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Keeping It Real Estate

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

Posted in Real Estate News

New Year, New CIL Regs to save £millions

The New Year has started off with a bang as changes to the Community Infrastructure Levy (CIL) Regulations 2010 were laid before Parliament.  The draft 2018 Regulations correct an unintended defect in the current legislation.  The error had resulted in millions of pounds of extra CIL being charged, even where no extra floorspace or change in use had been applied for.

Out with the old…

The current legislation is supposed to provide that where planning permission is granted before CIL comes into force in the area (Permission A) and a later S73 permission amending Permission A is granted after CIL comes into force in that area (Permission B), no CIL is payable unless extra floorspace or a change of use under Permission B is authorised.  However, indexation within the complex CIL formula meant that a CIL can be charged solely due to an indexation change from Permission A to Permission B even where there is no uplift in floorspace. Developers are currently facing this in the Nine Elms Opportunity Area.

This error was highlighted in an appeal to the Valuation Office Agency relating to Peabody’s St John’s Hill development where the valuer interpreted the legislation in a way that corrected the error.

… in with the new

The draft 2018 Regulations provide the much needed clarification.  Ultimately, when calculating the amount of CIL payable on Permission B, the same index figure is to be used for Permission A and B.  As such, any CIL payable will be based on extra floorspace or a change in use brought about by Permission B and not any indexation changes.

New Year’s Resolution

While the clarification will be welcomed by developers, the draft 2018 Regulations do not address various other technical problems with CIL, such as where a S73 permission is granted in respect of a permission for which CIL has already been paid.  It is hoped that the Ministry of Housing Communities and Local Government will correct these as part of the forthcoming CIL consultation.

Posted in Real Estate News

No blues for the Blues on rights to light

There was much fanfare when Chelsea Football Club secured planning permission for redevelopment of Stamford Bridge last year.  However, one family’s fight against the new stadium’s impact on its right to light had the potential to bring the redevelopment to a standstill.  Hogan Lovells’ Planning and Development specialists, Hannah Quarterman and Paul Tonkin consider the implications of rights to light on development, and how even a goliath-like Chelsea FC can become unstuck at the hands of a local family

When the Club secured permission for the state-of-the-art stadium it knew that the new stadium would potentially infringe rights of light enjoyed by neighbouring owners. This is by no means an unusual situation and Chelsea, like other developers, tried to negotiate financial deals to release the rights in return for cash.

In most cases, this strategy succeeds and it appears to have worked for Chelsea in the case of all of its neighbours other than the Crosthwaites.

Developers seeking to negotiate away rights of light should, though, be aware that ultimately adjoining owners can seek an injunction from the court to prevent the development. Whilst the court has a discretion over whether to grant an injunction (and it is a broad discretion) the legal position remains that an injunction is the primary remedy for infringement of property rights (including rights of light). An adjoining owner armed with an injunction is a formidable opponent indeed, as Chelsea have no doubt discovered.

So, what can developers do to minimise the risk?

The first stage is to get the strategy right. The once-favoured approach of “hoping to get away with it” will not find favour with the courts and developers must be open and reasonable in their dealings with affected neighbours. Developers are also increasingly looking at flexible insurance cover for rights of light claims, which enables them to negotiate whilst providing a financial payout if those negotiations stumble. However, whilst insurance may compensate for losses, it will not get a scheme built in the face of an injunction.

Using local authority powers may also be an option. For Chelsea, the London Borough of Hammersmith and Fulham may be its knight in shining armour. It has resolved to exercise statutory powers which would enable Chelsea to continue with the development, notwithstanding the interference with the relevant rights.

Section 203 of the Housing and Planning Act 2016 permits developments to be carried out even though they would interfere with third party rights.  The party with the benefit of those rights can no longer secure an injunction but, instead, has a right to statutory compensation for the loss in value to their property caused by the interference.

In order to benefit from these provisions:

• there must be planning permission for any relevant building work;

• the work must be carried out on land which has been held by the Council;

• the Council must show that they could acquire the land compulsorily for the purposes of those works; and

• the work must be for purposes related to the reasons for which the land was acquired.

In Chelsea’s case, the Council has never owned the land and so a lease and leaseback arrangement is needed, so that Chelsea can derive title from the Council, and benefit from the relevant power.

The process is further complicated, as an LPA cannot acquire land willy-nilly and must do so for a particular purpose, complying with the relevant tests for that acquisition. The stadium land is to be acquired for planning, so the Council had to demonstrate that the acquisition would promote the improvement of the economic, social or environmental wellbeing of its area and that the redevelopment would justify interference with private rights.  Whilst it may seem obvious that a housing development would meet those tests, there is more of a question mark over a football stadium.  Nonetheless, the Council has concluded that redevelopment of the stadium would deliver significant benefits, not only for its area, but for London generally, and has resolved to follow the process to allow Chelsea to complete its redevelopment.

But the story may not end there.  The Crosthwaites have already made it clear that they don’t think the tests have been satisfied, and that they will challenge the Council’s decision to follow this process.

All this serves as a timely reminder that any potential infringement of rights to light should be addressed early on to avoid scoring an own goal in your development timetable.

Posted in Real Estate News

Government consults on abolition of the “staircase tax”

Business occupiers (and particularly small business owners) welcomed the announcement in the Autumn 2017 Budget that the government is putting an end to the so-called “staircase tax”.

The “staircase tax” acquired its name from the 2015 Supreme Court decision on assessment of business rates in Woolway (VO) v Mazars, which held that a tenant who occupies separate floors in a building is only entitled to treat the floors as part of the same rateable occupation for business rates purposes (known as a hereditament) if it is possible to move between those floors without leaving space that exclusively belongs to the tenant. As a result, where a tenant moves between floors using a common parts staircase or lift, the Mazars test is not met.

If there are two separate hereditaments, the tenant is less likely to be able to claim an allowance for size (quantum relief) to reduce its liability for business rates. Whilst the Mazars decision was not new law, it differed from the practice previously applied by the Valuation Office Agency. That practice was to treat two adjoining floors of a building separated by a floor /ceiling only as a single hereditament where in common occupation.

The government has now taken the next step towards abolishing the “staircase tax” by issuing a consultation which seeks views on how to reinstate the pre-Mazars practice of the VOA. The consultation pre-supposes that the staircase tax will be abolished and seeks views on how that should be implemented. The Department for Communities and Local Government has simultaneously issued a draft Bill (called the Non-Domestic Rating (Property in Common Occupation) Bill) for consideration.

The move is good news for business occupiers and forms part of the government’s Budget pledge to increase the fairness of the business rates system in England. Affected businesses will be able to ask the VOA to recalculate valuations so that bills are based on the previous practice of assessment, backdated to April 2010.

The consultation opened on 29 December 2017 and closes on 23 February 2018.

For further details on the background, see our earlier blogs on this topic here and here.

Woolway (VO) v Mazars [2015] UKSC 53

Posted in Real Estate News

Government to ban leasehold houses and set ground rents at zero

Following the consultation in summer 2017 on ground rents and leasehold houses (read our blog here) the government has published its response (read it in full here) with the following headline proposals:

A ban on granting new residential long leases of houses, other than in exceptional circumstances

This currently only affects new leases, but the government will consult on allowing existing leaseholder houseowners to buy the freehold or extend their leases on more favourable terms.

The legislation will contain exemptions.  Developers who only have an existing leasehold interest will continue to be able to build and sell leasehold houses on that land. The government will consider other specific exemptions when the legislation is brought forward.

The government will consider introducing a right of first refusal for house lessees and aims to bring forward a solution in summer 2018.

Ground rents on new leases of houses and flats will be set at zero

There are no specific proposals to tackle existing onerous ground rents, but the government will consider measures in future if necessary.

The response also confirms the government is committed to professionalising managing agents, tackling unfair service charges, and modernising the home buying process.  The government will also try and reinvigorate commonhold (as an alternative to leasehold flats).

The next stage is for draft legislation to be brought before Parliament, at which point it will be closely scrutinised.  It will be interesting to see what definitions and specific exemptions are proposed, and in particular how these might impact on existing developments.

While Parliamentary time is particularly tight due to Brexit, given the high profile of leasehold reform we expect the government to treat this legislation as a priority.

Posted in Real Estate News

Time to crack the Code: the new Telecoms Code comes into force on 28 December

Earlier this year, we blogged about the new Electronic Communications Code and the impact the changes would have for equipment installed by approved telecoms operators on private land. It has been announced today that the changes are coming into force on 28 December 2017. As a quick recap, the main changes are:

1. New no-scheme valuation method for setting rents payable to site providers, which will result in lower rents
2. Automatic rights for operators to upgrade and share equipment with other operators, as well as automatic rights to assign the agreement, in new agreements granted going forward
3. Transfer of the dispute resolution jurisdiction from the court to the First Tier Tribunal
4. Longer, two stage termination and removal of equipment procedure, with termination of rights based in statutory grounds only (including redevelopment)
5. Removal of dual security of tenure regimes for leases not contracted out of the Landlord and Tenant Act 1954
6. No statutory lift and shift rights for new agreements
7. Transitional provisions for existing agreements

To see our earlier blog on the changes, click here.

Posted in Real Estate News

DREAMING OF RETIREMENT …

That’s what we were doing at Property Week’s Retirement Living Conference. As one of the most untapped sectors in real estate we were amazed to hear about the potential for a retirement living explosion. There were approximately 11.8 million people over the age of 65 in the UK in 2016, and this is set to rise by 52.7% by 2036.

We met John Nettleton, Land Director at Audley Group who gave us his view on the potential for growth: “The retirement living sector in the UK has been growing steadily for the past decade or so. However, with an ageing population and insufficient supply, it is a market which we believe has significant capacity for accelerated growth in the coming years. Audley Group has long held this belief, and the recent activity by large institutional investors further backs up our conviction that the sector is at a tipping point.”

The glossy photographs of beautiful apartment buildings on the conference slides showed all the facilities that an (ageing) rock star would want, and we started to daydream about living there one day ourselves. This is certainly aspirational living, but one of the key “takeaways” for us was the many tenures of retirement living that already exist. One size does not fit all. Retirement living properties offer a wide range of care, facilities and services and we are now seeing the rise of operational models supporting luxury living, hospitality and care. The pioneering of a rental model is set to open up the sector further in a bid to meet the increased demand. It was widely acknowledged that this sector may be somewhat insulated from the economic condition due to this demographic need.

As planning and real estate lawyers, we are particularly interested in how planning policy can help this sector reach its full potential. The main issue seems to be the lack of central and local government buy-in, with more focus on homes for first time buyers than other types of housing. However, according to the government’s Chief Planner, Steve Quartermain, who opened the conference, the government is taking action to increase the mix of housing. He asked for views on how this is best achieved, citing national policy, guidance and/or separate use classes as potential solutions.

The word “retirement” appeared only once in the government’s Housing White Paper. However, it suggested that national planning policy may be introduced to encourage local planning authorities to set clear policies for addressing older people’s housing needs. This would be a step in the right direction, but much more is needed.

The current build to rent (BTR) boom has government backing, partly brought about by the hard work the industry has done to persuade Westminster and the Mayor of London of its benefits. If the retirement living sector could do the same, it could ignite the political will to unlock some of the existing constraints to growth. The stats on the potential capacity of this sector are clear, but to make a real success of it, retirement schemes need to be planned properly to ensure high quality, sustainable development that meets the needs of the next wave of retirees, whether they are rock stars or not!

Posted in Real Estate News

Technology in the Property Industry

Hogan Lovells hosted the Reading Real Estate Foundation Breakfast Forum (RREF*) on 17 November 2017.  This year’s topic was: Technology in the Property Industry and provided digital food for thought from three key areas.

David Sleath (CEO of SEGRO) described the ways in which technology has changed the warehousing sector.  This includes how warehouse design and operation has changed due to developments in robotics, for example Amazon’s use of “picking arms” to bring stock to warehouse workers rather than the other way around.  The growth in “digital” sheds and data centres is also an interesting impact of technology.  This isn’t surprising given that more digital data has been processed in the last 2 years than in the rest of history combined!

Looking to the future, could we soon see driverless electric lorries distributing products?  Or perhaps drones delivering to your desk?  Or will we need distribution at all if 3D printers can print anything you need?

David Atkins (CEO of Hammerson) focused on the use of technology in the retail sector, in particular shopping centres.  Hammerson are making use of Apps to improve consumers’ retail experience.  These Apps help consumers find products at, and obtain information about, the shopping centre.  Shoppers can photograph an item they like and the App will tell them where to get it.  Shoppers can also try on products without getting changed using their smart phones.  With the growth of internet shopping, it is increasingly important for the high street and shopping centres to offer customers an “experience” that they can’t get from a computer at home.

Patrick Nelson (Executive Vice President of WeWork) talked about the technology WeWork uses in its offices.  Desks are digitally personalised and automatically adjust to the user, so smart “hot desking”.  Apps also allow different businesses using the offices to interact and communicate easily, they can offer services to each other or collaborate in shared ventures. This creates a real business community.

WeWork also uses algorithms to analyse how their space is used and that enables them to improve it.  For example, cameras will spot if a sofa isn’t being used and WeWork  can then change its location or style so that it is.

One key (and comforting) theme to emerge from all the presenters was that technology isn’t necessarily intended to replace humans.  It should instead facilitate and enable work.

*RREF is a registered charity that provides support for real estate and planning education at the University of Reading.

Posted in Real Estate News

Budget shock for property industry: non-UK resident landlords to be taxed on UK property gains

Quietly, almost without any fanfare, a tax policy of more than 50 years designed to encourage overseas investment into UK real estate was reversed in the small print of the Budget. The announcement has provoked a storm across the property industry.

UK tax will apply to the disposal by non-UK residents of all UK property (commercial and residential) from April 2019.

There will also be a UK tax charge where a non-UK resident realises a gain on disposal of a 25% interest in an entity which derives directly or indirectly 75% or more of its gross asset value from UK property.

Generally only gains accruing from April 2019 will be within the charge to tax and historic gains will be excluded. For residential property already within the scope of the Non-Resident CGT regime, gains from April 2015 will continue to be within the charge to tax.

Overseas pension funds registered in the UK will be exempt from capital gains tax on disposal of UK property investments or interests in UK property rich entities. Also companies owned as to at least 80% by qualifying institutional investors such as pension funds, life assurance companies and investment trusts will be able to benefit from the substantial shareholdings exemption when disposing of 25% shareholdings in property rich companies.

Despite the historic nature of this change in UK tax policy, the writing has been on the wall for some time. It follows the pattern of a gradual widening of the UK tax net for overseas investors in UK property over the last few years.

The UK is practically the only developed country in the world not to charge tax to non-residents on the disposal of commercial property located in its jurisdiction. Most double tax treaties allocate taxing rights on immoveable property to the State in which the property is located. You could characterise this Budget announcement as bringing UK tax policy on commercial property gains into line with that in other countries.

It has been a feature of the UK property market for several years that overseas investors, particularly from China and the Middle East, have dominated the acquisition of high value commercial UK property. Much of this investment is held through offshore structures, such as non-UK resident companies and unit trusts.

We may see a flurry of sales and restructurings in 2018, but many investors are long term holders of UK property.

In the future, investors will look at onshore structures for holding UK property. The proposed reduction in UK corporation tax to 17% from April 2020 will mean that a UK holding company may be a simple and relatively attractive option.

Alternatively there are tax exempt vehicles like open-ended property funds (PAIFs) or listed property companies (REITs). One likely impact of the change is that investors will look closely at converting existing joint venture vehicles and funds into UK REITs.

The government has made its policy intentions clear, but there is a consultation on the shape of the legislation which is open for comment until 16 February 2018.

Posted in Real Estate News

Unopposed Lease Renewals – a need for speed?

From 1 December 2017, there will be a year-long pilot scheme for unopposed lease renewals that are issued in the County Court at Central London (CCLC).  All claims will be transferred to the First Tier Tribunal (Property Chamber) (the FTT) in London.

The main aim of this is to “ensure that all cases proceed to a final determination as smoothly and as quickly as possible“.

Significant changes to the current process

1. From the issue of proceedings until the final hearing should take just 20 weeks – there is no allowance to stay the claim except for a one-off three month stay at the beginning for PACT referral, mediation etc.

2. There is no Case Management Conference – once the proceedings have been issued (if no initial three month stay is agreed) the FTT’s standard directions kick in.

3. These directions only allow for one round of tenant’s amendments to the draft lease.

4. They do not allow for witness statements of fact.

5. The valuation experts are to exchange comparable evidence on market rent at an early stage – prior to solicitors having agreed on which terms of the lease are in dispute!

6. The judge will always sit with a valuer/assessor (London valuers will not be allowed to sit due to potential conflicts).

Benefits

The main benefits appear to be:-

1. the judge will have greater knowledge of property matters, including business tenancies, and there will be a valuer/assessor at the hearing;

2. if valuation is the only issue, the FTT may consider written submissions rather than an oral hearing; and

3. no excuses for parties to drag their heels, or drag out the proceedings for tactical purposes.

Parties should be prepared for the fact that once proceedings are issued, they are going to have to work extremely quickly on getting the draft lease agreed.  They should therefore be proactive with their negotiations from the moment a notice is served.  Additionally, it would be sensible for a draft lease to be submitted as soon as reasonably practicable and not left until directions are in place.

A point to note is that should a party wish to use this pilot scheme and issue proceedings at the CCLC when the property is not in London, it will be sent back to the county court venue which has jurisdiction.  Additionally, any interim applications still need to be issued out of CCLC and transferred from there to the FTT.

Posted in Real Estate News, Uncategorised

Government issues draft Tenant Fees Bill banning residential letting fees

Earlier this year, we blogged on the government’s proposals to ban residential letting fees.  On 1 November, the government took the next step towards realising those proposals by publishing the draft Tenant Fees Bill.

The Draft Bill

The draft legislation bans landlords and agents in England from charging residential tenants and licensees fees or other charges on top of the rent as a condition of the grant, renewal or continuance of a tenancy.  The ban covers letting agents’ fees as well as fees charged by landlords and any required payments to third parties (for example credit checks).  There are a handful of exceptions: a refundable security deposit (capped at six weeks’ rent, which is an increase from the one months’ rent originally proposed), a refundable holding deposit (capped at one weeks’ rent) and tenant default fees.

The ban will apply only in relation to tenancy agreements and licences entered into after any legislation comes into force.  It does not apply to long residential leases or social housing tenancies.

It does not bite on assignments of tenancy agreements.  In reality, assignments of Assured Shorthold Tenancies are rare as ASTs are often short term and personal.

The draft Bill includes anti-avoidance measures by preventing a rent at a higher initial sum which subsequently drops during the first year of the tenancy.  It does not prevent an increase in rent spread over the term of the tenancy.  However, the devil is in the detail, and the final legislation will need to be unpicked to fully understand what the anti-avoidance measures prohibit.

Where agents seek to pass fees onto landlords, there is nothing that prevents a landlord from reflecting such fees in a higher rent spread evenly across the term.  Whether they do so is likely to depend on supply and demand of similar properties in the area and therefore the extent to which tenants can shop around for rental properties.

Enforcement of the ban will be carried out by local authorities (Trading Standards).  An initial breach would result in a civil penalty of up to £5,000.  Subsequent breaches within five years would be a criminal offence but with a civil penalty of up to £30,000 as an alternative to prosecution.

In his written statement to parliament, Sajid Javid (Secretary of State for Communities and Local Government) highlighted the government’s aim to create “a more transparent and competitive private rented market with a higher quality of service” by sharpening and increasing letting agents’ incentives to compete for landlords’ business.  The ban will also do away with the risk of unfair practices in the form of double charging.

The draft Bill has only this week been introduced in parliament and it will not come into force for some time.  However, the message from the government is clear and consistent: it is a case of when not if we see the end of letting fees.