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

Posted in Real Estate News

A new challenge in the mix: Hotel developments to provide affordable housing?

It is no secret that this is a challenging time for the hotel industry in London with peak prices, a shortage of viable sites, uncertainty over labour and rising costs and taxes. Notwithstanding, one London Borough has decided that hotels should also be doing their bit to address the housing crisis.

In its draft City Plan, published on 12 November, Westminster City Council has proposed affordable housing requirements for many hotels in the Central Activities Zone.  In particular:

• hotels of 750m2 – 999m2 would need to pay a financial contribution for the provision of affordable housing; and

• hotels of 1,000m2 or more would have to provide 35% of their floor space as affordable housing.

The draft document has scant detail on how this would work in practice.  And whilst it does recognise that there may be some areas where a contribution might be more appropriate than onsite provision (provided the developer can demonstrate that it is not practicable or viable to provide it on site), the Plan is clear that in most cases the starting point should be affordable homes being provided as part of the same development.

The practicalities of onsite provision are unlikely to be the only issue. Assessing the viability of providing affordable housing may pose its own challenges.  Many local authorities have enough difficulty trying to apply their affordable housing assessment models to Build-to-Rent housing.  This does not bode well for trying to apply affordable housing requirements to an entirely different type of use on which the local authority is not resourced with expertise. Will the local authority appreciate that hotel developments can be intricate and how common areas are used and accessed, hotel lay-outs, design and the type of brand or operator a site may attract are all important considerations in a hotel development?

Further, whilst the Plan does recognise the need to maintain Westminster’s draw as a visitor destination, and protect all the benefits that brings, including by protecting existing hotel facilities, there are also other key points that hotel developers and operators should be aware of:

• There will be a bar on new hotels over 2,500m2 in the Soho Special Protection Area;

• New hotels will be directed to the CAZ, meaning those looking to develop hotels elsewhere to avoid the affordable housing requirements are likely to have little joy; and

• Extensions to existing hotels will be linked to upgrade of that hotel, and will not generally be able to include new or additional facilities to be used by non-residents. This comes at a time when it is important for the industry to be innovative and explore sources of income and models other than room lettings or traditional F&B services.

The consultation on the draft Plan closes on 22 December, and those with hotel interests in not only Westminster, but the wider London area should consider making representations, as where one borough leads, others often follow.  And whilst it may be optimistic to think that the affordable housing policy will be abandoned all together, the industry should take this opportunity to voice its concerns and explain how its sector needs to operate to thrive.

More details on how to respond can be found at: https://www.westminster.gov.uk/cityplan2040

 

 

Posted in Real Estate News

Tenant’s Right to Manage – A damp squib?

As the number of people in privately rented accommodation increases, the ability of tenants to manage their homes in a way that works for them is becoming increasingly important.  The Right to Manage (“RTM”), which landlords cannot contract out of, was introduced to give tenants of flats more control if they are dissatisfied with the way a landlord or property manager is managing the services in their building.

How does it work?

Under the Commonhold and Leasehold Reform Act 2002, the RTM applies to premises that:

• consist of a self-contained building or part of a building;

• contain two or more flats held by qualifying tenants; and where

• the total number of flats held by qualifying tenants is not less than 2/3 of the total number of flats in the premises.

Qualifying tenants are those who have long leases of 21 years or more from the date of grant.

Certain premises are excluded from the RTM.  They include premises owned by local housing authorities and buildings where more than 25% of the internal floor area (excluding common parts) is non-residential .

The RTM must be exercised through a private company limited by guarantee set up by the qualifying tenants (the “RTM Company”), which must give notice to each qualifying tenant inviting them to participate in the RTM.  The RTM Company then has to serve a claim notice on anybody who is:

• a landlord under a lease of the whole or any part of the premises;

• any party to those leases that is not a landlord or a tenant; and

• a manager appointed (under Part II of the Landlord and Tenant Act 1987) to act in relation to the premises or any part of them.

On the date that the claim notice is given, the number of qualifying tenants that are members of the RTM Company must be at least half of the total number of flats in the premises.  If a person given a claim notice disagrees that the RTM Company is eligible to acquire the RTM, it will need to serve a counter-notice; the RTM Company may then apply to a tribunal for determination of its right.

If the RTM Company acquires a RTM of the premises, it will assume management functions in relation to services, repairs, maintenance, improvements, insurance and management. This excludes landlord functions in respect of re-entry or forfeiture and matters relating only to flats not held by qualifying tenants.

Worthwhile?  Possibly not.

For a group of tenants willing to act together and with the right skillset, this can be a great way to ensure quality management of shared areas and services and expenditure on services that are important to them. However, the Law Commission has commented that take up is limited and those who have done so “have found delays, costs and uncertainty” in the statutory process for acquiring the RTM.  Stumbling blocks identified include the prescribed form of notices, difficulties in managing additional parts of properties used by others (e.g. access roads) and the inability for one RTM Company to manage multiple blocks on the same estate.  At a time when mixed use development and redevelopments are finding favour (with residential development above retail and leisure assets, for example) it is arguable that the exclusion of buildings with more than 25% of commercial space deprives an increasing number of flat tenants of the right to manage their building.

Given these problems, it might be unsurprising that the take up of the RTM scheme has been slow since 2002. However, with the Law Commission looking to publish a consultation paper by the end of 2018 with a view to “making the procedure simpler, quicker and more flexible”, it may well be that landlords will face more RTM claims in the future.

 

Posted in Real Estate News

Structures and Buildings Allowance: What a relief for construction costs

Whilst capital allowances have been available for plant and machinery that forms an integral part of buildings, there has been no relief available for the capital investment to construct most structures or buildings themselves.

Until now…

The Chancellor announced in the 2018 Budget that the government will introduce a new Structures and Buildings Allowance (“SBA“) for new non-residential structures and buildings.

Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of two percent on a straight-line basis over a 50 year period once the building comes into use.

The key features of the relief are that:

  1. relief will be given at a flat rate of two percent over a 50-year period;
  2. relief will be available for new commercial structures and buildings, including costs for new conversions or renovations;
  3. relief is available for UK and overseas structures and buildings, where the business is within the charge to UK tax;
  4. relief will be limited to the costs of physically constructing the structure or building, including costs of demolition or land alterations necessary for construction, and direct costs required to bring the asset into existence;
  5. relief is available for eligible expenditure incurred where all the contracts for the physical construction works were entered into on or after 29 October 2018;
  6. claims can only be made from when a structure or building first comes into use;
  7. land costs or rights over land will not be eligible for relief, nor will the costs of obtaining planning permission;
  8. the claimant must have an interest in the land on which the structure or building is constructed;
  9. dwelling houses will not qualify, nor any part of a building used as a dwelling where the remainder of the building is commercial;
  10. sale of the asset will not result in a balancing adjustment – instead, the purchaser takes over the remainder of the allowances written down over the remaining part of the 50-year period;
  11. expenditure on integral features and fittings of a structure or building that are currently allowable as expenditure on plant and machinery, will continue to qualify for writing down allowances for plant and machinery including the Annual Investment Allowance (“AIA“) up to its annual limit;
  12. SBA expenditure will not qualify for the AIA; and
  13. where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure will qualify for a separate two percent relief over the next 50 years.

As the allowance will pass to a buyer of the new commercial building, the amount of available relief will need to be disclosed by the seller. Buyers of new commercial buildings will need to raise this issue in pre-contract enquiries.

For further details please click here.

Posted in Real Estate News

SDLT: same tax; different filing window

From 1 March 2019 the window to file a Stamp Duty Land Tax (“SDLT”) return, and pay any SDLT due, will reduce from 30 days to 14 days from the effective date of the transaction.

As a reminder, generally the “effective date” is the date of completion. However, where a contract for the sale of land or (for example) an agreement for lease is “substantially performed” before completion, the effective date is the date of that substantial performance.  Examples of substantial performance include where a purchaser takes possession of the property, or pays the majority of the consideration for the transaction, before completion.

The reduced filing window will apply to all transactions with an effective date on or after 1 March 2019. Businesses and lawyers will need to ensure that internal processes are updated in line with this change to avoid late filings.

HMRC’s objective with the reduced window is to improve efficiency in the SDLT system. For more information about their rationale for the changes please click here.  As we blogged in 2016 when HMRC originally consulted in relation to the proposed change, we felt that substantial simplification of the forms and of the amount of information required would need to be undertaken in order to mitigate the risk of late filings under the new regime. In our experience, the process of preparing the forms to report complex commercial transactions can be extremely time-consuming.

HMRC are now consulting on the proposed changes to the return and, this week, have published draft legislation including the reduced number of questions. There is a helpful reduction in the amount of information which now needs to be supplied, particularly in relation to new leases granted and occupational leases to which a property is subject.  HMRC assert that there will be “no significant impact on business, charities or voluntary bodies […as the…] majority of returns are already filed within 14 days of the transaction”. However, SDLT remains a complicated tax and in time-pressured transactions it is now going to be even more important for all involved to engage at an early stage with the approval of the significant amount of information which still needs to be included on the returns.

For more information about the changes to the forms, or to take part in the consultation, please click here.  The consultation closes at 11:45pm on 23 November 2018.

 

 

 

Posted in Real Estate News

New Guidance paves the way for more Build to Rent

What’s happened?

The Government has issued new guidance to help councils grant planning permission for Build to Rent schemes. This is great news for Build to Rent developers as it should mean that permissions are granted more quickly. Councils are encouraged to plan for Build to Rent in their areas where a need is identified, which should mean that more Build to Rent permissions are granted in the future.

Why?

The Government has recognised the significant role that Build to Rent has to play in solving Britain’s housing crisis. As a relatively new type of housing, the Government is trying to provide a national framework for Build to Rent housing and to provide clarity to councils who want to plan for and grant permission for Build to Rent schemes.

What kind of affordable housing?

A discount of at least 20% off market rent should be applied to the affordable units at the point the tenancy is entered into or renewed. The affordable units should be in place for the life of the scheme. The guidance tells councils how to deal with the possibility of units being sold off as build for sale units. This may include the provision of alternative types of affordable housing or a “clawback” contribution. The guidance provides a potential formula to help councils with this.

Other types of affordable housing (including financial contributions) can be provided, but this will require specific agreement with the council. Like the market rent homes, the affordable units should be under common management, be distributed throughout the scheme and be indistinguishable from the market rent homes.

How much?

The guidance suggests that 20% of the Build to Rent units should be affordable. However, councils are free to set their own required proportion in their local plan, based on their local housing needs.

The Mayor of London has done just this in his draft London Plan. For Build to Rent schemes to follow the Fast Track Route (avoiding the need for an open-book viability assessment) they must deliver at least 35% affordable housing and at least 30% of the affordable units must be rented at or below the London Living Rent.

The guidance allows some flexibility for developers as it recognises that viability issues may mean that developers need to make a case for fewer affordable units. There is also flexibility in terms of the spread of discount across the site. This might involve a trade-off between the proportion of discounted units and the discount offered on them – another win for developers.

Management

The process for managing affordable rented units should be set out in the section 106 agreement with the affordable units under the same management as the market rent units. The agreement should specify:

  • the lettings agreement parameters;
  • rent levels;
  • spread of homes across the scheme;
  • management and service agreement; and
  • marketing arrangements.

The scheme operator may be asked to produce an annual statement to the council to show compliance with the planning agreement.

The guidance does not prescribe a covenant period during which homes must remain as rentals, but suggests that councils should consider setting one. Potential compensation mechanisms are suggested in the event that homes are sold off during the covenant period.

Giving Build to Rent a boost

All in all, this is good news for the Build to Rent sector. There continues to be clear support for Build to Rent and the guidance provides structure and detail to the planning process. This should help to demystify councils and inject confidence and trust in the sector. What is crucial, now, is that the flexibility within the guidance is respected and that communication between councils and developers is maintained to build on the steady foundations of the new planning policy and guidance.

Posted in Real Estate News

Enforcement action for arrears – a useful reminder for landlords


Although company voluntary arrangements have stolen the headlines this year, there are many other tenants, particularly those in the retail sector that are not seeking to reduce their rents but simply falling into arrears.  This presents a significant headache for landlords trying to manage their property portfolios.

There are a number of remedies available to landlords who find themselves in this situation including:

• Forfeiture: A right to forfeit is invariably found in commercial leases and provides a landlord with the ability to bring a lease to an end upon the tenant’s default.  In the case of non-payment of rent, a landlord can exercise its right to forfeit without notice to the tenant.

• Commercial Rent Arrears Recovery regime: CRAR is a statutory regime which allows a landlord of commercial premises to recover rent arrears by taking control of a tenant’s goods at the leased premises and, if the arrears are not paid, selling them.  CRAR requires notice to be given to the tenant and a certified enforcement agent needs to be engaged to attend the premises to take control of the goods.

However, landlords need to be careful how they pick and choose these remedies as otherwise they risk prejudicing their own position.  The recent case of Thirunavukkrasu v Brar & Brar [2018] EWHC 2461 (Ch) serves as a useful reminder that before taking any enforcement action against a tenant for arrears, landlords should first consider whether their priority is to get paid or get the premises back.

In the case, Thirunavukkrasu was the tenant of premises in Teddington, Middlesex and the Brars were the landlord.  The rent was due quarterly and the tenant had failed to pay the December 2015 quarter’s rent.  The landlords decided to exercise CRAR on 1 February 2016 and subsequently purported to exercise their right to forfeit for non-payment of rent on 12 February 2016.  One of the issues before the County Court, which was then considered by the High Court on appeal, was whether exercising CRAR waived the right to forfeit.

A landlord can waive a right to forfeit for a “once and for all breach” (like not paying rent on the due date) by unequivocally confirming the existence of the lease and communicating this to the tenant.  The County Court and subsequently the High Court held that exercising CRAR amounted to a waiver of the right to forfeit.  In the judge’s words, the “exercise of CRAR… contained an unequivocal representation that the lease was continuing”.  Therefore the forfeiture of the lease was unlawful.

This decision serves as a useful reminder for landlords when faced with a tenant in arrears. Exercising one form of enforcement action may scupper their ability to take other steps at a later date.

Whenever a landlord is considering forfeiting a lease, it is important to obtain advice on how best to proceed.  As the case of Thirunavukkrasu demonstrates, a mistake can lead to a lengthy and expensive legal dispute, which all landlords would rather avoid.

Posted in Real Estate News

No quick fix for a broken housing market – government consults on leasehold reform

We blogged previously about the government’s proposed reforms banning the granting of new residential long leases of houses and setting ground rents at a notional figure. The government has now published its consultation on how to implement these proposals and also proposals to make charges paid by freeholders for maintenance of communal parts fairer and more transparent. Finally, proposals are included to set fixed time frames and maximum fees for the provision of leasehold information. The full consultation can be found here.

KEY POINTS

Implementing the ban on the unjustified use of leasehold for new build houses

  • Once the legislation is in force, it will not be permissible to apply to the Land Registry to register a residential long lease (over 21 years) of a house granted or assigned in circumstances caught by the ban.
  • The consultation asks for views on what remedies should be available to home owners who have been caught out by the ban – including transferring the freehold to the homeowner – and the practicalities of enforcing this. The consultation seeks input on further means of implementing the ban on new residential long leases.
  • A workable definition of “house” will be crucial for the legislation to be effective and the consultation invites views on the type of arrangements and structures which should or should not be considered a “house”.

Exemptions to the ban on new residential long leases of houses

  • The government believes shared ownership homes, community led housing (Community Land Trusts, cooperatives and cohousing schemes) and inalienable National Trust land and excepted sites on Crown land are possible exemptions to the ban.
  • The consultation asks respondents for other suggested exemptions.

Retrospective application of the ban

The consultation sets out the government’s proposals for the retrospective application of the ban on the granting of leasehold houses, namely:

  • any leasehold land owned on or before 21 December 2017 will not be caught by the ban but it is not clear how this applies to the ban on assignments referred to below
  • it will be possible to grant leases of houses before the new legislation takes effect
  • once the legislation is in force, the ban of granting leases of houses will apply to:

any freehold land at any time; and

any leasehold land acquired on or after 22 December 2017

  • The ban will catch assignments of leasehold land once the legislation is in force if a house or houses have been developed on that land after the legislation comes into force.

The government’s belief is that houses developed on freehold land should be provided on a freehold basis. It also states that the proposed restrictions should be placed on new leases of land granted or assigned from 22 December 2017 so that land is not acquired to circumvent the proposed ban. How these retrospective provisions will work is not clear and responses to the consultation will no doubt call for additional clarity, particularly in relation to existing development agreements and leasehold land where it will be impossible to develop under a freehold structure. There is also a concern that a one size fits all approach could prevent the future use of leasehold structures commonly used on complex regeneration projects.

Implementing the cap on future ground rents

  • Whilst the government wants to set ground rents at a nominal value on all new leasehold residential properties, it is also keen to clarify what “nominal” means. The proposed cap on future ground rents is therefore £10 (the figure being drawn from the Housing Act 1985 applying to council tenants and Right to Buy). The government asks whether there are justifiable reasons why ground rents on newly created leases should not be capped at £10, but instead at a different value. It should be noted that this is a cap so developers could choose peppercorn rents.
  • The consultation also seeks views on the exemptions to the cap, including:

community led housing (where ground rent forms the sole income for not for profit organisations)

shared ownership, but only where ground rent is used to buy out a landlord’s retained equity

retirement properties where community facilities costs are recovered through ground rents rather than service charges. Capping such ground rents could impact the affordability of such properties for an increasingly elderly population

mixed use leases (such as a lease of a building comprising of a shop with a self-contained flat above), although a further sub-lease of the flat for residential use would be subject to the cap

  • The proposed date for the cap to come into force will be three months after commencement of the legislation.
  • As with the ban on new long leases of houses, it will not be permissible to apply to the Land Registry to register a newly granted long lease with a ground rent in excess of the cap.

When to respond by

The consultation will close at midnight on 26 November 2018.

Posted in Real Estate News

Holy HMOly

Properties that qualify as Houses in Multiple Occupation (HMOs) have long presented a potential headache for unwary landlords, but from the start of this month the headache got bigger.

Originally, the requirement for an HMO licence only applied to properties that comprised at least three storeys but under new rules, introduced on 1 October 2018, size is no longer relevant. The change was brought in to tackle sub-standard and overcrowded homes and poor management practices. It is expected that it will bring an additional 160,000 properties within the HMO remit.

When do I need an HMO licence?

Landlords need to get an HMO licence from their local housing authority if:

• they rent out a property to five or more people who form two or more households; and
• the property meets one of the following tests:
­

The “standard test”: the property:

(a) consists of one or more units of living accommodation (excluding self-contained flats);
(b) is occupied by two or more households, is the tenants’ only or main residence (this includes students only occupying during term time) and this is the only use of the property;
(c) one or more tenants pay rent; and
(d) two or more tenants share a toilet, bathroom or kitchen, or the accommodation is lacking in one of these.
­

The “self-contained flat test”: the property is a self-contained flat with a bathroom, toilet and kitchen available for the tenants’ exclusive use, and (b)-(d) above apply (but it must not be a purpose-built flat in a block of three or more self-contained flats).
­

The “converted building test”: the property is a converted building and (a)-(c) above apply.

A landlord will commit an offence if he doesn’t have a licence and could face an unlimited fine and a rent repayment order or a penalty of up to £30,000 as an alternative to prosecution.

Even if a property doesn’t meet the HMO licence criteria, there is still a risk that it will need an HMO licence as local housing authorities have powers to extend the mandatory licensing regime to other properties (typically where social and economic improvement is a priority in their area).

What sort of conditions will be included in the licence?

The licence must include various conditions ranging from landlords submitting annual gas safety certificates to the local housing authority to installing smoke and carbon monoxides alarms.

The new rules also introduce extra mandatory conditions: minimum bedroom sizes, restrictions on the number of people of certain ages in each bedroom and waste storage and disposal requirements. These conditions are intended to reduce overcrowding and problems with waste.

A landlord who fails to comply with the licence conditions could face a fine of up to £5,000. If he knowingly permits occupation in excess of the number of tenants or households authorised by the licence, the resulting fine is unlimited. In either case a penalty of up to £30,000 could be imposed as an alternative to prosecution.

Posted in Real Estate News

Dancing to the wrong tune? Theresa May’s additional SDLT levy on foreign buyers

Theresa May’s announcement at the Conservative Party conference that foreign investors into the UK property market were going to be targeted with an additional SDLT levy has caused further consternation within the industry.

Asserting a determination to “level the playing field” for those who live and pay taxes in the UK, the Prime Minister paved the way for yet another stamp duty surcharge, building on the higher levels already introduced for second homes and for corporates purchasing residential properties.  Whilst ostensibly aimed at the overseas oligarchy whose empty penthouses attract the continued ire of many who are struggling to get onto the property ladder, developers have claimed that the charge will have a negative impact on viability and thus reduce the more general supply of new housing stock coming to market – precisely the opposite of the intended effect.

What is beyond doubt is that the announcement follows a clear pattern and policy trend of targeting particular types of buyer through increased tax take.  These have included:

  • An additional 3% on top of normal SDLT rates if buying a residential property that means you’ll own more than one.
  • A flat 15% SDLT rate on residential properties costing more than £500,000 when purchased by certain corporate bodies or ‘non-natural persons’ – and, in some circumstances, a 3% surcharge when the price is less that £500,000 (but more than £40,000).
  • The ‘Annual Tax on Enveloped Dwellings’ (ATED) – an annual levy on the value of residential property (above a threshold value of £500,000 per separate dwelling), again where held by non-natural persons.

As ever with SDLT, the devil will be in the detail when it comes to analysing the implications of this latest additional charge.  The industry waits to see what further detail, if any, will be revealed in the Autumn Budget at the end of this month.  In the meantime, it does seem apposite to ask: to what extent is the UK really “open for business”?

Posted in Real Estate News

Law against revenge evictions extended to all Assured Shorthold Tenancies

From 1 October 2018, the government’s clampdown on so called “revenge evictions” has been extended to all existing assured shorthold tenancies, including those which pre-date the commencement of the Deregulation Act 2015.

The regime introduced by section 33 of the Deregulation Act 2015 is intended to prevent landlords from serving section 21 notices to recover possession of property let on an AST, if they are serving that notice as a reaction to the tenant having complained about the condition of their property.

Until this month, section 33 only applied to new tenancies created after the Deregulation Act 2015 came into force on 1 October 2015.  From 1 October 2018, it will apply to all ASTs irrespective of when they were entered into.

To take advantage of this statutory protection, a tenant will have to have made a written complaint to their landlord about the condition of the property, and then taken the complaint to their local housing authority, before obtaining an Improvement Notice or a Notice Requiring Emergency Remedial Action under the Housing Act 2004.

Our blog in February 2017 highlighted that in the first 18 months of the new regime fewer than half of the local authorities in England have been called upon to serve Improvement Notices to prevent so-called “revenge evictions”.  Although the  law will now apply to a larger number of ASTs, tenants need to be better advised as to their statutory rights, and as to the advantages of escalating legitimate complaints to their local housing authority, if more tenants are to benefit from the government’s clampdown.