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Keeping It Real Estate

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

Posted in Real Estate

PropTech Decoded – Ten Top Tips for Taking Flexible Working Space

With a boom in co-working across the world, getting the best deal on the space you occupy and understanding the small print is top ticket for flexible leasing. Before signing on the dotted line, ask yourself these key questions to make sure you get the most out of your flexible workspace:

  1. What space do you get? Will it be the same desks/offices every day or is it just first-come-first-served? Does the arrangement meet your specific technology security and confidentiality requirements? Does the provider guarantee you the space?
  2. For how long are you tied in? Can you leave early, and if so is any deposit refundable or a minimum fee still payable?
  3. Can the provider evict you early?
  4. Can you stay in the space for longer, or take more space? If you can, what will it cost you to do so and what can or should you agree upfront?
  5. Is any deposit payable when you sign the contract? What must you do to get it back at the end?
  6. Can your staff enter the building or the working space immediately, and what can you do in advance to save time on the first day?
  7. Do you pay extra for office services (e.g. printing, scanning, photocopying, telephones, internet data services and IT support) and refreshments? If so, what can or should you negotiate in advance to keep control of the bills?
  8. What “hidden” costs might the provider seek to pass on to you, and is there anyone else who might seek to charge you directly for something?
  9. Do you need to bring your own IT equipment/telecoms cables etc. into the space? If so, do you have all the rights you need, or is a third party (e.g. the provider’s landlord) also going to have to be involved? Make sure you can arrange everything before you commit to taking the space otherwise you might end up paying your provider for space you can’t use.
  10. Finally, are there hidden traps in the agreement? Clauses on things like anti-money laundering, bribery and corruption, the use of brokers are often found there.

Ever wondered what PropTech was all about? Our PropTech event on Thursday 4 October will decode what it’s really about and how to stay ahead of the game. If you are interested in attending please contact Lauren.Boyle@hoganlovells.com

Find us at what3words

truly.offers.answer

Posted in Real Estate News

Call for Evidence on EPCs

On Thursday 26 July 2018, the government published a Call for Evidence on Energy Performance Certificates.  The deadline for responding is 19 October 2018.  The government is particularly keen for responses from building owners and occupiers (both domestic and commercial), estate agents and others involved in the sale or letting of buildings, anyone involved at any level of the energy efficiency products supply chain (such as EPC assessors, accreditation bodies, software providers and enforcement bodies) and anyone else who regularly uses EPCs.  If that’s you, this is an opportunity to influence how future government policy affects you and your business.

This Call for Evidence comes hot on the heels of the Call for  Evidence – helping  businesses to improve the way they use energy which was published by the government on 18 July and which is open for responses until 26 September 2018.  Both Calls for Evidence are a result of the government’s continued thinking and policy development following the Clean Growth Strategy  published in October 2017.

EPCs

EPCs were originally introduced in 2007, via a European Union Directive, with the intention of enabling individuals and businesses to compare the energy performance of different properties and to use this as a factor in choosing where to live/rent.  However, since then the uses to which they are put have expanded significantly. In particular, since 1 April 2018, the asset rating in an EPC is of critical importance to landlords because of the prohibition against granting new leases, and renewing leases, of premises with a “sub-standard” asset rating (of F or G, shown on a valid EPC).   The government therefore wants to ensure that it understands all the uses (both regulatory and commercial) to which EPCs are now put.  It is also trying to improve their quality, the way in which they encourage building owners to improve the energy performance of existing building stock, and the availability of EPCs.

Quality

The government wants to reduce the degree to which EPCs are inaccurate and/or unreliable and it needs to understand the causes of this and how they can be addressed.  The Call for Evidence contains a number of suggestions, such as improving assessors’ access to relevant data to reduce the number of errors or assumptions made when producing EPCs.  This could mean providing EPC assessors with data from previous EPC assessments, data held by public bodies (such as Building Control and the local planning authority), and possibly smart meter data (although the Call for Evidence acknowledges this may cause data protection and consent issues).

There is also a clear intention to address perceived attempts to “game” the system and obtain a higher asset rating than might be appropriate.  The government thinks that the MEES legislation in particular may have resulted in building owners pressurising assessors to produce inaccurately favourable EPCs, possibly by making it appear that features such as insulation exist when in fact they do not.  Clearly the government wants to prevent this.

Whilst this seems perfectly proper, there may be difficulties in practice.  For instance, an EPC assessor preparing a new EPC on second hand retail space in a “white box” condition cannot currently assume that the future occupier’s fit-out will comply with modern building regulations (he can assume this for newly developed space), and so will have to make worst-case assumptions.  This will often result in the space having a sub-standard asset rating, making it difficult for the building owner to let the space without breaching MEES.  A common solution to this is to install temporary LED lighting, which allows the assessor to displace the worst-case assumption of tungsten lighting and normally results in a substantial improvement in the asset rating.  Preventing that sort of practice will make it much more difficult for building owners to relet second hand retail space in a “white box” condition.

The government also acknowledges that a lot can happen to premises without triggering the need for a new EPC to be prepared, which can mean that an existing, and lawfully valid, EPC may not be accurate as it does not reflect changes since it was prepared.  Several new triggers for obtaining a new EPC are therefore proposed, such as major renovations and minor works (for instance the installation of wall insulation, or the replacement of windows or a boiler), and it is also suggested that there could be triggers linked to renting out a room in a House in Multiple Occupation and to accessing a green mortgage.

How EPCs encourage action

The Call for Evidence asks about how consumers engage with the recommendations reports produced with EPCs, and how this process can be improved.  In particular, the government is seeking views on the Green Finance Taskforce’s recent suggestion that there should be mandatory operational energy ratings, and a public reporting mechanism, building on the (limited) current use of Display Energy Certificates.

The government also wants to make EPCs more relevant in the decision to buy or take a lease of a property, and suggests that property comparison websites could allow users to filter by asset rating.

There is no suggestion in the Call for Evidence that MEES might be made stricter, although we know from other government publications in the past 12 months that this is on the agenda.

Availability

The government wants more EPCs generally. The more EPCs there are, the more useful the data they provide about existing UK building stock and the more effective policies and legislation will be.  MEES, for instance, only applies if there is an existing, valid EPC so one simple way of avoiding it is not to have an EPC at all!

The Call for Evidence seeks suggestions on encouraging building owners and other stakeholders to access and use EPC data and clearly implies that there is a pattern of non-compliance with the current legislation requiring an EPC to be provided on the sale or letting of premises.  This leads to the suggestion that enforcement should be improved (possibly by increased regulation of estate agents and letting agents).

Finally, the government would also like to know whether there are barriers to obtaining an EPC that can be addressed, such as how easy it is to get an assessment undertaking and the cost.  The Call for Evidence recognises that some of its suggestions may result in increased costs, which it says the government will consider when making any changes.

Go on, respond!

It is likely that most developers, building owners and occupiers will have a view on some or all of these topics.  The Call for Evidence is their opportunity to make their voices heard!

Posted in Real Estate News

Whose property is it anyway? Government publishes plans for beneficial ownership register

Draft legislation to implement the government’s proposals for a “beneficial ownership register” has finally been published and the government is seeking views on the detail. The Registration of Overseas Entities Bill follows hot on the heels of last year’s consultation on the proposed register and provides some much needed flesh on the outline plans.

The government’s preferred option is a register showing the owners and controllers of overseas entities that own property in the UK. This will affect freehold and leasehold property (where the term is more than seven years) and will apply to all overseas entities except governments and public authorities.

Beneficial ownership will need to be registered with (and verified by) Companies House who will then issue a unique identification number (an overseas entity ID). Without the ID, the overseas entity will not be registered at the Land Registry as the owner of property. The overseas entity will need to comply with an “updating duty” (at least every 12 months) in order to retain its status as a “registered overseas entity” and restrictions will be put on the title registers of its properties that will prevent the registration of certain transactions (transferring the title, granting leases with terms of more than seven years or granting charges) unless the overseas entity is registered (or is exempt from registration).

Overseas entities who already own UK property will be given 18 months from implementation of the new law to register and obtain an ID. After that a restriction will be put on their property registers whether or not they have done so.

The diagram below (published as part of the government’s impact assessment) sets out how the proposed system will work:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Bill is open for consultation and views are specifically invited on the following topics:

  • Whether there are any types of overseas entities that may not have beneficial owners or managing officers.
  • Whether it is reasonable that foreign governments and public authorities should be exempt from registration and whether there are any other types of overseas entities that should be exempt.
  • Whether the requirements should be modified for any types of overseas entities so that the information they have to produce would be changed or reduced.
  • Whether registration should still be possible in the rare circumstances where an overseas entity is unable to identify their beneficial owners (the government envisages that this may be needed, for example, where an entity is incorporated in a jurisdiction that allows “bearer” shares).
  • Whether the scope of the prohibited dispositions are sufficient.
  • Whether there should be power to disapply the effect of the prohibitions in specific circumstances (the government envisages that there may need to be an “appeal” process which could be invoked on a case by case basis).
  • Whether the proposed exceptions to the prohibited dispositions (court order, statutory obligations, prior contract and power of sale/receivership dispositions) are sufficient.

The government describes the register as a “world’s first” that will tackle money laundering and increase transparency. It is especially quick to highlight the criminal sanctions that will follow for those who illegally profit from the UK’s real estate market through the illegal use of overseas shell companies.

The government expects the beneficial register to become operational by 2021.

This is another key step on the road to greater transparency. It will still be important to ensure that the proposals are workable and will not cause undue problems with the proper operation of a real estate market.

The closing date to submit your views is 5pm on 17 September and you can respond by clicking here.

Posted in Case Updates

Tangled in Knots – Beware of Japanese Knotweed

Japanese knotweed has blighted UK properties for over a century. The invasive plant’s roots and stems spread rapidly and have the capacity to smash through concrete, damaging a building’s foundations. Eradicating the knotweed is another headache entirely. As a result, securing finance on blighted properties can prove to be very tricky.

These issues were at the heart of the recent Court of Appeal case of Network Rail Infrastructure Limited v Williams and Waistell. Williams and Waistell each owned a bungalow neighbouring part of Network Rail’s estate from which Japanese knotweed had spread.

The County Court originally held that for “encroachment” type nuisance claims to succeed, physical damage has to have been caused to property. The difficulty faced by the respondents was that they could not prove that the knotweed had damaged their properties’ foundations. Despite this, the respondents were awarded damages in excess of £30,000 in connection with a “loss of amenity” type nuisance claim. This sum was based on the loss in the value of the respondents’ properties caused by the presence of the knotweed.

On appeal, the Court of Appeal agreed with the outcome of the decision at first instance, but for different reasons.

The Court of Appeal held that private nuisance claims, at their very core, concern the protection of the owner of land and their use and enjoyment of it, rather than protection of the market value of property. As such, damages for nuisance should not be linked to the diminution in value but should instead compensate for loss of use and enjoyment of property. The presence of the knotweed would increase the costs incurred by the respondents when developing their land (whether or not such development was currently intended). It is this increase in cost that should form the basis of the damages claim.

Crucially, the Court of Appeal also clarified that the categorisation of nuisance claims into “types” (such as “loss of amenity” type) is archaic, and the constituent parts of a valid claim are the same irrespective of “type”. As such, physical damage isn’t necessary as a pre-requisite to a successful nuisance claim as long as there is some identifiable loss of amenity.

The fact that an owner’s liability can arise prior to physical damage being caused to neighbouring property, in particular, will alarm landowners. A more proactive approach to estate management will need to be adopted by landowners who already have a knotweed problem, to identify areas of risk at an early stage so that potentially costly claims can be avoided.

 

Posted in Real Estate News, Uncategorised

The CRC is dead: long live Streamlined Energy and Carbon Reporting

On Wednesday 18 July, The CRC Energy Efficiency Scheme (Revocation and Savings) Order 2018 was laid before Parliament.  This Order will come into force on 1 October this year and will abolish the CRC when its current Phase ends.  This means that, from 1 April 2019 onwards, there will be no further obligation to monitor gas and electricity supplies under the CRC. The final CRC allowances must be purchased and then surrendered by the last working day of October 2019.

Few, if any, in the property industry will mourn the passing of the CRC.

However, we now need to gear ourselves up for Streamlined Energy & Carbon Reporting instead!  Also on 18 July, the government published its response to the consultation it launched in October 2017 on what could replace the CRC.  Government has already legislated to increase the Climate Change Levy in 2019, so that the abolition of the CRC is fiscally neutral to the Treasury.

The consultation response shows a clear policy intention to replace the reporting aspects of the CRC with a new mandatory reporting regime that broadly follows the existing reporting regime under the Energy Savings Opportunity Scheme (ESOS). However it will be implemented through the existing mechanism of directors’ reports within annual company accounts rather than requiring additional filings with Companies House (or other regulator).  This follows the recommendations of, in particular, The Financial Stability Board’s Taskforce on Climate-related Financial Disclosures, that climate-related disclosures should be part of mainstream financial filings.

This means that the reporting obligation will normally fall upon the highest UK company in a corporate group (as that is usually the entity that submits group accounts) and that non-UK companies will be exempt from reporting.
The proposal is that all quoted UK companies and all “large” unquoted UK companies and LLPs will be required to report their energy consumption and greenhouse gas emissions.  The proposed thresholds for triggering the reporting obligation are:

– 250+ employees; or

– an annual turnover greater than £36m and annual balance sheet total greater than £18m.

The consultation response suggests this will catch about 11,900 companies, 230 LLPs, and up to 50 unregistered companies who will need to include SECR information in their directors’ reports.  However, there will be an exemption for “very low energy users”, which the government suggests will be entities that use 40,000 kWh or less in a 12 month period.  There will also be an exemption for entities who cannot practically report.  This all aligns, broadly, with ESOS and mandatory greenhouse gas reporting.

SECR information must include a section on energy efficiency action taken in the financial year.  There will be no compulsory disclosure of ESOS recommendations and how they have been acted upon, although reporters can of course comment on this if they wish to do so.

It will be interesting to see how the property industry responds to these proposals and how the government develops and fleshes them out in legislation.  As the new reporting regime will need to come into effect in 2019, expect to see draft legislation published soon to give effect to the outcome of the consultation.  More on that when we have seen it!

Posted in Real Estate News

Time’s almost up for residential letting fees

Seven months on from its publication in November 2017, the draft Bill to ban residential letting fees has undergone the Committee Stage of pre-legislative scrutiny without amendment and now heads back to Parliament for its Report Stage. As the Bill looks increasingly likely to become law, we take stock of the Bill’s aims and review its anticipated impact.

The Bill

The Tenant Fees Bill is intended to make the residential lettings market more transparent and affordable for the 4.7 million private rented sector households in England. The Government hopes to achieve this by capping security deposits and banning landlords and letting agents from charging residential tenants and occupiers (including those in student accommodation) any fees other than those expressly permitted.  Research shows that fees currently paid by tenants range from £120 to £750 per letting.  Permitted payments include:

(1) rent;

(2) security deposits of up to six weeks’ rent;

(3) holding deposits (to take the property off the market) of up to one week’s rent;

(4) tenant default fees; and

(5) capped fees for assignment, variation or early termination of a tenancy.

Impact

Proponents claim the Bill will result in savings for tenants (almost three quarters of whom cite letting fees as a hindrance on their ability to move) and result in broader economic benefits as tenants’ disposable incomes increase. However, opponents argue that the legislation could remove a vital revenue stream for residential estate agencies; tenants’ fees currently generate approximately £700m per year for agents in England and Wales. Warnings of consequent job losses, consolidation and reduction in service quality abound.
Debate remains as to how to ensure tenants do not get charged letting fees ‘through the back door’ if landlords simply pass higher service fees onto tenants through rent hikes.  The Government is mindful of this potential pitfall, but argues that transparent, up front costs are preferable to ‘hidden fees’.

Time frame

The Government’s determination to ban residential letting fees and cap security deposits is clear. Having passed through the Committee Stage unamended and with cross-party support as to its aims, we expect to see the Tenant Fees Bill become law in late 2018 or early 2019.

Posted in Real Estate News

The Road to Zero – What does it mean for you?

What is it?

On 9 July 2018 the Government published its Road to Zero strategy. This sets out how the Government plans to lead the world in zero vehicle emissions. It follows the Government’s Air Quality Plan which prohibits the sale of new petrol and diesel cars from 2040. This means that electric vehicles are going to be part of our future and we need to ensure that we have the infrastructure needed to power them.

So what?

The strategy includes a number of initiatives that will have a significant impact on the real estate industry. They largely relate to the provision of charging infrastructure that will be needed for all cars on UK roads to be electric.

What’s the plan?

There are currently 14,000 public chargepoints across the UK, but the Government wants many, many more. It wants the UK to have one of the best charging networks in the world and it is going to use both the carrot and stick approach to get there.

A consultation on a new requirement for chargepoint infrastructure for new homes is expected “as soon as possible”. Non-residential development is also likely to be caught, as proposals to change Building Regulations to require new charging facilities are also mentioned. Workplace charging is a particular focus, so we can expect to see charging requirements for offices and other places of work in the near future.

Changes to national planning policy to require charging facilities are also expected. Highway works could get more expensive as the plan is for all new street lighting columns to have charging points in appropriate areas. There has also been discussion in the market about how the wayleave process needs to be sped up to make delivery of charging infrastructure happen, which is not something picked up by the Road to Zero.

In terms of carrots, the Government is increasing its investment in this area by making funding available for workplace charging schemes. The proposals also extend to bus and taxi facilities.

What does this mean for you?

Whether you work in the residential or commercial sector, you need to be electric vehicle ready. As well as meeting occupier/end user demand, there are a number of opportunities that this potential £7.6 trillion market presents to landlords and investors. Getting in early to attract tenants and purchasers with the latest technology could set investors and developers apart from their competitors, but there may also be other revenue generating possibilities that they may wish to explore, such as installing communal charging areas within new and existing schemes.

It is estimated that two thirds of vehicles on the road will be electric by 2050, but as there is no standardised charging system at present, developers and investors may find it hard to choose a product that will truly future proof sites. Complexities apply to mixed use schemes, where you will need to think about how different uses will share energy. Considered early, though, this can fuel innovative solutions which can allow uses to complement each other. One example is the use of kinetic pavements (where energy is generated from people walking over grids) on the commercial part of a site being used to charge electric vehicles on the residential part or vice versa.

There is plenty to ponder about how this will work in practice and how the real estate sector can tap into this new and exciting field. Dubbed as the biggest technological advancement of the motor industry since the invention of the motor car in the 1880s, this is clearly an area of rapid growth and it seems evitable that sparks will fly.

Please contact John Condliffe or Alex Harrison if you would like any further information on the Road to Zero or the roll-out of EV charging infrastructure in the UK.

Posted in Real Estate News

10 things you need to know about MEES and residential property

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“MEES Regulations“) introduced the Minimum Energy Efficiency Standards (“MEES“), which aim to encourage landlords to improve the energy efficiency of buildings via a restriction on granting new tenancies and continuing existing tenancies where the property has a sub-standard EPC rating.

Below are 10 key points to bear in mind concerning the impact of the MEES Regulations on residential property, or “domestic private rented property”:

1. Lots of MEES Regulations apply to both commercial and residential property

From 1 April 2018, landlords of “domestic private rented property” (i.e. residential property) or “non-domestic private rented property” (i.e. commercial property), are unable to grant new leases of properties without a minimum EPC rating of E: F and G rated properties are “substandard”. There are also restrictions on continuing to let substandard properties in the near future…

2. …BUT the restriction on continuing to let property applies earlier for residential property

Landlords are prohibited from continuing to let domestic private rented property with a commercial property substandard EPC rating from 1 April 2020; it is 1 April 2023 for substandard commercial property.

3. The MEES Regulations enable residential tenants to ask for the landlord’s consent to the tenant making “relevant energy efficiency improvements”

Tenants of domestic private rented property can ask the Landlord for consent to the tenant undertaking certain sorts of energy efficiency improvements to its property, even if there are provisions in the lease that would prohibit those alterations. The Landlord must not unreasonably withhold or delay its consent.

4. The MEES Regulations will not affect all residential property

Generally, for the MEES Regulations to apply there must be either an assured tenancy (for example, an assured shorthold tenancy), a regulated tenancy under the Rent Act 1977, or a certain form of agricultural tenancy.

If a tenancy is not one of these, the MEES Regulations will not apply. This means that leases of residential property to companies, leases of second homes (because the tenant must occupy the property as its principal home), leases of residential property granted on or after 1 April 1990 where the rent is over £100,000 per annum, or leases of residential property where the principal rent is £1000 or less (in Greater London) or £250 or less (elsewhere), will all be outside the scope of MEES.

5. Confusingly, the status of residential property can change

It is possible for a tenancy to move in and out of the scope of MEES. For example, if rents change during the term of a residential lease to push it above the £1000/£250 thresholds mentioned above the tenancy will become subject to MEES.

6. Social housing will not be caught

Low cost rental accommodation provided by a private registered provider of social housing and low cost home ownership accommodation offered by housing associations will be excluded from the MEES Regulations.

7. Certain types of landlords will fall outside the scope of the MEES Regulations

The MEES Regulations will not apply if a landlord is a registered social landlord under the Housing Act 1996, or where there is a tenancy granted by the Crown, a government department, local authority or certain housing associations.

8. Unlike commercial property, there is no upper or lower limit on length of term

It is possible for residential lettings of a significant term, for example 125 years or even 999, to fall within the definition of an assured tenancy and so be within the scope of MEES.

9. There are certain exemptions

If a landlord has a substandard residential property, it may still be able to let it.

Residential landlords, along with commercial landlords, can rely on the “consent exemption” (where a landlord can demonstrate that it has been unable to obtain a third party consent for any energy efficiency works), the “devaluation exemption” (where works would reduce the market value of the property by more than 5%) and certain temporary exemptions to cover situations where the landlord has no opportunity carry out relevant energy efficiency works.

Notably for residential property, landlords will be able to rely on the consent exemption if they plan to use Green Deal funding and the tenant refuses to confirm that the landlord may enter the Green Deal financing agreement.

If proposed works would adversely affect the structure or fabric of a property (as evidenced in a specialist’s report), the property can continue to be let despite its F or G rating. Similarly, if all relevant energy efficiency works are carried out and a property is still below E, it can be let (although the “seven year payback” test does not apply to residential property for the purpose of working out what is a relevant energy efficiency improvement).

Exemptions are only valid for a maximum period of five years (6 months for the temporary exemptions), do not benefit future landlords and must be registered on the PRS Exemptions Register.

10. There is an on-going consultation regarding the “no costs” principle for residential landlords

For residential property, energy efficiency works must generally be capable of being financed “at no cost to the landlord” – this does not apply to commercial property. This can be done via Green Deal finance, energy company obligations or local authority grants.

However, this is subject to on-going government consultation, which could result in landlords having to contribute up to £2,500 per property to the cost of improvement works.

Posted in Real Estate News

Assets of Community Value – a NIMBY lifeline?

Objectors are always looking for new, low cost ways to stop or delay the offending development. Lobbying for town and village green designations used to achieve this, but as the effectiveness of that route has been hampered by changes in the law NIMBYs have been offered a lifeline in the form of Assets of Community Value (ACVs).

How do they work?

ACVs are a way for communities to protect spaces of community value. A community group nominates an asset to the local authority who then decides whether it meets the registration criteria. Typically, communities have used the ACV process to protect their local pub or village shop, but a recent case reminds us that ACVs apply equally to open land.

The Banner Homes case

Open land was the issue in the Banner Homes case. Following an on-going battle with St Albans City and District Council regarding the ACV registration of one of their development sites, Banner Homes took the matter to the Court of Appeal. They didn’t win though. Although Banner Homes had not agreed to the community using the land (in fact, everyone accepted that the use had been trespass!), it was still enough to satisfy the ‘social wellbeing’ requirements of an ACV, and the land’s registration as an ACV stood.

So what can be done?

If your site is registered as an ACV, all is not lost. Yes, the ACV designation might add complexity and delay, but it is not fatal. There is nothing to stop planning permission being sought and obtained at any point in the ACV process, or during its registration as an ACV (which lasts for five years). However, the local authority can view the designation as a material consideration when deciding an application, which might weigh against it.

What about landowners who want to sell a site on to a developer?

This is the point where the ACV registration bites. An owner wishing to sell an ACV must notify the local authority. This starts a 6 week ‘interim moratorium’ to allow the community group to consider submitting a bid. If the group registers an interest in bidding, a 6 month ‘full moratorium’ begins during which the land cannot be sold (except to the group). However, at no point is there any obligation on an owner to sell, and once the moratorium periods have been cleared, it is business as usual.

The bitter irony

Interestingly, although ACVs were brought in to protect community spaces, when it comes to open land, it may end up having the opposite effect. The unintended fall-out of the Banner Homes case is that developers are likely to fence off sites to stop public use. In doing this, developers minimise the risk of an ACV nomination, but are also removing the very opportunities for social wellbeing that ACVs were brought in to foster.

Posted in Real Estate News

Overcoming the barriers to longer tenancies in the private rented sector

Since the introduction of assured shorthold tenancies under the Landlord and Tenant Act 1988, tenancies of 12 months have become the norm.

The Ministry of Housing, Communities & Local Government has just launched a consultation on “Overcoming the Barriers to Longer Tenancies in the Private Rented Sector”, asking whether measures that would encourage or compel landlords to grant longer term tenancies would lead to greater stability for both tenants and landlords.

The consultation document states that research by a major developer in the build to rent sector  suggests that one of the main reasons that tenants do not take up or demand longer term leases is because shorter terms have been the market standard for so long.  Once accustomed to the idea of taking a longer term tenancy, tenants have shown more interest, provided that they are given enough flexibility (such as break rights) and control over rent increases.

What is wrong with a market dominated by short term tenancies?  According to statistics published in the consultation paper, 38% of households in the private rented sector are families with school age children.  The paper states that short term tenancies create uncertainty. Tenants who pay their rent and comply with their covenants may still find themselves having to incur the cost and disruption of relocating their families after a year or two.  More sobering still, the end of assured shorthold tenancies is now the leading cause of homelessness, with tenants finding it difficult to find new, affordable accommodation when their tenancy comes to an end.

One question for consultees is whether the solution lies in legislation (prohibiting tenancies of less than 3 years other than in exceptional cases) or introducing incentives to landlords to grant longer terms (such as tax breaks).

The principal proposal in the consultation is for a standard tenancy of not less than 3 years, starting with a 6 month probation period after which either the landlord or tenant can decide to walk away.  Provided that the tenant complies with their obligations, they would enjoy the security of a longer term, but landlords would still be able to terminate the tenancy early on the tenant default grounds that currently apply to assured shorthold tenancies.  The landlord would have a right to increase the rent every 12 months, but without any nasty surprises: the tenant would have to understand up front what the maximum rent could be.

It will be interesting to see how the market responds to this consultation.  The sector is already highly regulated, and the sources of many tenant complaints have been tackled in recent years.  Tenancy deposits are protected under a statutory scheme (and some landlords do not take them anyway), letting agents are to be regulated, and letting fees banned. The Deregulation Act 2015 introduced protections for tenants against so-called “revenge evictions” which should allow tenants to speak more freely about disrepair and problems with their homes without fear of being thrown out by a disgruntled landlord.

It will also be important to ensure that regulation of tenancy lengths does not dissuade institutional and private investors. It is investors, after all, that fund and develop build to rent schemes. The consultation paper recognises that major upheaval and more regulation could stifle investment in the sector at a time when the investment market is already softening and the need for supply is still very high.

Ultimately, the recommendation for longer “short term” tenancies is driven by a wider problem in the residential property market.  Home ownership is in decline, due to a lack of affordable stock.  Assured shorthold tenancies are by far the most common tenancy in the private rented sector.  There seems to be little in between the two extremes. However there are signs that the private rented sector is evolving naturally, thanks to diversification (student accommodation, buy to rent, and retirement living, to name a few) and innovative steps by developers and planners.  In London, tenancies of new PRS stock are already expected to have a 3 year term, under the Mayor’s Affordable Housing and Viability SPG (July 2017), and this policy is reflected in the draft NPPF that will be published this month.

Perhaps the answer is to let the market adapt, rather than forcing change upon it.