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Keeping It Real Estate

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

Posted in Real Estate News

The Construction Industry Scheme: Change in the air?

What does real estate investment have to do with the problem of tax evasion made possible by cash-in-hand payments in the building industry?  Very little, one might suspect, but that has not prevented real estate investors becoming the unintended casualty of a withholding tax introduced in the 1970s to target tax fraud among builders.  A concerted effort has now been made to lobby for sensible improvements, spearheaded by the Chartered Institute of Taxation.

The Construction Industry Scheme (CIS) requires deductions to be paid to HMRC when payments are made under certain construction contracts, similar to the way that employers are required to make deductions when operating payroll in respect of employment contracts.  By securing tax revenue at the source of payment, the risk of tax loss on undeclared income is reduced.

Two factors have resulted in the CIS becoming a misplaced administrative burden for real estate investment.

First, the law as written could apply very broadly, including (at least potentially) to situations where a landlord and tenant agree as part of lease negotiations that the tenant will undertake works going beyond ordinary fit-out works and which therefore benefit the landlord.  Any landlord’s contribution to those works may fall within the scope of the CIS.  The result has been large, institutional investors devoting material amounts of time and effort to comply with a counter-evasion regime at odds with the context in which they operate.

Second, HMRC’s commendable work engaging with taxpayers and providing bespoke rulings to make up for the deficiencies caused by that drafting has allowed the situation to remain just about tolerable for many years.  Nonetheless a great many landlord and tenant transactions have been subjected to disproportionate delays and additional costs as parties grapple with the CIS.

The Chartered Institute of Taxation has recently made a public submission to HMRC urging a change in the law that would make the CIS more targeted, removing ordinary landlord and tenant activity from its scope.  The submission is, in our view, an excellent piece of work and Hogan Lovells’ tax team has provided evidential support for it to HMRC.

The real estate sector will remain hopeful that HMRC applies the same energy to tackling this issue at its legal source as it has done in coping with its day-to-day fall-out.

A copy of the submission can be found here.

Posted in Real Estate News

IPF Launches Template Non-Disclosure Agreement and Exclusivity Agreement

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is typically entered into between parties who need to share confidential information with each other in order to evaluate it, typically as a prelude to an acquisition or a merger.  An NDA sets out the terms on which the information is being disclosed and imposes obligations on the receiving party to keep the information confidential.  NDAs can be unilateral (where one party is receiving the information from another, but not disclosing any confidential information itself) or bilateral (where both parties are disclosing confidential information to each other).

An exclusivity agreement (EA) prevents the parties to it from negotiating in respect of a proposed transaction with other parties for an agreed period of time – typically to enable them to agree specific terms or carry out due diligence.  An EA does not legally bind either party to conclude a deal with the other, but it does provide breathing space to do so.  Where one party is committing to significant professional costs, an EA may be a shrewd move.

The problem is that both NDAs and EAs can be heavily negotiated in their own right and can distract the parties from the deal itself.  There are common terms which parties will seek to include and compromise positions which are often agreed.

In an effort to streamline the process, the Investment Property Forum formed a working group to produce a template NDA and a template EA which they hope will be acceptable to both sides of the agreements with minimal amendment.  The NDA and the EA (and the accompanying guidance notes) can be downloaded from the IPF website here. In particular the IPF seems to have its eye on overseas investors who they hope will take comfort from knowing that the agreements are acceptable in the UK market.  The IPF states that the templates have been:

“created to represent what the IPF believes is a fair and reasonable position for both parties and reflecting general market standards at the current time.”

Historically, the real estate industry has not been quick to adopt standard form documents as evidenced by successive attempts to standardise commercial leases.  However, NDAs and EAs do not create long term relationships between parties so in theory, at least, they should be less controversial.  The acid test is likely to be what happens where one or both parties have their own standard documents, which may not have been created specifically with real estate in mind.  This scenario is recognised by the IPF, but their hope is that use of the templates will become standard across the industry in keeping with their mission:

“to enhance the efficiency and liquidity of real estate as an investment asset class.”

No one in the industry would argue with the merits of that mission.

Posted in Real Estate News

New Law on Revenge Evictions Goes Cold

The BBC reported this week that fewer than half of the local authorities in England have been called upon to prevent so-called “revenge evictions” since new laws came into force on 1 October 2015.

The headline implies that councils might be failing to exercise new statutory powers intended to protect assured shorthold tenants from unscrupulous landlords, but the reality is more likely to be that tenants just aren’t aware of the new law, or about the steps that they themselves need to take in order to take advantage of the new statutory protection.

The new law is set out in section 33 of the Deregulation Act 2015.  Its purpose is to prevent landlords from using section 21 notices to evict their assured shorthold tenant, in apparent retaliation for the tenant having complained about the condition of their property.

Landlords are required to use section 21 notices (under the Housing Act 1988) to recover possession of property let on an AST following its expiry or on an earlier break date.  In much the same way as a landlord is prevented from recovering possession if it has failed to comply with the tenancy deposit scheme , the “retaliation eviction” rules prevent the landlord from recovering possession from a tenant who has raised a legitimate complaint, notwithstanding that the contractual term of their tenancy might have expired.

However, under section 33 the tenant will only obtain protection from eviction if they have gone through specific steps before the landlord’s section 21 notice was served, as follows:

1. First, making a complaint in writing to the landlord about the condition of the property, which the landlord fails satisfactorily to deal with within 14 days;

2. After those 14 days, making a fresh complaint to their local housing authority about the same problem;

3. Obtaining from the local housing authority in response to that complaint an Improvement Notice or a Notice Requiring Emergency Remedial Action (both under the Housing Act 2004), served on the landlord.

Only once the landlord has received an Improvement Notice or Notice Requiring Emergency Remedial Action, will the landlord’s right to serve a section 21 notice be suspended, for a period of 6 months.  As a section 21 notice must give at least 2 months’ notice to the tenant, this regime should afford the tenant at least 8 months’ further enjoyment of their property from the date on which the local authority’s notice was served on the landlord.

In order for these new protections to operate successfully, assured shorthold tenants should ensure that they are aware of their rights, and of the need to make formal complaints to both their landlord and the local housing authority.

There are also clear lessons for landlords, here, too.  Not only should landlords ensure that their let properties are habitable and in repair, but they should also ensure that if they receive a complaint from their tenant, they provide an “adequate response” within the meaning of section 33, in good time. That is: they should provide within 14 days a written description of the remedial action they intend to take, and they should set out a reasonable timescale in which to carry it out.

Posted in Planning

Draft Airports NPS takes off…

On 2 February 2017 the Government published its highly anticipated draft Airports National Policy Statement (“NPS”) alongside a consultation on the contents of the draft NPS.

The draft NPS

The draft NPS will, if adopted, provide the primary basis for decision making on applications for development consent for a Northwest Runway at Heathrow Airport.

Although its name suggests that the NPS will apply broadly to airports, the document’s main concern is with development at Heathrow.  For applications for new runway capacity and airport infrastructure elsewhere in London and the South East it is an “important and relevant consideration” akin to a material consideration when determining applications under the 1990 Act.  So although it doesn’t carry quite the same weight for development away from Heathrow as it does for the Northwest Runway, it remains significant nonetheless.

The draft NPS sets out:

– why the Government sees a strong need case for new airport capacity in the South East in order to secure the UK’s status as a global aviation hub;

– the case for the Heathrow Northwest Runway as the Government’s preferred scheme, building on the long-awaited “preferred option” announcement in October 2016;

– the various principles against which applications for development consent relating to a Northwest Runway at Heathrow will be decided; and

– in relation to the potential impacts of the development of a Northwest Runway, the assessments that the applicant will need to carry out, and the specific planning requirements that the applicant will need to meet, in order to attain development consent.  As one would expect in relation to development of this nature, air quality, carbon emissions and noise issues feature strongly, and the draft NPS devotes much time to mitigation measures, community engagement and compensation.

Interestingly, the draft NPS was published shortly after the High Court struck out a claim for the judicial review of a decision by the Government to select for inclusion in a draft NPS a proposal for a third runway at Heathrow.  Cranston J. held that proceedings can only be brought in the six week period after designation of the NPS, so in this case the High Court had no jurisdiction to hear the claim.  As the NPS isn’t expected to be designated until late 2017 at the very earliest, any potential claimants will have to sit tight for now.

Consultation

Together with the draft NPS the Government has published a consultation document which contains nine open questions seeking views on the key issues dealt with in the draft NPS.  In addition to the written consultation, the Government will hold a series of 20 local and 13 nationwide consultation events.  The local events are open to all whilst the nationwide events will be open to invited stakeholders.

The Government clearly has an eye on the importance of the consultation and its potential to be contentious and has appointed Sir Jeremy Sullivan, the former Lord Justice of Appeal, as an independent consultation adviser.  Sir Jeremy’s role will be to provide oversight of the process, ensure that best practice is upheld and to raise any concerns about procedure with the Secretary of State.

The consultation period closes on 25 May 2017.  The draft Airports NPS is available here and the consultation document is available here.

Posted in Real Estate News

Falling Foul of Flying Freeholds

A mental image of a building sprouting wings and taking to the sky is one way to picture a flying freehold, but mention the phrase to most property lawyers and their hearts will sink. Discovering a flying freehold raises alarm bells because, without appropriate reciprocal rights between adjoining owners, they can leave both owners exposed.

What are flying freeholds and do they really need to cause such fear?

Put simply, a flying freehold is part of a freehold property that either reaches into or is built over a neighbouring property. The flying freehold owner owns the “flying” part, but not the land or buildings beneath it.

The difficulties stem from the fact that, without express agreement, each land owner has very limited rights in relation to the other’s land.  In particular they cannot force the other owner to maintain or repair their property, even if the flying element is structurally dependent on the other land, or where a flying element in disrepair risks damaging the adjoining property. In these circumstances, financing either property may be difficult as lenders will want a clean title certificate. Problems can also arise where one owner wants to redevelop or carry out works because rights of access can be limited. These problems apply equally to the owner of the flying element and the owner of the adjoining land.

In the absence of express rights and obligations, there are a number of options:

1. Title indemnity insurance

Typically insurance would cover loss of value following damage due to lack of repair of the adjoining property and costs incurred in prosecuting the adjoining owner. However, it does not resolve the fact that there are no access rights and insurance may be invalidated by any redevelopment or structural alterations

2. A new mutual agreement

A mutual agreement can be put in place between the two owners, documenting the reciprocal rights and obligations. As with any positive covenant, the agreement would only bind future owners if they agree to be bound by it when they acquire the property. This can be built into the agreement and backed up by a restriction on the title register.  However, the process of putting an agreement in place may be time consuming and costly, particularly where there is little or no incentive for the non-selling owner to co-operate quickly

3. Alternative structure

It may be possible to convert the flying freehold to a leasehold structure so there is only one freehold out of which a long (999 years) lease is granted to the adjoining owner. The advantage of this is that the appropriate rights and positive covenants can be included in the lease and will not be affected by a transfer of the freehold or leasehold interests.  However a lease may also be time consuming and costly to negotiate and tax structuring advice should be sought at an early stage.

In June 2011, the Law Commission recommended revising the law of easements and introducing the concept of a “legal obligation”. This would make it possible for the benefit and burden of positive obligations to be enforced by and against subsequent owners. So far as flying freeholds are concerned, this would simplify and make more attractive a mutual agreement as it would avoid any concern that those obligations could be lost over time. It was announced in the Queen’s Speech in May 2016 that the Government will bring forward proposals to respond to the report; however, any progress appears painfully slow and no change is on the immediate horizon.

In the meantime, identifying flying freeholds early on in a transaction is key. This is not always easy or obvious and careful analysis of the plans of the building may be required. After that, there are various options to address the risks but they may take time to implement and a wary lender’s views should be considered early.  With careful thought a flying freehold need not result in the death of the deal.

Posted in Planning

HS2: chugging towards its final destination

The government has now issued its formal response to the House of Lords’ special report on the hybrid bill for HS2, issued in December.  Whilst much of this relates to specific petitioners it also includes some important changes to the bill relating to the government’s powers of compulsory purchase, compensation and engagement with landowners.

From the first publication of the draft bill there has been concern about the breadth of the government’s proposed powers of compulsory purchase.  In particular, where the central government considered that the construction or operation of HS2 had given rise to “the opportunity for regeneration or development” of land, the bill gave it powers to compulsorily acquire that land.  These unprecedented powers were not subject to any spatial or time limits, and were also seen by many as the government trying to ensure that it had “first dibs” on any uplift in land value created by HS2.  If the government could demonstrate that HS2 had unlocked the development potential for the land, it would be entitled to compulsorily acquire it and the landowner would only be entitled to the pre-HS2 value of the land.

Some commentators accused the government of trying to make a profit from the HS2 regeneration opportunities at the expense of local authorities and land owners, although the government said the powers would not be used in this way.

In their report, the Lords concluded that it was “not sound law-making” to grant such wide ranging powers based only on ministerial statements that they would only be used as a measure of last resort, without a statutory guarantee.  As a result the provisions were struck out.

The government has confirmed that these provisions will not be reinstated and instead they will rely on local authorities to ensure that all regeneration opportunities unlocked by HS2 are delivered.

Other points of note are:

  • The compensation package will be improved for those living in certain urban areas and affected by severe and prolonged noise and other disturbances during construction. The government has said that this will “provide a fair and proportionate remedy” for the HS2 construction effects on these owners.  This is a positive move to redress the balance between urban and rural property owners, as previously rural owners were in a better position when seeking compensation for disturbance during construction; and
  • Many petitioners complained that government engagement with land owners on HS2 was often “sporadic and frustrating”.  In response the government has established a new Community Engagement Directorate which will be tasked with dealing with public responses, including looking at ways to develop “genuine and timely two-way engagement.”
Posted in Planning

Our Top Ten Planning Changes for 2017

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.

Posted in Planning

I’m Dreaming of a White Paper…

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”.

Posted in Real Estate News

Don’t sweep CIS under the carpet

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.

Posted in Real Estate News

Top Hats and Baseball Caps: Old vs New Estates in the Battle for London

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.