Real Estate Focus - July 2022

New register of overseas entities owning UK land about to “go live”

The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on March 15, 2022. Part 1 of the Act (Part 1) makes provision for the registration of overseas entities who already own, or wish to own, land in the UK.

The primary objectives of Part 1 are: “to prevent and combat the use of land in the UK by overseas entities as a means to launder money or invest illicit funds” and “to increase transparency and public trust in overseas entities engaged in land ownership in the UK”. It seeks to achieve this by establishing a new register of the “beneficial owners” of such entities: the register of overseas entities. Companies House, which is responsible for setting up and running the new register, has just announced that it intends to launch the new register on August 1, 2022, although this is not yet confirmed by statutory instrument.

In broad terms:

• Any overseas entity that already owns, or wishes to own, land in the UK will be required to be registered in the new register of overseas entities.
• This will involve the overseas entity providing information about its registrable beneficial owners or confirming that it has none. This information must be updated annually. Additional information must be disclosed where a registrable beneficial owner is a trustee.
• The new regime is retrospective: overseas entities that acquired UK land on or after January 1, 1999 but before the date on which the relevant provisions of the Act come fully into force will have a limited transitional period of six months from commencement in which to register. 
• A failure to register or to comply with the requirement to update the register annually will mean that an overseas entity:
  • cannot be registered at HM Land Registry as the legal owner of UK land; and
  • where already registered as legal owner, cannot sell, charge or grant a lease of the land for a term of more than seven years as any buyer, chargee or lessee will not be able to register the disposition at the Land Registry
• Compliance will be enforced through restrictions on the title registers of land owned by overseas entities. There will also be criminal sanctions for non-compliance and for delivering misleading, false or deceptive information.

As to practical considerations:

• Overseas entities wishing to acquire the freehold or take a long lease of property in the UK should ensure that they are registered in the new register in good time. 
• Compliance with the registration requirements may be onerous, and potentially time-consuming, particularly for those with complex ownership structures. Given that the new regime is imminent, overseas entities who own, or wish to own, land in the UK should consider now how the new rules will apply to their particular ownership structures and apply for registration as soon as the register goes “live”.
• Sellers and prospective landlords should ensure that registration of a planned sale or grant of a lease to an overseas entity is not delayed by the latter’s failure to register in the new register in good time.  
• There will be additional levels of due diligence for those buyers, tenants and lenders proposing to enter into a land transaction with an overseas entity where the transaction is registrable at the Land Registry. They will not want to run the risk of their transaction not being registered at the Land Registry - and thus not taking effect at law - because of a failure by the overseas entity seller, landlord or borrower to comply with the requirements of the new register. Protection through contractual provisions should also be considered. 
• Any lender to an overseas entity should also consider how it ensures that the overseas entity complies with these requirements as non-compliance may lead to a restriction on the marketability of the property.

First arbitration case under the Commercial Rent (Coronavirus) Act 2022

The Commercial Rent (Coronavirus) Act 2022 (the Act) received Royal Assent on March 24, 2022 and came into force immediately.

The Act aims to tackle the issue of unpaid commercial rent built up by tenants forced to close by measures taken in response to the pandemic.

The Act ring-fences “protected rent debts” and requires parties to work together to agree terms for payment or, if resolution is not possible, to refer the matter to arbitration under a new legally binding arbitration scheme. The “protected rent debts” include traditional rent, service charges, insurance rent, interest and VAT for the period that the tenant was mandated to close its premises or cease trading. 

The first arbitral award under the Act was published on July 11, 2022 and has been described as a “landmark pandemic rent arrears arbitration award”.

In Signet Trading Limited (Applicant) and (1) Fprop Offices (Nominee) 4 Limited (2) Fprop Offices (Nominee) 5 Limited (Respondents) the Applicant carried on a retail business in over 350 stores. The business was run from its registered offices which comprised four floors of office space held by the Applicant under a lease from the Respondents.

As a result of the measures taken in response to the pandemic, the Applicant was required to close its retail stores. In consequence, the staff working at the office premises were, apart from a security guard and a member of staff to monitor and scan incoming post, instructed to work from home. 

The Applicant contended that, in the circumstances, the office premises were also affected by a “closure requirement” within the meaning of the Act and sought relief under the Act's arbitration scheme from payment of a protected rent debt in relation to those premises amounting to just under £450,000. 

The Respondent landlords disputed the claim, contending that the offices were not by definition subject to a “closure requirement”.

The arbitrator agreed with the Respondents, not least because the fact that the Applicant continued to use the office premises, albeit with a much reduced staff, was consistent with the fact that they were not legally required to close. The business carried on by the tenant specifically at the office premises was not subject to a closure requirement and accordingly, there was no protected rent debt, so the arbitration scheme did not apply. The arbitrator was therefore required to dismiss the reference.

Bad news for tenants in a similar position but welcome clarity on the scope of the arbitration scheme.

Leaseholder cost protections under the Building Safety Act 2022

A key focus of the wide-ranging Building Safety Act 2022 (the Act – see our May Real Estate Focus) is to shield residential leaseholders from costs related to the remediation of unsafe cladding and certain other building defects. The cost protection provisions in the Act have just been supplemented by the Building Safety (Leaseholder Protections) (England) Regulations 2022 which came into force on July 20, 2022. 

The protection regime is complicated but in a nutshell:

• “Qualifying leaseholders” in England can no longer be charged for cladding remediation costs and the amount they might have to pay towards certain non-cladding work is capped. Leasehold terms to the contrary are overridden.
• To be a “qualifying leaseholder” the leasehold block must be over 11 metres in height (or 5 storeys) and on February 14, 2022: 
  • the property was the leaseholder’s main home; or
  • the leaseholder owned no more than 3 UK residential properties in total.
• Building owners are now liable to pay the costs of remedying historical fire safety defects if they are (or are linked to) the developer of a building with fire safety defects and they meet a certain wealth threshold. These tests apply to the wider groups of which the building owners may be part, including where they are linked through their directors. If a building owner does not meet these tests, they will only be able to pass on to the qualifying leaseholder non-cladding costs up to a cap, which is normally £10,000 (£15,000 in Greater London) but may be higher or zero, depending on the value of a property.  Any sum payable will be spread over 10 years.
• It is illegal for building owners and landlords to pass on to qualifying leaseholders non-cladding costs above the cap and any costs for the removal of unsafe cladding systems.

In a linked development, the Government has published a draft contract for agreement with developers who have signed its Building Safety Pledge, committing them to remediating unsafe buildings in England with which they are associated. Apparently 48 developers have now signed up to the Pledge. The Government aims to finalise the terms of the contract with those developers by August 10, 2022. 

Ground rents: R.I.P.

Ground rents in most new residential leases are now banned. The Leasehold Reform (Ground Rent) Act 2022 (the Act) has come into force, with the primary aim of abolishing escalating ground rents in long residential leases. 

The Act applies to “regulated leases”, meaning long leases of a single dwelling for a term exceeding 21 years and granted for a premium on or after June 30, 2022. Leases granted pursuant to a contract entered into before then are excluded, although “contract” does not include an option or right of pre-emption.

Landlords of regulated leases must not require their tenants to pay a “prohibited rent”, being any rent that exceeds an annual rent of one peppercorn. “Rent” is defined as “anything in the nature of rent, whatever it is called”.

Certain leases where, according to the Government, ground rents “fulfil a justifiable purpose”, are still permitted. These include: 

• leases that expressly permit the premises to be used for business purposes, provided the landlord and tenant give each other written notice in advance that they intend the premises to be used as such;
• statutory lease extensions;  
• “community housing leases”; and
• “home finance plan” leases including those granted as “rent to buy arrangements”.

Retirement homes are not excepted but the Act provides that it will not apply to them until April 1, 2023 at the earliest.

Enforcement is through local weights and measures authorities; district councils may also choose to enforce. Financial penalties are determined by the enforcement authority, subject to a minimum of £500 and a maximum of £30,000. Unlawfully charged rents can also be recovered, with interest. 

While the Act is not retrospective, it has been on the radar for some time and has already had an impact on the market, with many landlords reducing ground rents to zero in new leases in the run-up to commencement.