Real Estate Focus – June 2022

Abolition of ground rents in new leases now imminent

The Leasehold Reform (Ground Rent) Act 2022 (the Act) comes into force on June 30, 2022, banning ground rents in most new residential leases. The Act follows a great deal of adverse publicity about 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 the Act comes into force. 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 the tenant 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 excepted. 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”.

Despite early indications to the contrary, 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. 

The Act is not retrospective but as the Government has pointed out, it has already had an impact on the market as, in the run-up to commencement, many landlords have reduced ground rents to zero in new leases. 

Reforms in the residential rented sector: full steam ahead

As promised in this year’s Queen’s Speech, the Government has published a White Paper setting out details of its proposals to reform the residential private rented sector.

The White Paper contains a 12-point “plan of action”. The headline grabber is the proposal to abolish  section 21 ‘no fault’ evictions and to deliver a simpler, more secure tenancy structure where a tenancy will only end if the tenant ends it or if the landlord has a valid ground for possession. “To achieve this, we will move all tenants who would previously have had an assured tenancy or assured shorthold tenancy onto a single system of periodic tenancies”. 

As a counterbalance, grounds for possession will be reformed to make sure that landlords have effective means to regain possession of their properties when necessary, for example to sell or to occupy themselves. A landlord’s ability to evict those who disrupt neighbourhoods through antisocial behaviour will also be expedited and a new ground for persistent rent arrears will be introduced. 

Other proposals include:

• Limiting rent increases to one per year and improving a tenant’s ability to challenge excessive rent increases.
• Making it illegal to have blanket bans on renting to families with children or to those in receipt of benefits and exploring whether similar action is needed for other vulnerable groups.
• Giving tenants the right to request a pet in their property, which the landlord must consider and cannot unreasonably refuse.
• Strengthening tenants’ ability to hold their landlord to account and introducing a new Ombudsman scheme that all private landlords must join. 
• Reducing unacceptable delays in court proceedings and strengthening mediation and alternative dispute resolution for landlords and tenants.
• Requiring privately rented homes to meet the Decent Homes Standard for the first time.
• A new Property Portal to contain all the information that tenants, landlords and local councils   need. 
• Strengthening local councils’ enforcement powers. 

Many of the proposals will be contained in a Renters Reform Bill which is to be introduced during this parliamentary session. The Government comments that: “Collectively, this 12-point plan will create a private rented sector that is fit for the 21st century”.
 
The Queen’s Speech also promised a Social Housing (Regulation) Bill and this was introduced in the House of Lords on June 8, 2022. The Bill is intended to facilitate a new, proactive approach to regulating social housing landlords on consumer issues such as safety, transparency and tenant engagement, with new enforcement powers to tackle failing landlords. The Government’s stated overall aim is to drive significant change in landlords’ behaviour to focus on the needs of their tenants and to ensure that landlords are accountable for their performance. 

We will report further as the proposals and the Bill progress.

New UK Luxembourg double tax treaty signed (but not yet in force)

The United Kingdom and Luxembourg have signed an updated double tax convention and protocol (DTT). 

While a new DTT between these jurisdictions has been on the cards for some time, particularly following the implementation by the UK of a non-resident capital gains tax on disposals of UK property rich entities, news that the change is now imminent may have a potential knock-on effect for the way in which UK real estate is held.

Assuming the DTT is ratified by both Luxembourg and the UK on or before 31 December 2022, the new treaty would generally become effective for UK income and capital gains tax purposes in April 2023 (with an earlier 1 January date in respect of income withheld at source). Anyone considering a disposal of, or investing in, a UK property rich entity, should be mindful of this proposed change to the treaty.

For further information and contact details please see:

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New tax measures: the RPDT and Building Safety Levy

A new UK Residential Property Developer Tax (RPDT) and Building Safety Levy (BSL) are part of the Government’s response to the Grenfell tower tragedy. 

The RPDT was introduced as part of a package to fund the cost of remediating cladding issues. It came into force on April 1, 2022 and is expected to run for a 10-year period. Within UK residential property development activities, annual trading profits in excess of £25 million per group are now subject to a 4% RPDT charge. This applies only to trading profits and does not include chargeable gains from land held for investment or to income from build-to-let activities.

The regime applies to the development of land or property held as trading stock by a developer or a related entity. “Residential property development activities” include dealing, designing, seeking planning permission, constructing or adapting, marketing and managing. The concept of ‘residential’ encompasses buildings designed or adapted for use as a dwelling and any associated land. It excludes certain types of buildings designed for communal use, typically those intended to accommodate specific classes of residents such as student accommodation and care homes.

The UK Government is also introducing a levy on developers of residential buildings in England. The BSL, which is expected to be finalised in 2023, is also designed to raise revenue for the replacement of defective cladding and to remediate any other historical building safety defects. 

The BSL was initially limited to ‘higher risk’ buildings but the Government has subsequently extended the potential scope to all residential and mixed use buildings and has stated that this expansion will raise an estimated additional £3 billion for cladding remediation.  It is anticipated that there may be targeted exclusions to the BSL but these have not yet been confirmed. The BSL rates are also yet to be confirmed. 

Stakeholders affected by the new measures need to be on top of those that are already in force and also those in the pipeline. For further information and contact details please see our briefing: New tax measures: the RPDT and Building Safety Levy

The Building Safety Act 2022: all set for new causes of action and extended limitation periods

The vast majority of the provisions of the Building Safety Act 2002 (BSA) will not come into force for 12-18 months as secondary legislation is required. However a limited number of changes take effect on June 28, 2022. 

From that date, two new concepts will come into force: the Remediation Order and the Remediation Contribution Order. These orders may compel relevant landlords to remedy defects that have arisen from construction or conversion work carried out within the period of 30 years up to June 28, 2022, and which cause a ‘building safety risk’.

In addition new and expanded causes of action come into play:

• The BSA extends the ability of homeowners (including leaseholders and landlords) to bring statutory claims under the Defective Premises Act 1972.
• Section 38 of the Building Act 1984 will also (at long last) come into force on June 28, 2022. The section provides a statutory right to claim compensation for physical damage (such as injury or damage to property) from those responsible for the damage caused, where such damage is caused by a breach of building regulations. 
• Closely aligned with the above is the concept of a building liability order (BLO). The High Court will be empowered to issue a BLO which pegs the relevant liability of an original corporate body to an associated corporate entity. 
• A new cause of action appears within the BSA to allow claims to be brought in relation to construction and cladding products.

Extended limitation periods, within which one party can bring a claim against another for damages, are also introduced. These include a 30-year retrospective period for certain claims under the Defective Premises Act 1972 where the cause of action accrued before June 28, 2022.

These imminent changes will have a significant impact on the construction sector (and supply chain) and those within the English domestic real estate market. The concept of a 30-year limitation period is unprecedented and will cause concern for developers, contractors and design professionals (and personal injury insurers in an already tight market). The retrospective limitation period will also no doubt increase the volume of claims regarding historic defects dating back to 1992.

For further information and contact details please see our briefing: The Building Safety Act 2022: New and expanded causes of action and extended limitation periods | United Kingdom | Global law firm | Norton Rose Fulbright