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Keeping It Real Estate

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

Posted in Case Updates, Planning, Real Estate, Real Estate News

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Posted in Real Estate News

Happy News Year for Leasehold Homeowners

In the first working week of the New Year, Housing Secretary Robert Jenrick announced major reforms to the way that houses and flats are owned in England and Wales. The changes could affect more than 4 million leaseholders across England and Wales.

The government has come under increasing pressure in recent years to tackle what has been seen as unfair practices and systems that penalise leasehold homeowners. Historically, many leaseholders have found it difficult to obtain mortgages on their homes when their leases have less than 60 years left to run, and they have had to grapple with an expensive and complicated process in order to buy an extension of just 90 years. In some cases, homeowners have unwittingly bought leases of new houses, with the ground rent payable to their landlord increasing significantly over time, without any appreciable benefit in return.

In July last year, we blogged about the Law Commission’s proposals for the future of residential property in England and Wales. These included a host of recommended changes to the law, intended to reduce the number of new houses sold on a leasehold basis, empower leaseholders to take control of their property, and encourage commonhold as an alternative to leasehold ownership. The government’s latest announcement indicates that it has taken up many of the Law Commission’s core recommendations.

Following the Law Commission’s proposals, the Housing Secretary has announced that leaseholders will be entitled in future to extend their leases by 990 years and reduce any ground rent to zero. The valuation process for calculating the premium payable for a lease extension is to be simplified, and an online calculator will give an indication of the price a leaseholder should expect to pay. We will have to wait and see what effect the new valuation regime will have on the cost of lease extensions, and the impact that this might have on investment in the residential sector.

The government is also taking tentative steps to follow up on the Law Commission’s recommendations for reinvigorating commonhold. Since its introduction in 2004 there has been very little take up (particularly from housebuilders) for the regime, which is intended to put ownership of a block of flats under the control of a commonhold association representing the individual flat owners. A new cross-industry Commonhold Council is intended to promote commonhold development, or conversion of existing flats to a commonhold structure, again with the intention of giving leaseholders greater control of the property they occupy.

Whether this will indeed lead to a cultural change in the way that residential property is developed and managed in England and Wales, only time will tell; but the industry will require buy-in from housebuilders as well as home owners if commonhold is to become a genuine alternative.

Authored by Tim Reid, Counsel

Posted in Uncategorised

Powering our Net Zero Future – What does the Energy White Paper have in store?

The government published its Energy White Paper in December 2020, making a clear statement of its commitment to the 2050 Net Zero target and setting out a trajectory for meeting it.

The proposals are wide-ranging, with various policy suggestions affecting consumers, power generation and energy transmission, energy consumption in buildings and their energy efficiency, industrial energy uses and the oil and gas sector. Inevitably, a lot of the detail is to be fleshed out and it looks like 2021 will be a busy year for government consultations!

Here are the key points for real estate investors and occupiers:

  • Improving the energy efficiency of the built environment remains a high priority for the government. Buildings are identified as the second highest source of carbon emissions in the UK, after transport, accounting for 19% of UK emissions, despite achieving a 17% reduction over the past 30 years.
  • The government wants to see the energy efficiency of homes improved to an EPC asset rating of C or higher by 2035. With 66% of homes in England having an EPC rating of D or below, this is a big undertaking. The White Paper suggests that there will be investment in technologies such as ground source and air source heat pumps (to replace gas central heating) as well as more tried and tested solutions such as loft and cavity wall insulation, double and triple glazing and draught-proofing. A further roll-out of smart meters is also proposed.
  • There will be a consultation this year on how mortgage lenders can help homeowners improve the energy performance of their homes, which the government hopes will kickstart a green finance market. So let’s see what that consultation has to say!
  • The government has now settled on its policy for Minimum Energy Efficiency Standards for rented non-domestic buildings, following the consultation in 2019. Although we’ve not had a formal response to that consultation, the White Paper says that the government will increase the minimum EPC rating to B by 2030, where cost-effective, with a further consultation to follow on how to make this happen.
  • A “performance-based rating scheme for large commercial and industrial buildings” is also proposed, with a consultation due to be launched early this year. It will be interesting to see what this covers, as the real estate industry has for a long time been telling the government that EPCs are a blunt tool and do not properly measure “in use” energy performance.
  • Electric vehicles will become more prevalent, as the government has already announced that it will ban the sale of new petrol and diesel cars and vans from 2030. But to encourage the take-up of electric vehicles, there needs to be major investment in the charging infrastructure to facilitate longer journeys. £1.5bn will be made available to fund the installation of charging points in homes, workplaces, on streets and on the motorway network, and the government proposes to introduce new building regulations requiring electric vehicle charging points in all new homes and non-residential buildings.
  • Now that we have left the EU, the government intends to launch a new UK Emissions Trading Scheme to replicate the EU version. It will operate a similar cap and trade scheme, and will apply initially to energy-intensive industries, electricity generation and aviation. The White Paper suggests that there might be an expansion of this scheme in the future but no details are given.

The White Paper is worth reading if you want to understand the government’s direction of travel in more detail. You can find a copy by clicking here.

The impact on all of us, both in the way we run our businesses, occupy properties and of course live our daily lives, could be significant but the ultimate policy goal is for the UK to do its bit to minimise climate change. Hopefully the wave of consultations will help us understand fully what that means, and the government will listen to our views and ensure that future measures are proportionate, workable and fair.

Posted in Planning

Ten CIL lessons 2020

We are now – thankfully – firmly out of 2020 and in the hands of 2021. Although reviewing the past year may not initially seem an appealing prospect, it is nonetheless a worthwhile one. 2020 delivered some important takeaways for advisers and developers for the coming year – particularly so in the realm of the Community Infrastructure Levy (“CIL”). We have, therefore, compiled our top ten CIL lessons from the many appeal decisions and judgments published in 2020.

  1. Personal circumstances cannot be considered in a CIL appeal. In this case, the appellant said she had not assumed liability or submitted a commencement notice before starting works on the chargeable development because she was going through a stressful period. Despite this, the inspector held that an appeal can only be determined on the facts and cannot take into account personal circumstances (PINS appeal decision: APP/C3620/L/20/1200391).
  2. The collecting authority should send CIL notices to the applicant and the applicant’s agent. This will ensure that, in instances where the applicant doesn’t receive the notice (as was the case in this appeal), the notice can still be validly served if received by the applicant’s agent. (PINS appeal decision: APP/V3310/L/19/1200344).
  3. A liability notice is correctly served if it is served on the relevant person. In this appeal, it didn’t matter that the receivers were unaware of the liability notice; the liability notice was correctly served on the person who applied for the planning permission. As such, it, and the relevant surcharges, were to be paid. (PINS appeal decision: APP/H5390/L/20/1200416).
  4. Correct procedure must be followed to rely on exemptions. Here, failure to assume liability or submit a commencement notice led to the self-build exemption being lost for one development. The inspector pointed out that the exemption form makes clear that this will happen. (PINS appeal decision: APP/W4705/L/20/1200399).
  5. There is no power to correct CIL notices on appeal. The inspector made clear in this instance that, as there is no power on appeal to correct or vary a demand notice within the CIL Regulations themselves, errors in demand notices should be corrected by serving a revised demand notice. The earlier notice will then cease to have effect (PINS appeal decision: APP/L/19/1200356).
  6. Surcharges are inevitable when it comes to retrospective planning permission. When a planning application is retrospective it is impossible for a commencement notice to be submitted in advance of the chargeable development starting. This makes a surcharge inevitable. (PINS appeal decision: APP/L5240/L/20/1200389).
  7.  It is the collecting authority’s responsibility to ensure that a liability notice is correctly served. Specifically on this appeal, it was found not to be enough for an email to be generated. Instead, there needs to be proof that the email was actually sent or delivered. The inspector made the point that, even if the developer in question knew they would have to submit a commencement notice, if they did not receive a liability notice they could not correctly submit the notice. (PINS appeal decision: APP/C1435/L/19/1200305).
  8.  A commencement notice must follow the prescribed form. Failure to submit in a form published by the Secretary of State (or something to substantially the same effect) will result in the notice being invalid. Here an email informing the council of the intention to start works did not satisfy the requirement that a commencement notice should be in a prescribed form. It was therefore deemed ineffective. (PINS appeal decision: APP/C1245/L/20/1200386).
  9. Developers must ensure that the commencement notice has been received no later than the day before chargeable development is to be started. In this instance the appellant claimed the notice was sent two weeks before beginning works, however, the authority did not receive the notice and the appellant was unable to provide proof of postage. The inspector could not be certain that the commencement notice was submitted before the works began and as such a surcharge was payable. The inspector suggested that developers should seek acknowledgement of receipt to avoid this risk. (PINS appeal decision: APP/A1910/L/20/1200405).
  10. Developers should set CIL phasing strategies early in the planning process. The Oval Estates decision handed down in February made clear that developers can’t rely on retrospective action when it comes to calculating CIL liability. Indeed, if CIL payments are to be phased, the permission must make this clear and developers should not, as was the case in Oval Estates, seek to incorporate phases after commencing the development. (R (Oval Estates (St Peter’s) Ltd) v Bath & North East Somerset Council [2020] EWHC 457 (Admin). You can read in detail about this case in our previous blog post here.)

Evidently CIL continues to be a topic just as complex and changeable as your relationship with your January 2021 fitness regime. Undoubtedly, 2021 – and this blog – will bring with it further changes and developments which any development project will have to examine carefully to avoid falling foul of the countless potential pitfalls.

Posted in Real Estate News

Important changes to DAC6 regime in the UK

Speedread

The UK has made important changes to its implementation of the EU Mandatory Tax Disclosure Rules known as DAC6. The changes, which significantly reduce the scope of the rules in the UK, are largely good news for UK taxpayers and their advisers. The effect is that DAC6 reports will be required more rarely from intermediaries or taxpayers in the UK. This applies both on an ongoing basis and to the ‘look-back’ period of reporting for arrangements where the first step of a reportable cross-border arrangement was between 25 June 2018 and 1 July 2020.

In the short term, however, there is likely to be some additional compliance burden in adapting existing DAC6 reporting processes for real estate transactions which also involve the EU. This is especially so given the last-minute and unexpected nature of the changes.

A reminder of how DAC6 could apply to real estate transactions

By way of recap, DAC6 is an EU Directive which can require “intermediaries” (or, in certain cases, “relevant taxpayers”) to file with a specified tax authority in the EU information that is within their knowledge, possession or control about:

• “cross-border arrangements”
• that contain at least one of certain “hallmarks”.

Any arrangement or series of arrangements concerning both (i) an EU Member State; and (ii) another jurisdiction (whether an EU Member State or not), will be a cross-border arrangement for these purposes. Prior to these changes and the end of the Brexit transition period, references to an EU Member State also included the UK for these purposes.

Professional advisers such as law firms and accountants, as well as others such as lenders and fund managers are all likely to qualify as intermediaries.

Many cross-border real estate transactions will therefore involve at least one cross-border arrangement. Where this is the case, the key ‘filter’ for DAC6 reporting will be whether one or more of the hallmarks are present. It is this aspect of the UK rules which has changed.

What has changed in the UK and how does it affect real estate transactions?

The UK has repealed its implementation of the substantial majority of the DAC6 “hallmarks”. This has effect immediately before 1 January 2021, when the obligation to make DAC6 reports in the UK was due to come into effect.

The only two hallmarks which will continue to apply in the UK relate to cross-border arrangements which (i) may have the effect of undermining reporting under the Organisation for Economic Co-operation and Development’s Common Reporting Standard or a similar exchange of information regime, or (ii) involve non-transparent beneficial ownership structures where the beneficial owners are made unidentifiable for Anti-Money Laundering purposes. In our experience, it is likely to be rare that either of these hallmarks would apply to a typical real estate holding structure.

This is an interim measure pending the replacement of these rules in their entirety with new legislation for reporting based on OECD standards. Consultation on this is expected in the course of 2021.

Does this affect the application of DAC6 in the EU?

No, this change to the UK rules does not directly affect the application of DAC6 more generally in the EU. Reports may therefore still be required in the EU.

Posted in Real Estate News

Engage is coming soon

Hogan Lovells is changing how we deliver our Real Estate content. On January 18 we will be moving the Keeping it Real Estate blog to a new technology platform: Hogan Lovells Engage.

You’ll soon receive an email with details on how to join us on Engage to continue to stay up-to-date on the latest developments in Real Estate. We look forward to seeing you there

Posted in Real Estate News

UK COVID-19: Government announces “final” extension to protections for commercial tenants

The government has today announced that it will be extending the current protections that have been afforded to commercial tenants as a result of the COVID-19 pandemic, for one final time.

What are the current protections?

Since the outbreak of the COVID-19 pandemic, the government has repeatedly extended temporary prohibitions on landlords taking certain enforcement action against tenants. The last extension to these prohibitions occurred in September, and you can read our blog from September here.

Commercial tenants currently benefit from a number of COVID-19 focused protections including:

  • restrictions on the use of statutory demands and winding up petitions to encourage tenants to pay rent;
  • a temporary prohibition on landlords forfeiting commercial leases as a result of a tenant’s failure to pay rent; and
  • a requirement for arrears of at least 276 days’ or 366 days’ rent to be outstanding before Commercial Rent Arrears Recovery action (CRAR) can be exercised, dependent upon whether it is exercised before or after the December 2020 quarter’s rent falls due.

These measures were all due to come to an end on 31 December 2020.

What is the latest announcement?

The government has announced that in relation to the temporary prohibition on landlords forfeiting commercial leases, there will be a “final extension” until the end of March which “will give landlords and tenants 3 months to come to an agreement on unpaid rent“.

According to the government, “further guidance to support negotiations between landlords and tenants will be published shortly“. This will sit alongside the existing Code of Practice for commercial property relationships during the COVID-19 pandemic – read our blog for more information.

Further, the government has announced that the current restrictions on the use of statutory demands and winding up petitions, together with the restrictions on using CRAR, will also be extended until the end of March 2021 which the government says “allows businesses sufficient breathing space to pay rent owed“.

What does this mean for landlords and tenants?

As Robert Jenrick stated this morning, these measures “will help [tenants] recover from the impact of the pandemic and plan for the future”.

Business Secretary Alok Sharma also commented that “knowing that [tenants] won’t be evicted by their landlord will give thousands of business owners some breathing space and additional confidence”.

Understandably, given the recent second lockdown and the current local restriction tiers, many tenants are facing an uncertain trading outlook over the coming months. Therefore, these measures do provide a valuable further window of opportunity for struggling tenants to consider new arrangements with landlords, and to assess the benefit of Christmas trading, with a view to agreeing future arrangements with landlords that they can afford.

However, although the government has maintained its stance that “where businesses can pay any or all of their rent, they should do so”, this will be of little comfort to many commercial landlords who have seen tenants who are able to pay the rent simply refusing to do so.

Many landlords will be forgiven for wondering how this extension provides any reassurance that they will receive rents from those tenants who can and should be paying, or that tenants will now proactively engage in negotiations to ensure that they pay what they can.

Further, given the minimal impact the Code of Practice referred to above has had, it is unclear what benefit landlords or tenants will gain from the government’s promised “further guidance to support negotiations” which, it is assumed, like the Code of Practice, will be voluntary.

What else?

At the same time, the government has announced a review of “outdated commercial landlord and tenant legislation, to address concerns that the current framework does not reflect the current economic conditions”. According to the government, this review will “consider a broad range of issues including the Landlord & Tenant Act 1954 Part II, different models of rent payment, and the impact of Coronavirus on the market”.

We can only speculate, but as part of any review it may be the case that the government will dust off the Law Commission’s 2006 proposals for abolishing forfeiture. As, arguably, the most powerful remedy available to landlords, any changes to a landlord’s right to forfeit will be not just hugely significant but also extremely controversial.

What can landlords do?

Today’s news leaves landlords in the difficult position of knowing that many tenants who are not struggling will see this as a further extension of their licence not to pay rent. However, landlords and tenants should bear in mind that if a tenant who can pay is simply refusing to pay rent, a landlord can still issue court proceedings against a tenant for non-payment of rent.

Posted in Planning

The Use Class that keeps on giving

Just when you thought that no more excitement could happen in the planning world, the government has launched a consultation seeking views on potentially far reaching proposals to allow a change of use from any Commercial, Business and Service (the new Class E) to residential (Class C3). This would allow any property falling within Class E on 1 September 2020 to change to residential property without requiring planning permission, although not vice versa.

Vibrant town centres and the COVID-19 response

The new Class E only came into effect 1 September 2020 and spans a significant range of uses, from retail to sport and fitness, to crèches and nurseries. The government considers that owners of such properties should have greater flexibility to move between uses and that this, in turn, will enable businesses to respond to changing market demands. Key to this strategy is the impact of COVID-19 on the retail sector, with retail spaces becoming less attractive and people looking for long-term flexibility for their assets in response to the increased prevalence of home working.

The consultation notes that in the year from June 2019 – June 2020 there has been a net reduction of 5,350 retail units in English town centres. The government is therefore hoping that the new permitted development right (PDR) to allow this change of use, will not only address housing need, but will also increase footfall for those retail units that have survived the pandemic by increasing the numbers of local residents, while offering those unable to sustain businesses an alternative option.

Whilst the proposed measures form part of the government’s overall efforts to mitigate the economic consequences of the COVID-19 pandemic, thought does need to be given to their longer term consequences. Whilst the aim of increasing footfall by way of new residents is laudable, it does increase the risk that in areas already poorly served by amenities such as shops, the situation could become even more dire, as property owners switch these valuable local resources to become homes. Indeed, there is nothing within the proposals to stop whole areas of retail or employment uses being lost entirely.

Any exceptions?

The proposals relate to England only and the new permission would apply to any property within Class E without limitation to the size of the building (part or whole) to which the PDR would apply. Properties with certain designations, such as listed buildings, would fall outside of the PDR. The change, if approved, would come into force on 1 August 2021.

What else is in the consultation?

The consultation also seeks views on speeding up the approval process in rolling out public infrastructure improvements – a key focus point for the Prime Minister and government – and to introduce a further new PDR allowing educational and medical establishments to increase their facilities by up to 25%. Given the controversy which often surrounds the extension of schools, in terms of  increased traffic and noise, these proposals may not receive the warm welcome the government seems to expect.

Next steps

The consultation remains open to responses until 28 January 2021. The speed and content of the government’s response is sure to be impacted by the pandemic over the next few months. The timing of this consultation also demonstrates the government’s confidence in the changes that it introduced to the Use Classes Order and the Permitted Development Rights in September. The recent, failed challenge to those changes (read our blog) has clearly fuelled the government’s appetite to deliver on its promise of a reshaped planning system.

Posted in Real Estate News

What’s happening with the Retail Prices Index and why?

Speedread: Alongside Wednesday’s Spending Review, the government and the UK Statistics Authority (UKSA) have published their response to the recent consultation on reform to the RPI. The outcome to the consultation states that “it is UKSA policy to address the shortcomings of the RPI in full at the earliest practical time”.  The earliest the proposed changes can legally and practically be made by UKSA will be February 2030.

The RPI is described as the oldest measure of consumer prices in the UK and is used widely across the economy and in financial contracts. However, for some time the government has perceived that the RPI has a number of shortcomings which, more often than not, overestimate the rate of inflation.

What is changing and when?

As an official measure of inflation, the RPI is used for a variety of purposes including the calculation of interest and redemption payments under index-linked government bonds.  If the RPI is recalibrated then this could mean lower returns for funds which have invested heavily in those assets.  In view of this the Chancellor has now confirmed that he will not consent to a change to the methodology of the RPI before the current proposed date of February 2030, which is when the last of the RPI-linked gilts mature.

The change, when it happens, will bring the methods and data sources of the Consumer Prices Index (including owner occupiers’ housing costs (CPIH)) into the RPI.

What is the practical impact for real estate?

In real estate transactions, many rent adjustment clauses (and service charge caps) are index-linked by reference to the RPI.  This method of rent review is particularly popular in sale and leasebacks and other fixed income deals.

When the formulae used to calculate the RPI are altered to bring the index more in line with the CPI, the likely practical effect of such a change will be to reduce the increases in rent where they are linked to increases in the RPI. Parties who have negotiated clauses in the expectation that the RPI would give a greater return will not welcome this change, whilst others may well argue that index-linking is supposed to reflect inflation and the formulae used to calculate the RPI do not accurately do so.

Additionally, in some contracts, drafting will have been agreed which effectively seeks to preserve the original method of computation even after a material change in the RPI methodology, although how straightforward and/or contentious this might be to implement will remain to be seen.

In the meantime, for those contemplating entering into new index-linked deals, now is a time to give pause for thought about the choice of index if a contract’s duration will extend beyond  February 2030, at which point it now seems certain the change will be made.  Index-linking is unlikely to die out as an appropriate method of rental uplift, but the choice of index and, perhaps, the use of caps and collars will now come into sharper focus.

 

 

Posted in Real Estate News

A Conclusive Conclusion for Service Charge Certificates?

In a case that will be welcomed by landlords, the Court of Appeal has ruled that a service charge statement was conclusive both as to the landlord’s costs and the scope of the services.

Background

The case concerned Blacks, the outdoor retailer, who was the tenant under a commercial lease. Under the service charge clause:

  • the landlord was obliged to calculate “the total reasonable and proper cost” it incurred in providing various services;
  • Blacks was obliged to pay a “fair and reasonable proportion” of the total cost; and
  • the landlord was obliged to provide a service charge certificate detailing the total cost it incurred and the sum payable by Blacks and that “such certificate shall be conclusive”.

In January 2019, the landlord issued a service charge certificate for a much larger sum than it had in previous years. Blacks challenged the certificate on various grounds including that it contained unnecessary works and matters outside the scope of the relevant repairing obligations. The landlord subsequently issued proceedings to recover the unpaid service charge.

The High Court held that the certificate was conclusive as to the total cost incurred by the landlord in providing various services, but it was not conclusive as to whether those services fell within the scope of the service charge clause.

The decision

The Court of Appeal overturned the decision of the High Court. It held that the certificate was conclusive on both points. To be otherwise would require clear and express wording to that effect.

Lessons learned

Clauses which seek to make a service charge certificate conclusive are common in commercial leases.
This judgment will be welcomed by landlords, as (whilst each case will need to be determined on its facts) this decision should avoid opening the floodgates on challenges by tenants on historic service charges. It will also give landlords certainty to be able to operate service charge provisions without fear of challenge by tenants although we have yet to learn whether the case will be appealed.

The case is a reminder to all parties to pay close attention to the detail of the wording and the mechanics of service charges. As the Court commented, it is not the job of the courts to save the parties from an imprudent term which they have agreed.

Case: Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020]