Real Estate Focus – March 2023

Minimum EPC “E” rating in the commercial PRS – deadline now imminent

From the beginning of April 2023, the minimum energy efficiency standards (MEES) requirements for landlords of commercial premises in the private rented sector (PRS) will be extended.

An Energy Performance Certificate (EPC) provides a letter-grade (A-G, with A being the highest) following an assessment of a property’s energy performance. An EPC is required when a new property is built and when an existing property is sold, rented or altered significantly. EPCs are valid for 10 years, unless there are significant alterations to the property.

Since April 1, 2018 residential and commercial landlords have been prohibited from renewing or granting a new tenancy of a property if it does not have an EPC rating of E or higher. Since April 1, 2020 private sector residential landlords have also been unable to continue to let a property if it does not have an EPC rating of E or higher. From April 1, 2023 MEES requirements will be extended further so that commercial landlords cannot continue to let a property if it does not achieve that rating.

While failure to comply does not invalidate a tenancy and does not give the tenant the right to terminate, it is a civil offence for the landlord and a non-compliant landlord may be liable to a financial penalty. The penalty for commercial properties is based on the property's rateable value, up to a maximum of £150,000. Details of the breach may also be entered in the PRS Exemptions Register. 

Looking ahead, the Government ran a consultation in 2021 that proposed a framework for a minimum EPC B rating for commercial properties by 2030. A phased implementation was proposed, with the introduction of two ‘compliance windows’ starting in 2025 – 2027. A separate consultation has proposed a minimum EPC C rating for residential properties, the preferred option being to require new tenancies to achieve a C rating from 2025 and all tenancies from 2028. Feedback in each case is currently being analysed.

For further details, please contact Counsel, Lucy Bruce Jones or associate, Alysha Patel.

Real estate tax: Budget highlights

The March 2023 Budget contained a number of measures relating to real estate investment, many of which have been expected for some months. These changes are welcome, particularly in relation to the REIT and Qualifying Asset Holding Company (QAHC) regimes. 

REITs: Amendments to the UK REIT regime include:

• removing the requirement for a REIT to hold a minimum of three properties provided it holds a single commercial property worth at least £20 million; 
• amending the rule that deems a disposal of property within three years of being significantly developed as being outside the property rental business of the UK REIT; and
• changes to the rules on deducting tax from property income distributions (PIDs) paid to partnerships to allow a PID to be paid partly gross and partly with tax withheld. 

The amendments in respect of the disposal of property will be introduced on April 1, 2023 while the remaining amendments will be introduced when the Finance Bill 2023 receives Royal Assent.

QAHCs: The QAHC regime was introduced to recognise circumstances where an intermediate asset holding company is used to facilitate the flow of capital, income and gains between investors and underlying assets. The regime taxes investors as if they had invested directly in the underlying assets. Amendments to the QAHC rules were announced to better align the conditions that must be met by a company to qualify as a QAHC with the intended scope of the QAHC regime. These include:

• allowing an investment fund to be treated as meeting the diversity of ownership condition when it is closely associated with another investment fund that meets that condition;
• special rules for alternative finance arrangements intended to help Sharia-compliant structures access the regime; and 
• extending the existing anti-fragmentation rule.

Capital Allowances: measures were announced to encourage continued business investment when the main corporation tax rate increases from 19% to 25% on April 1, 2023 and following the expiry of the "super-deduction". These include that companies incurring qualifying expenditure on the provision of new plant and machinery will be able to claim one of two temporary first year allowances: a 100% first year allowance for main rate expenditure, or a 50% first year allowance for special rate expenditure. The measure is expected to last for at least three years to March 31, 2026.

Investment zones: In Autumn 2022, the Government announced a consultation on the selection of university-led clusters for its programme of ‘investment zones’. Investment zones will have access to a single five-year tax offer of comprehensive tax and regulatory incentives worth £80 million over the five years. The Government has now announced the launch of the 12 clusters that will benefit from the incentives. To access the offer, plans must demonstrate how the investment zone will support the 2050 net zero goal and targets to protect and enhance the natural environment.

SDLT: no substantive changes to the SDLT regime were announced and we have not yet had a response to the 2021/22 consultation on potential amendments to the residential/mixed property classification and multiple dwellings relief.

PIFs: there was also no announcement about the proposed new form of unregulated onshore tax transparent vehicle, the “Property Investment Fund”. We understand that this remains a work in progress.

Sovereign immunity: The Government’s proposal to amend the application of the tax rules for sovereigns has been put to one side and will not be taken further.

For further information please contact tax partner Julia Lloyd.

More on the Budget: environment and planning round-up

Another look at Budget announcements, this time from an environment and planning perspective:

• Carbon capture, usage and storage (CCUS): The Government has announced that it will provide up to £20 billion of funding for early deployment of CCUS, aiming to capture 20-30 million tons of carbon dioxide per year by 2030. CCUS will be delivered in two industrial clusters by the mid-2020s and a further two clusters by 2030. A shortlist of projects for the first phase of CCUS deployment will be confirmed shortly. A future Finance Bill will establish the tax treatment of payments made into decommissioning funds to repurpose oil and gas assets for use in CCUS projects.
• Nuclear: a consultation will be held to seek views on the inclusion of nuclear energy in the green taxonomy. If nuclear energy meets the criteria to be considered environmentally sustainable, it will benefit from the same investment incentives as renewable energy. The Government has created Great British Nuclear, which will launch the first staged competition for small modular reactors and select the leading technologies to co-fund by the end of this year. Gigawatt-scale projects will be considered in the future to help provide 25% of electricity by 2050.
• Energy efficiency: the Department for Energy Security and Net Zero will consult on extending the Climate Change Agreement Scheme for a further two years, to 2027. Operators entering into climate change agreements with the Environment Agency are under an obligation to reduce energy use and carbon dioxide emissions and to meet energy efficiency targets. In return, they receive a discount on the Climate Change Levy, a tax added to electricity and fuel bills.
• Infrastructure investment: the Chancellor provided a series of updates on £600 billion worth of public sector investment in economic and social infrastructure over the next five years. The Government will publish a revised National Infrastructure and Construction Pipeline later this year. The UK Infrastructure Bank will accelerate investment into infrastructure projects that tackle climate change and support levelling up. The Government also announced consultations to support the reform of the Nationally Significant Infrastructure Project planning process so that it delivers a more sustainable system.
• Nutrient neutrality: the Department for Levelling Up, Housing and Communities will shortly open a call for evidence to seek views from local planning authorities on locally-led nutrient neutrality credit schemes. The Government will provide funding to support proposed routes to deliver nutrient neutral sites, which should reduce delays to housing delivery caused by high levels of nutrient pollution in protected sites.

For further information, please contact Counsel, Lucy Bruce Jones or Head of Planning, Sarah Fitzpatrick.

Fire safety in multi-occupancy residential buildings – what next?

The Government has placed a renewed focus on improving fire and structural safety in multi-occupancy residential buildings in 2023. Here is a brief overview of some of the statutory instruments and provisions coming into force during the course of this year to help the Government achieve its aims:

• The Fire Safety (England) Regulations 2022 (the 2022 Regulations) came into force on January 23, 2023 and introduce the majority of the recommendations made in the Phase 1 report of the Grenfell Tower Inquiry. New duties are placed on the Responsible Person (as defined in the Regulatory Reform (Fire Safety) Order 2005) (the RP) and these will apply predominantly to high-rise multi-occupancy residential buildings. The range of new duties includes providing the local Fire and Rescue Service with information about the design and materials of the building’s external wall system and undertaking monthly checks on the operation of firefighting and evacuation lifts and other firefighting equipment. Further information can be found here.
• Part 4 of the Building Safety Act 2022 (BSA 2022) will come into force from April 2023 and will represent a seismic shift in the regulation of fire and structural safety in multi-occupancy, high-rise residential buildings. Higher-risk buildings are defined as multi-occupancy residential buildings over 18 metres in height or with 7 or more storeys (HRBs). The Government has confirmed that it does not intend to include schools and hospitals in the definition of an HRB for these purposes. The “Accountable Person” will be the new duty holder for HRBs and this will ordinarily be the freeholder of the HRB or the organisation or person responsible for maintaining its structure and common parts. Further information can be found here.
• Section 156 of the BSA 2022 will come into force no earlier than April 2023 and will introduce further obligations to be placed upon RPs in respect of all buildings containing two or more residential premises. The additional obligations will include providing residents with information regarding fire safety, the provision of information to a new RP from an outgoing RP and an obligation on the RP to co-operate with Accountable Persons appointed under the BSA 2022.

Insofar as safety measures for higher-risk buildings are concerned, these are just the tip of the iceberg. Other developments include a Government requirement for developers to sign a legally binding building safety contract committing them to repair safety defects in high rise residential buildings (with a threat that those who refuse “will not be able to operate freely in the housing market”); a consultation on proposals to mandate a second staircase in residential buildings of over 30 metres; and new regulations, in force on April 6, 2023, imposing a requirement to register higher-risk buildings with the new Building Safety Regulator.

For further information please contact Caroline May, EMEA Head of Environment, Health & Safety or associate, Andrew Swarbrick.