few will be happy to sit and wait for the VOA to contact them but the guidance suggests there is little more that can be done.

Guidance: https://www.gov.uk/government/news/changes-to-how-we-value-some-non-domestic-properties-with-more-than-one-occupier

Our previous blog on the Supreme Court decision:

Business rates: the Supreme Court decides on rating practice for separate floors in a building

 

Posted in Real Estate News

A Game of Drones

The use of drones in the UK is rapidly increasing. Construction companies use drones to survey sites, local authorities use them to assist with planning applications and the retail sector will no doubt be revolutionised by aerial delivery. There is even a suggestion that drone visits will replace site viewings by 2025.

Operators must be particularly wary when flying over land they don’t own.  Equally, landowners should be aware of their airspace and property rights. Regulation breaches, aerial trespass and nuisance claims, impact property damage (with related buildings insurance claims) and data protection infringement are all potentially relevant.

Aviation regulations differentiate drones by weight. Small drones (under 20kg) must be operated with direct and unaided visual contact at all times. For drones weighing between 20–150kg, both airworthiness approval and Civil Aviation Authority (CAA) registration are required. Drones over 150kg fall within the remit of the European Safety Agency while drones weighing anything below 150kg are regulated by the CAA.

While a drone operator doesn’t require a licence, CAA permission is required to fly a drone for “aerial work”, which broadly includes surveillance, data gathering, or flying within 50 metres of any person, vessel, vehicle or structure not controlled by the drone operator.  Breach of the aviation regulations is a criminal offence and the CAA has successfully brought prosecutions in respect of drones.

We watch with interest to see how the law develops in months to come (particularly as Brexit plays out, given that much of the aviation framework is governed by EU law). Ultimately, a balance will need to be struck between reassuring the public that security, property and privacy are protected without overregulation.

For further information see here.

Posted in Real Estate News

Hogan Lovells wins Real Estate Legal Team of the Year at the EG Awards!

We are delighted to have won the inaugural Real Estate Legal Team of the Year category at the 2016 Estates Gazette Awards!

We were recognised for our work across the full spectrum of real estate, including development, investment, planning, and disputes.  A panel of leading real estate industry judges praised our work on headline-grabbing deals over the past year, from the BBC’s sale and leaseback of Media Village to Argent/Related’s £4bn redevelopment of Brent Cross South, as well as our commitment to real estate as a sector, including asset management work.

Jackie Newstead, Global Head of Real Estate said “I am delighted for the whole real estate team here at Hogan Lovells that all the hard work everyone puts in on a daily basis has been recognised in being awarded the first ever award for Real Estate Legal Team of the Year by Estates Gazette.  It is a real honour to be chosen by the judges, who come from right across the real estate industry.”

The award was presented at a full house of property’s leading lights at the Grosvenor House Hotel on London’s Park Lane. To view all the winners, please click here.

This fantastic news followed hot on the heels of our promotion to the elite top band in Legal 500 UK for commercial property, where we are also top-ranked for development, hotels and leisure, and property litigation.

Jackie Newstead, Nicholas Cheffings, Oliver Chamberlain and Gill McGreevy collecting our awardegawards16-winners_Real-Estate-Legal-Team-of-the-Year

Jackie Newstead, Nicholas Cheffings, Oliver Chamberlain and Gill McGreevy collecting our award.