Real Estate Focus - January 2025

On the horizon for 2025

At the start of 2025, there are a number of significant legal reforms on the horizon for the built environment. Here are some highlights to keep a close eye on.

Security of Tenure – Time for Reform?

For a number of years there have been calls to reform the security of tenure regime with critics arguing that the process is in need of modernising given the commercial landscape has changed significantly since the last major update around 20 years ago.

It led to the Law Commission publishing the first of two consultation papers seeking views on potential reform to Part 2 of the Landlord and Tenant Act 1954 (LTA 1954). The consultation focuses on four proposed models ranging from mandatory security of tenure with no option to contract out through to abolition of the relevant parts of the LTA 1954 so that the tenant no longer has any right to remain at the end of an existing term. The other options are to keep the existing contracting out regime or switch to a contracting-in regime.

The current consultation is open until 19 February 2025 so if you are interested in providing input then please use the link here to review and respond to the consultation paper and the Law Commission’s connected survey.

High street rental auctions

In December 2024, new powers were granted to local authorities in England to auction vacant commercial rental premises in designated high streets and town centres. See our previous commentary in our November and December 2024 editions of Real Estate Focus.

As we enter 2025 it remains to be seen the extent to which under-resourced local authorities will seek to take advantage of such powers. Affected landlords will be keeping a close eye on how this progresses as the powers could mean reduced control over their future occupiers and the terms of occupation. Landlords will likely be concerned with how these new powers might interplay with their wider statutory obligations. For example, the landlord’s obligation to ensure that it complies with the minimum energy performance requirements when granting a lease. Could we see landlords facing enforcement action despite having little control over the letting?

Leasehold and Freehold Reform Act (LAFRA)

LAFRA was passed in May 2024 as one of the final acts of the previous government. LAFRA is intended to strengthen the rights of residential long leaseholders and (amongst other things) includes reforms affecting a leaseholder’s enfranchisement rights (the right to extend the lease term or buy their freehold); the right to manage the property directly; and the service charge regime.

The current Labour government has since committed to the staged implementation of LAFRA and in a ministerial statement in November 2024 we were given a general timetable for implementation of these reforms with some key dates being:

• January 2025: abolishing the 2 year ownership requirement before a leaseholder can exercise their enfranchisement rights;

• Spring 2025: the ‘right to manage’ provisions to be brought into force;
• Later in 2025: consultation on the service charge reforms with a view to bringing measures “into force as quickly as possible thereafter”.

Beyond the above, we still have little clarity as to the exact timings for implementation and expect to see a number of further consultations on various provisions in LAFRA throughout 2025 including how enfranchisement premiums are calculated and curbing the sorts of items that might have previously been charged as part of a landlord’s ‘insurance costs’.

Leasehold and Commonhold Reform Bill

The ministerial statement in November also re-committed to the publication of the Leasehold and Commonhold Reform Bill in 2025. This Bill is expected to relaunch the conversation over commonhold as an alternative form of tenure to leasehold. A further consultation is expected in 2025 to consider a ban on new leasehold flats and the possibility of converting existing leases to commonhold.

Planning Framework

Housebuilding has been high on the government’s agenda with ambitious targets set for the next few years. In order to facilitate developments, the government published an updated National Planning Policy Framework on 12 December 2024.

The framework has set out a number of significant changes to planning policy including:

• increased housing targets for local authorities being no longer ‘advisory’ but ‘mandatory’;

• the introduction of the concept of a “grey belt” being green belt land that either fails to strongly contribute to a specific set of green belt purposes or has been previously developed;

• climate change being taken into account in the planning process as part of the transition to net zero by 2050; and

• a new focus on data centres with local planning policies required to identify suitable locations for data centres and other digital infrastructure.

Will local authorities rise to the challenge in 2025?

Martyn’s Law

The Terrorism (Protection of Premises) Bill is expected to become law this year, placing enhanced obligations on public venues to ensure they are better prepared to protect visitors against terrorist attacks and ready to respond. Public venues that might qualify are those where at least 200 people might be expected to be present at the same time and so the legislation is likely to affect a wide range of venues including schools, hospitals, places of worship, sports and music venues, shopping centres, hotels and other entertainment or leisure venues.

Renters’ Rights Bill

The Renters Rights' Bill is expected to dramatically change the landscape of the private rental sector in England and Wales. The abolition of "no fault" evictions is the most striking proposal meaning that a landlord can no longer evict a tenant without providing a specific reason.

However saying goodbye to “no-fault” evictions is just one aspect of the bill which has other strings to its bow including:

• amending the landlord’s mandatory grounds for possession;

• granting the tenant a 12-month protected period at the start of the tenancy in which they cannot be evicted;

• offering increased protections for tenants who do fall into arrears;

• the abolition of fixed terms tenancies such that all assured tenancies are periodic;

• measures aimed at tackling rental bidding (a practice where landlords ask tenants to blindly name their best price); and

• limiting rent increases so that they occur no more than once a year and to no higher than market rent.

For more details see our previous commentary in our September 2024 edition of the Real Estate Focus.

Stamp Duty Land Tax (SDLT) group relief – not available where the transaction forms part of arrangements with a main purpose of tax avoidance

In a recent SDLT decision, the Upper Tribunal has found that the arrangements pursuant to which land was transferred between group companies, which was done at least in part to obtain a step up in cost base, did not qualify for group relief from SDLT as the land transaction in question formed part of a wider scheme with the main purpose of tax avoidance.

SDLT group relief and avoidance of liability to tax

By way of reminder, there is relief from SDLT for intra-group transfers, which may apply if the transferor and transferee are both members of the same 75% corporate group. That relief is not available if the transaction on which relief is claimed forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of a liability to tax.

For a transfer between two connected companies, the starting point is that the chargeable consideration is deemed to be at least market value. There are a number of exceptions to this rule. One exception is on a distribution of assets by a company, provided that the asset transferred has not been the subject of a claim to group relief in the preceding three-year period.

Facts of the case

The facts of this case were that: a company, S, granted a 999-year lease to its subsidiary, B, for a premium equal to the book value of the property for S; another company in the group, T, acquired the shares in B for market value then bought the lease from B at book value. B and T both claimed SDLT group relief. The intention was to obtain a step up in the base cost to market value without a tax charge, although T later conceded that this was ineffective.

HM Revenue & Customs (HMRC) argued that T was not entitled to group relief on the purchase of the lease from B as that purchase formed part of arrangements with the main purpose of tax avoidance. HMRC did not challenge the claim to group relief by B as it was of the view that SDLT sub-sale relief was available. T appealed, arguing that the purpose of the arrangements was to transfer the property to a special purpose vehicle for commercial reasons, including ring-fencing the asset during its construction. The First-tier Tribunal held in favour of HMRC and agreed that T was not entitled to group relief. Although not the subject of the appeal, the First-tier Tribunal also found that sub-sale relief was not in fact available to B, as the S-to-B land transaction was completed before the B-to-T transaction. T appealed.

Appeal decision

The Upper Tribunal dismissed the appeal, and found that SDLT group relief was not available, as one of the main purposes of the transactions of which the land transfer formed part was to obtain the base cost uplift, which was found to be a tax avoidance purpose. The fact that the tax avoidance scheme had not been successful did not matter, as the purpose should be tested at the time of the transaction and not by reference to the outcome. It also found that it was irrelevant whether the tax liability that the avoidance scheme was designed to reduce was a future or contingent liability (as in this case, the potential tax saving would come, in cash terms, when the property was sold). SDLT was assessed by reference to the market value of the land transferred, as the exception to the market value rule was found not to be applicable, as there had been an earlier claim for group relief made.

This case serves as a timely reminder that, whether or not a scheme is successful, SDLT group relief will not be granted where the main purpose of a transaction is the avoidance of a tax liability. Companies should therefore think carefully about transaction structures before assessing a possible claim for SDLT group relief.

Case: The Tower One St George Wharf Limited v HMRC [2024] UKUT 373 (TCC).

Government publishes Remediation Acceleration Plan

As referred to in the December 2024 edition of our Real Estate Focus, on 2 December 2024, the government published its Remediation Action Plan (the Plan) to speed up the identification and remediation of unsafe cladding on high-risk residential buildings in England. The Plan’s principal aim is for all higher risk buildings (18m+) with unsafe cladding in a government funded scheme to be remediated by the end of 2029, and buildings higher than 11m with unsafe cladding to either have been remediated or have a date for completion, otherwise landlords will be penalised.

Background

Following the Grenfell Tower tragedy in June 2017, the government has been under pressure to respond to the cladding crisis which has left many residents of high rise dwellings feeling unsafe in their own homes. Various steps have been taken to compel those responsible to remediate their buildings, including the enactment of the Building Safety Act 2022 (BSA) which bought the biggest swathe of regulatory changes to the UK built environment in almost 40 years.

Following the publication of the Grenfell Inquiry Phase 2 Report, the government committed to introducing measures to increase the pace of remediation of unsafe buildings in England, part of which would involve setting out further steps on remediation in late 2024.

The Plan

The Plan sets out three broad objectives, each of which translate into several detailed measures. We have summarised the key measures below.

Fix buildings faster

Not enough has been done to remediate unsafe buildings. Proposals to address the key blockers to increasing the pace of remediation include:

• A new duty on those responsible for 11m+ buildings to fix their buildings within clear timescales. Regulators will be given powers to enforce new financial penalties for inaction and criminal offences for failures to remediate.

• New powers for local authorities, fire and rescue authorities and the Building Safety Regulator to enforce remediation.

• New regulatory powers to compel entities to disclose their beneficial ownership chains. This aims to help enforcement agencies identify parent and associated companies sitting behind the legal owners of buildings and therefore bring enforcement action against those truly responsible for non-compliance.

• Publication of a Joint Plan between the government and major developers in England. The Joint Plan includes various commitments and targets for developers to start or complete remedial works on their buildings by the end of July 2027 and resolve all current cost-recovery negotiations with social housing providers by the end of July 2025.

Identify all buildings with unsafe cladding

There has been a failure to assess the need for remediation works in buildings measuring between 11 and 18m in height, leading to an information gap in how to remediate such buildings. Proposals to address this include:

• Legislating to require the registration of all 11m+ buildings and introducing the strongest possible penalties for non-compliance.

• Tightening rules around building assessments.

• Intensifying the assessment of around 200,000 records by April 2025 to identify the highest risk buildings that may have unsafe cladding. Landlords will be contacted and supported to get their buildings assessed and to join the appropriate government remediation scheme.

Support residents

Much more needs to be done to protect residents from the impacts and failures of others. Proposals to support residents include:

• Strengthening the obligation on those responsible for remediation to adhere to the Code of Practice for the Remediation of Residential Buildings and provide evidence of compliance.

• Publishing guidance on health and safety during the remediation phase and providing signposting to relevant health and safety standards.

• Amending the Landlord and Tenant Act 1987 to make clear that a court appointed building manager can also be responsible for building safety duties and that they can progress remediation.

• Introducing amendments to the BSA to ensure residents can recover costs that they may have paid in connection with remediation from those responsible for remediation. In addition, residents will be protected from costs of interim measures, including waking watch measures.

The government plans to introduce a Building Safety Levy in Autumn 2025 to raise funds to pay to remediate building safety defects. The Levy will be charged on all new residential buildings in England that require building control approval.

Comment

The Plan sets out the government’s commitments to improving the situation for those living with the uncertainty of remediation. Many of these commitments will bring changes to the law which developers, building owners and landlords will need to familiarise themselves with, on top of the plethora of other new laws and regulations these parties have had to grapple with following the enactment of the BSA. Given the scale of the issue and the change needed to meet the commitments outlined in the Plan, the government intends to publish a further update in Summer 2025 to assess and report on progress and outline further necessary steps. In the meantime, it would be prudent for developers, landlords and building owners to assess any buildings over 11m for potential unsafe cladding remediation requirements, and put in place processes to address these as soon as possible in order to meet any additional future requirements.