Header graphic for print

Keeping It Real Estate

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

Posted in Real Estate News

Turning over a New Leaf – the impact of multichanneling on turnover rents

We all know that multichannelling is having a major impact on the retail industry and the negotiation of leases is not immune from this.

One of the main areas affected is the capture of turnover rent and, increasingly, tailored drafting is required to reflect the differences in tenants’ businesses. For those who weren’t able to make our Retail Property Disputes Seminar last week, here are some of the key questions to bear in mind when agreeing turnover rent provisions at heads of terms stage:

  1. How does the tenant allocate its online orders – to the nearest store or to a separate online company?
  2. Which channels does the tenant use at the moment and how might its business evolve during the life of the lease?
  3. How will online returns to the store be dealt with and how can this be policed?
  4. How will the turnover provisions deal with click and collect orders that are picked up from the store?
  5. What about group companies which comprise a number of separate retail brands operating from their own stores, who allow customers to collect items ordered online from a designated store regardless of the brand? Convenience is key to the customer but if retailers are charged turnover rent on these items, they might be tempted to only allow collection from a store with no turnover rent provisions even if it is not as convenient or, in the worst case, not allow collection at all.
  6. How will the lease deal with orders placed on devices within a shopping centre but outside a tenant’s premises?
  7. How will the landlord audit information provided by the tenant and does it know enough about the tenant’s business to do this effectively?

The key to effective turnover rent is greater understanding and communication between landlords and tenants, a trend which started during the recent downturn and which is of growing importance.

It is also worth landlords and tenants bearing in mind the rent review provisions. Over time, it is likely that retailers will carry less stock in their stores as sales continue to migrate online. The upshot of this trend is that the optimum demise size is likely to decrease as less back of house space is required.

There is also an increasing trend towards shops becoming showrooms, where customers come to inspect and learn about goods that are then purchased online using a variety of devices. Over time, it will be interesting to see how this change of use affects rental levels, particularly in places such as shopping centres, where conventional retailers are mixed with multichannel operators.

Posted in Planning

TVG hopes left on the beach

The Supreme Court ruled on Wednesday that a beach in Newhaven could not be registered as a town or village green (TVG).

Opponents to development have long been using the TVG route to thwart unwelcome works, as once land is registered as a TVG it is effectively sterilised for redevelopment.  In order to register land as a TVG, members of the public must be able to demonstrate that a significant number of local inhabitants have used the area “as of right” for lawful sports and pastimes for at least 20 years.  However, over recent years, case law interpreting this test has tended to lessen the burden on applicants, making it easier for land to be registered as a TVG.  This recent decision takes a welcome step in the other direction.

The application related to a beach which was part of the operational port (and had indeed only been formed as a result of the construction of a breakwater).  There were many controls on the operation of the port, including various statutory provisions and byelaws regulating its use by members of the public.

Although the principle that a beach could be registered as a TVG was not argued at Supreme Court level, the operators of the port argued that the relevant byelaws granted an implied licence for members of the public to use the beach, provided they did so in accordance with certain conditions.  This position was accepted and it was further held that the byelaws did not need to be brought to the public’s attention for an implied licence to exist.

As it was held that there was an implied licence for use by members of the public, this use became “by right” and not “as of right”, and the beach was not registered as a TVG.

According to the Court, where a landowner can show that land used by members of the public is regulated by statutory provisions or byelaws, even if members of the public are not aware of them, there will be an implied licence in place. This means that any such use is not “as of right” and will ultimately defeat any application to register the land as a TVG. Therefore this decision will be welcomed by the development industry.

Case: R (on the application of Newhaven Port & Properties Limited) (Appellant) v East Sussex County Council and another (Respondents) [2015] UKSC 7

Posted in Real Estate News

Taxing Variations? Part Two- VAT on Lease Variations

In the second of this two part blog we look at the VAT consequences of lease variations.

If either party has opted to tax the property for VAT purposes then VAT will need to be charged on any supplies treated as made by that party, but often the parties do not appreciate that there has in fact been a supply.

For example, it is not uncommon for the parties to vary a lease to remove a tenant’s break option in consideration of an additional rent free period. If the landlord has opted to tax the property, it should charge VAT on the value of the consideration (from the landlord’s perspective) given by the tenant (i.e. the value of the tenant’s break option). If the variation is an even commercial deal, then the value of the tenant’s variations will be the same as the value of the landlord’s variations. So in this example the value of the tenant’s break option will be the same as the rent the landlord is forgoing.

If the tenant has opted to tax the property it would also have to charge VAT on the variation. In that case, the parties can agree to swap VAT invoices on completion marked “paid” rather than paying an equal amount of cash to each other: the net effect on their VAT accounts should be neutral assuming both can recover the input VAT in full. This will clearly have a cash flow advantage and for this reason a tenant may want to opt to tax its interest in the property ahead of the variation.

The position is more complex where a variation causes a deemed surrender and re-grant. As discussed in the first part of this blog, this may be an unintentional consequence of a lease variation (for example if there is an increase in the duration of the lease or in the extent of the demise). HMRC issued a statement of practice on this topic in the 1990s suggesting that the deemed surrender and re-grant will sometimes be accepted as a non-event for VAT purposes, probably reflecting the fact that they often represent the functioning of land law rather than transfers of commercial value.

However, the treatment of the deemed surrender and re-grant needs to be considered in the context of the transaction as a whole: VAT may well be chargeable on other elements of the transaction. The statement of practice does envisage that VAT will be charged on the surrender if a landlord pays cash, or if the demise or term is reduced (subject to an option to tax). Likewise, if the tenant pays cash for the variation VAT is usually charged on the deemed re-grant, or alternatively the landlord may be seen as making a taxable supply of accepting the surrender of the old lease if, for example, it is onerous. Advice should be taken on a case by case basis.

Posted in Real Estate News

Taxing Variations? Part One- SDLT on Lease Variations

The reach of the tax man is long and in the context of lease variations it may also result in unexpected consequences for unwary landlords and tenants.  In the first of this two part blog we outline the various SDLT implications which may arise from common lease variations.

  • A variation to increase the rent in the first five years of the term is treated as if it were the grant of a new lease in consideration of the additional rent.  SDLT is payable by reference to the increase in rent.
  • Some variations will result in a deemed surrender and re-grant of the lease, which may be an unintentional consequence of the variation. This will happen, for example, where the variation is an increase in the duration of the lease or in the extent of the demise. For SDLT purposes this will also be treated as if it is the grant of a new lease and (as for any other lease) SDLT is payable in respect of the deemed new lease subject to the availability of “overlap” relief.  For this reason (as well as other property law reasons), tenants may want to mitigate the SDLT implications by taking a reversionary lease for the additional term or a supplementary lease of the additional demise, particularly if the original lease was subject to stamp duty.
  • Where the tenant gives money or money’s worth for a variation (other than an increase in the rent or a variation to the term), the variation is treated as an acquisition of a chargeable interest by the tenant and SDLT must be paid on the consideration.  Consideration given by the tenant for a reduction in rent is also chargeable to SDLT, although HMRC state that they ignore a party relinquishing a right under a lease (such as a tenant’s break option) for these purposes.

The relevant notification and charging thresholds, and the rules for linked transactions, should be taken into account in each case.

Watch out for Part Two of Taxing Variations in tomorrow’s blog.

Posted in Real Estate News

MCL gathers pace

The Model Commercial Lease steering committee (of which I am part) met yesterday.  The MCL is quietly gathering momentum with major real estate firms steadily reviewing and committing to support it regularly.  The MCL team have had lots of feedback with many really useful suggestions. Most of those will find their way into an updated version around Easter time.

Thorny issues remain.  There is no real consensus on how you address uninsured risks. Everyone easily agrees the tenant shouldn’t end up as “default insurer”. Getting a one size fits all solution to that is less easy.

Watch out for the article in The Law Society Gazette in the next couple of weeks for more on the MCL.

Posted in Real Estate News

Who says crime doesn’t pay?

Since 1 September 2012, it has been a criminal offence to squat in residential property. However, how does this interact with the right of a squatter to claim ownership by way of adverse possession where he has been in possession of the property for the requisite 10 years but squatting has subsequently been criminalised?

The interrelationship between these issues has been considered recently by the Court of Appeal in the case of Best v The Chief Land Registrar. In 1997 Mr Best took possession of an empty and vandalised house and undertook substantial improvement works.  From 2001, he treated the house as his own although he did not actually move into the property until January 2012.

Mr Best applied to the Land Registry to have the property registered in his name on the basis of adverse possession. However, the Registrar refused to allow the application on the ground that his occupation since September 2012 had been a criminal offence and he could not rely upon what were now criminal acts to found his claim.

Mr Best appealed to the High Court, who found in his favour. The case then went to the Court of Appeal which again sided with Mr Best. The view of the Court of Appeal was that there was no general rule that criminal acts could never be relied upon to support a claim. Rather, the public policy considerations needed to be weighed up on both sides. In this case, the public policy objective of the new criminal offence was to provide homeowners with a speedy means of removing squatters from their homes. That was not inconsistent with the public policy objectives of the law of adverse possession – including the need to ensure that land is put to good use. Therefore, the two regimes could exist side by side.

The court was also influenced by the arbitrary distinctions which could otherwise arise. For example, the criminal offence was only committed by occupying the property. Therefore, a squatter who occupied a residential property would not be able to eventually claim possession, whereas one who was in adverse possession in some other way, for example, by fencing the property off, could still claim.

Whilst the reasoning of the court’s decision is hard to criticise, it appears that, in this instance at least, crime may well pay!

Case: Best v Chief Land Registrar [2015] EWCA Civ 17

Posted in Planning

The NPPF – How is it doing?

It is nearly 3 years since the government converted hundreds of pages of planning policy into a single 50 page document, the National Planning Policy Framework, with the promotion of sustainable development at its heart. But has the NPPF made a difference? The House of Commons CLG Committee recently published its report on the operation of the NPPF. It concluded:

  1. The NPPF needs more time to bed in, and the government needs to collect more data, before a full assessment can be made.
  2. The evidence highlights a number of emerging concerns: the NPPF is failing to prevent unsustainable development in some areas; inappropriate housing is being imposed upon some communities as a result of speculative planning applications; and town centres are insufficiently protected against the threat of out of town development.
  3. Accordingly, the policy needs to be strengthened:
    • First, to ensure that sustainable development is delivered, the same weight must be given to the environmental and social dimensions as to the economic one. Permission should be granted only where supported by infrastructure, and emphasis must be placed on the natural environment.
    • Second, councils must adopt development plans more quickly.
    • Third, the complex issue of the supply of housing land must be addressed so that loopholes are closed, and guidance on the assessment of housing need is clarified. Green belt reviews should be encouraged.
    • Finally, town centres must be better protected, through changes to permitted development rights.

“Could do better” seems to be the assessment. But following May’s general election, will the new government have the appetite to implement any changes?

Posted in Real Estate News

The Heat is On

The shockwave travelling around the property industry at the moment is that landlords of multi-let buildings who operate communal central heating systems are considered to be suppliers of heating, cooling or hot water and must comply with the Heat Network (Metering and Billing) Regulations 2014.

The introduction of the Regulations is staggered so, by 20 April 2015 (and then at least every 4 years), a supplier must notify the Secretary of State of the communal heating system and provide details of its location, the number and types of buildings and customers it supplies along with estimates for the yearly heating capacity, heat generated and heat supplied.

From 31 December 2014, where meters/heat cost allocators have been installed, suppliers must ensure that bills and billing information for the consumption of heating, cooling or hot water by a final customer are accurate and based on actual consumption.  This is going to be really tricky where service charges are apportioned in leases on, for example, a weighted floor area basis.

From 31 December 2016, suppliers must:

(a) install meters in buildings where there is more than one final customer and the building is supplied by a communal heating system, to measure consumption by each final customer (this includes all existing and new communal heating systems);

(b) if it is not cost effective or technically feasible to install meters, the supplier must install heat cost allocators and thermostatic radiator valves on each radiator, in order to calculate and enable each final customer to control its consumption.  Hot water meters must also be installed.

(c) if it is not cost effective and technically feasible to install cost allocators and thermostatic radiator valves, the supplier must use alternative methods of calculating charges for the supply of heating and hot water.

A breach of the Regulations could result in a fine of up to £5,000 per offence, plus daily penalties of £500 until the breach is remedied. However, no person will be prosecuted for a breach that occurred before 30 April 2015.  But there are also “naming and shaming” powers and the reputational harm that could arise is probably more of a concern for landlords. Do you have multi-let buildings?  If so, you need to know about these Regulations and you probably need to notify someone of your communal heating system soon!

Posted in Real Estate News

The European Commission approves Flood Re, but more criticism rains down

Last week the European Commission approved Flood Re, the reinsurance scheme designed to ensure the availability of flood insurance for homes and small businesses at high risk of flooding.

The Government sought approval from the Commission because there is a risk that the scheme could amount to a form of state aid which would confer a competitive advantage on the participating insurers. However, the Commission found that:

  • The aid was proportionate to the goal of facilitating the availability of flood insurance at affordable prices in high risk areas;
  • Flood Re is open on the same terms to all domestic insurers in the UK market so the distortions of competition will be minimised; and
  • Flood Re is intended to be a transitional scheme with a life of 20-25 years during which time the Government has committed to invest in infrastructure to improve flood risk management.

The decision has been lauded by the Commission as “a great illustration of how the Commission and Member States can work together to design effective aid measures that contribute to important public policy goals“, but the story is unlikely to end there.

Barely a week later Flood Re is back in the headlines facing more criticism, this time from the Committee on Climate Change.  They contend that the scheme breaks normal government spending rules because it offers negative value for money and will never be a long term solution to flood risk.  They also warn that it could act as a disincentive to property owners to manage flood risk as it removes the financial impetus to do so. They claim that the money would be better spent on bolstering flood defences for properties at high risk.

The Environment Agency predicts that by 2035 the number of properties at significant flood risk will rise by 350,000.  Most commercial properties will not benefit from Flood Re anyway, but all property owners have a vested interest in ensuring that flood risk management remains front of mind even if it does not remain on the front page of the newspapers.

Posted in Real Estate News

Hotels: Business as (un)usual

Hogan Lovells and CBRE Hotels hosted their sixth annual hotel conference on 4 February 2015 to explore how hotels are faring in the third wave of the digital revolution. Entitled “Voting with their feet: how to win guests and influence people” in this general election year, the delegates themselves had a chance to vote on their views.

A “return to normal” on the investment front

The polls showed that:

  • 2014 was a good year – in February 2014, 94% of delegates were optimistic about the prospects for the hotel industry in 2014 and in February 2015, 96% felt that they had been vindicated (borne out by the 2014 figures which recorded a total investment volume of £4.6 billion).
  • The sun is still shining – there is continued faith in a buoyant market, with 96% optimistic or very optimistic for the current year.
  • London is still on the up – the cheer was slightly more muted on improvement in London REVPAR (revenue per available room) in 2015, but 70% still expected a rise (most of whom anticipated a slower rate of growth than last year) with 30% expecting REVPAR to be static or decline overall.
  • The regions are resurgent – this year is tipped as the year for the regions to bounce back strongly – with 90% expecting REVPAR growth, only 10% expecting stagnation, and none anticipating REVPAR to fall.

The majority (62%) expected a resumption of normal investment activity as distressed sales, restructures and workouts from the last recession run their course.

An operational revolution

At an operational level, it seems there is no such thing as “normal” and the ground is shifting constantly as hotels grapple with the third digital revolution.  Jonathan Langston of CBRE Hotels interviewed keynote speaker, Tim Brown, VP of Oracle Hospitality, following the merger last year between Oracle and hospitality solution provider Micros. Brian Reeves of GOPPAR Digital gave a message of hope for hoteliers to reclaim ground lost in the battle against booking fees and online booking agents.

Big data will continue to drive developments like the “Shanghai experience” – hotels without a reception desk where hosts in a lounge check in guests with a tablet-pc. This is just the first glimpse of something revolutionary, with technology and social media allowing hotels to deliver a much more bespoke experience and to deploy staff away from administration and repetitive tasks towards enhancing the customer experience. Hoteliers faced with a mountain of data need to remain focussed on their guests and take bold decisions to avoid “analysis paralysis”.

Operators were asked to take the opportunity to treat revenue, sales, distribution, marketing and pricing as a single business function as the distinction between those roles becomes blurred.

“Big data” regulation

Hot on the heels of big data comes greater regulatory protection. Although the picture internationally on data protection is mixed, the proposed Data Protection Regulation will reform the position across the EU, backed up by stiff penalties for non-compliance. At present, it seems likely to come into force in 2016. Hoteliers were cautioned to build future-proofed privacy and data protection into their strategy from the outset and take care to ensure that their customers’ data is dealt with legally.

Panel session: running to stand still

Andrew Sangster, the Editor of Hotel Analyst, chaired a panel of industry leaders who mulled over how sales and marketing are changing and what hoteliers need to do to stay ahead of the game.

The panel comprised:

  • Terri Scriven, Industry Head of Travel at Google UK
  • Graham Dodd, Development Director (UK & Ireland) at Hilton Worldwide
  • Todd Shallan, Portfolio Manager at KSL Capital Partners
  • Brian McCarthy, Managing Director for the UK Valor at Hospitality Partners Europe

Last year more than 50% of hotel searches (although not yet the majority of bookings) were made from mobile devices, but not all brands provide a seamless mobile experience. The panel recognised a widening differentiation for investors between brands who are investing heavily in their online presence and succeeding at driving bookings through their proprietary websites and those who are losing revenue to OTAs’ (online travel agents’) booking fees. Peer-to-peer hospitality sites like AirBnB are generating a large amount of internet traffic. They continue to pose a threat to parts of the budget sector, but it was felt that they should be required to operate on a level regulatory playing field with hotels, who have to comply with stringent hygiene and safety rules.

Independent regional hotels under pressure

David Bailey of CBRE Hotels presented some enlightening statistics which seemed to indicate that (in London at least) approximately 82% occupancy is the level at which room rates start to rise steeply. Independent regional hotels seem to have become the biggest casualties in recent times, with many more closing than opening in the past year.

Rate parity” – the story continues

The fate of the “rate parity” arrangements with OTAs, which maintain a consistent room rate across booking-channels, still hangs in the balance. Despite a supposedly uniform competition law regime within the EU, there is inconsistent treatment of these arrangements across national borders. It remains to be seen whether the arrangements between OTAs and operators will survive the further regulatory scrutiny to which they are being subjected.