Real estate focus

Significant milestones in 2019…

...and more in the pipeline

• Electronic Communications Code: proposals published in 2018 are intended to make it easier to install digital services e.g. by placing an obligation on landlords to facilitate access to their properties for the deployment of digital infrastructure.  Further details (and possible implementation) expected in 2019.  
• SDLT: consultation expected in early 2019 on the introduction of a 1% surcharge on non-resident purchasers of residential property.
• Permitted development rights:  the government has proposed changes, including allowing uses in Classes A1(shops) to change to office use and allowing commercial buildings to be demolished for residential development to be carried out.
• Community Infrastructure Levy (CIL): the government has proposed a reform of developer contributions, in particular CIL and section 106 planning obligations
• Leasehold reform - new leases: in October 2018 the government consulted on the implementation of a ban on new long leases for houses (elements of which are likely to be retrospective) and a restriction of future ground rents to a nominal value. Also under consideration were measures to make maintenance charges paid by freeholders fairer and to improve how leasehold properties are sold.  Consultation outcome and draft legislation expected in 2019. 
• Leasehold reform - existing leases: in order to help existing leaseholders with onerous lease terms, the Law Commission proposed a series of reforms in September 2018 to make it easier and cheaper for leaseholders of houses and flats to “enfranchise”: to buy their freehold or to extend their lease. We await the outcome of a consultation on the proposals, which closed on 7 January 2019. 
• More leasehold – RTM in the spotlight: The Right to Manage gives leaseholders a “no fault” right to take over a landlord’s management functions in respect of their building. The RTM procedure is seen as problematic and the Law Commission published proposals in January 2019 to make it simpler, quicker and more flexible. Responses required by April 30, 2019.
• Minimum term for the PRS: in July 2018 the government consulted on a new tenancy model for assured shorthold tenancies (ASTs), proposing a compulsory 3-year fixed term tenancy with a break right for both parties after the initial 6 months.  Responses were required by August 2018 but things have gone quiet on this front.   
• On 6 April 2020 corporate non-resident landlords will come within the charge to UK corporation tax on net rental income (currently at the rate of 19%, but expected to fall to 17% by 2020) and will no longer be subject to income tax. The corporate interest restriction will apply to such non-resident landlords.
• Registration of overseas entities owning UK land: a draft Registration of Overseas Entities Bill was published in July 2018.  The Bill provides that any overseas entity that owns, or wants to own, UK land – residential or commercial – will be required to identify its beneficial owners, register their details in the new register and update that information annually. The register is intended to go live by 2021.
• LIBOR to go:  The Financial Conduct Authority has announced its intention to retire the LIBOR benchmark interest rate setting scheme by 2021. 
• Commonhold: The Law Commission published a consultation in December 2018 to reform the law of commonhold, an alternative to leasehold ownership introduced in 2002 but with very little take-up.    The consultation closes on 10th March 2019. 

Can Brexit frustrate a lease?

That is the worrying question currently being considered by the High Court in Canary Wharf (BP4) T1 Limited and others v European Medicines Agency. 

The claimant, Canary Wharf, is the owner of a substantial office building in Canary Wharf. The defendant, a decentralised agency of the European Union known as the European Medicines Agency (EMA), is a tenant of 10 floors under a 25-year lease granted in 2014 and reportedly commanding an annual rent of approximately £14 million. EMA occupies the premises as its headquarters and it asserts that it is legally obliged by EU law to be located in an EU member state. EMA has attempted to assign its lease and/or sublet its premises but so far without success.

Canary Wharf issued proceedings in June 2018 seeking a declaration that Brexit would not frustrate the lease and that it will continue in full force and effect if the UK leaves the EU. EMA counterclaimed seeking a declaration that the UK’s exit from the EU will amount to an event of frustration of the lease and/or that it will render EMA’s future performance of the lease ultra vires and so unenforceable as a matter of EU law.

A contract can be brought to an end by “frustration” if an external unforeseen event occurs which renders the contract impossible or illegal to perform, or transforms the obligation into a radically different obligation than originally undertaken. However frustration is generally difficult to establish. One of the issues which the court must determine in this case is whether or not Brexit was reasonably foreseeable either in 2011 when the agreement for lease was entered into and/or in 2014 when the lease was subsequently granted. 

The judgment, which is due to be delivered before 29 March 2019 (Brexit Day), could have serious and wide implications for the commercial property industry and beyond. It will make very interesting reading in the context of Brexit and in terms of how the doctrine of frustration applies to leases generally.

The facts of this case are unusual so that, even in the perhaps unlikely event that the court holds that the lease will be frustrated by Brexit (should it proceed), this may not have significantly wider consequences for the real estate investment market. No doubt, however, any corporate tenants wishing to relocate their business to the EU in the light of Brexit will review the judgment carefully.  The judgment is also likely to have wider commercial implications in relation to contractual arrangements with EU entities generally.

For further information please contact real estate litigation partner David Stevens.

Land agreements and competition: dos and don’ts

The Competition and Markets Authority (CMA) has published guidance to help UK businesses avoid breaking competition law in the context of land agreements. These include agreements for the sale or lease of land and agreements relating to the use of or access to land. 

A breach may have very serious consequences, including fines of up to 10 per cent of worldwide annual turnover: the guidance was published hot on the heels of a £1.6M fine levied against Heathrow airport for breaching competition law by including a pricing restriction in a lease with a hotel.

The “don’ts” in the guidance include that a business should not, without seeking legal advice:

• Enter into a land agreement which restricts the prices at which goods or services can be supplied from the land;
• Enter into a land agreement which restricts how the land can be used with the aim of sharing or dividing up territories or customers;
• Enter into land agreements which restrict how the land can be used to make it harder for other businesses to compete;
• Assume that existing land agreements are legal because they have been checked by lawyers in the past. This is because the law changed in 2011 so that land agreements (particularly restrictions on use) are no longer exempt from competition law.

The guidance also recommends that a business that operates under an existing land agreement or is contemplating entering into one should consider setting up a competition law compliance programme to manage and mitigate competition law risks.

The guidance is available free of charge on the gov.uk website.