Real Estate Focus – October 2024

Autumn 2024 Budget: property aspects

In the run up to the UK Budget the overwhelming call from business was for certainty and stability to enable long-term strategic decisions to be made and investment confidence to build. The key question for business now as it works through the Budget measures is whether this has been achieved and whether the UK is now a more or less attractive place to do business.

Coming into the Budget the Chancellor had little room for manoeuvre as she had committed not to raise income tax, VAT, the main rate of corporation tax or employee NICs. It is therefore not surprising that she has focussed her fire where she did.

On the real estate tax side, the notable announcements were:

• an unexpected increase in the rate of SDLT for acquisitions of second homes (an increase in the surcharge from 3% to 5%), and an increase from 15% to 17% for non-natural persons acquiring residential property worth more than £500,000 with effect from 31 October 2024 (subject to certain transitional provisions);
• Annual Tax on Enveloped Dwellings - the annual chargeable amounts will be uplifted by 1.7% for the 2025-2026 ATED chargeable period;
• Capital gains tax rates for individuals disposing of residential property will remain at 18% or 24%, depending on tax bands;
• Confirmation that the reserved investor fund will go ahead; and
• Confirmation that the furnished holiday let regime will be abolished.

For further information please contact Real Estate Tax Partner Julia Lloyd.

Building Safety Act 2022: changes following Leasehold and Freehold Reform Act 2024 provisions

The Leasehold and Freehold Reform Act 2024 (LFRA), passed very quickly on 24 May 2024, is best known for making long awaited changes to leasehold enfranchisement and we are waiting for secondary legislation to bring those provisions into force.

However, Part 8 of LFRA also made some changes to the Building Safety Act 2022 (BSA), which came into force on 31 October 2024 and we have summarised these, and their potential impact, below.

Meaning of “relevant steps”

Under the BSA, it is necessary for “relevant defects” (as defined in section 120 BSA) relating to relevant buildings (at least 11 metres high or five storeys with at least two residential units) to be set out in landlord’s certificates, the consequence being the landlord’s inability to recover the cost of works to remedy relevant defects through the service charge in certain circumstances. In addition, remediation orders or remediation contribution orders can require landlords to remedy relevant defects.

Section 114 of LFRA has added a definition of “relevant steps” in relation to the remediation of “relevant defects” which expands the principle above. Relevant steps are those taken to prevent or reduce the likelihood or severity of a fire or collapse of a building as a result of a relevant defect, and also to prevent or reduce harm to people in or about the building which might result from a relevant defect.

The consequence of this is that measures such as a waking watch, alarm systems and/or sprinkler systems could fall within the definition of relevant steps, meaning that landlords will be unable to recover the costs of these measures through the service charge.

Remediation orders

Similarly, the FTT, when making remediation orders, can require the landlord to take “relevant steps” to mitigate relevant defects, in addition to the power to order the actual remediation of the defects. The provisions have also been expanded to allow the FTT to order the production of an expert report in respect of relevant defects or the relevant steps to be taken.

Remediation contribution orders

Section 116 of LFRA has also extended the costs that can be the subject of a remediation contribution order by including those required to take the relevant steps (as outlined above), costs in obtaining an expert report, and the costs of temporary accommodation.

Changes already in force

LFRA introduced other changes to the BSA, with these already being in force as of 24 July 2024:

Service change - the provisions dealing with recovery or service charge now exclude professional costs relating to relevant defects from being charged through the service charge, except where the costs were incurred by a resident management company or RTM company in relation to a remediation contribution order.

Changes due to conflict with insolvency law – section 118 of LFRA repealed section 125 BSA. This had allowed insolvency practitioners to apply to court for an order obliging “associated” companies to contribute towards remediation costs (in circumstances where the insolvent landlord was under an obligation to remedy relevant defects). Section 125 was repealed due to its potential conflict with insolvency law and the potential risk that, instead of being used for remediation, any sums recovered could be directed to pay down debt.

Notifications for insolvency practitioners – a new section 125A has been inserted into the BSA which requires insolvency practitioners (where they have been appointed to insolvency of a leaseholder of a “relevant building” or “higher risk building”) to provide various information to the local authority, fire and rescue authority and (where there is a higher risk building involved) the Building Safety Regulator. This information includes (i) the name and address of the company to which the insolvency practitioner is appointed; (ii) the address of each of the relevant or higher risk buildings involved; and (iii) the name and contact details of the insolvency practitioners and the nature of their appointment.

Terrorism (Protection of Premises) Bill (Martyn’s Law): provisions affecting property

The Terrorism (Protection of Premises) Bill (the Bill), also known as Martyn’s Law, was introduced to Parliament on 12 September 2024. It is currently undergoing Parliamentary scrutiny, with its second reading taking place on 14 October 2024.

It will affect certain premises, and will require those with control over those premises to take steps and put in place measures to protect the premises (and the people in it) from the threat and impact of a terrorist attack.

Whilst we await the outcome of Parliament’s considerations and publication of further guidance, we explain how the property sector may be impacted by the introduction of Martyn’s Law.

Background

Following the Manchester Arena Inquiry and London Bridge Inquests’ call for the introduction of legislation and guidance to protect the public, the Bill is intended to ensure public premises and events are better prepared for terrorist attacks and ready to respond.

The Bill requires persons responsible for a “qualifying premises” or a “qualifying event” to take steps to reduce the risk of physical harm to individuals arising from acts of terrorism and, for larger qualifying premises and all qualifying events, reduce their vulnerability to acts of terrorism.

Which premises are affected?

Premises will be in scope if they meet the definition of “qualifying premises”, namely:

1. they are buildings (in whole or part) or a combination of buildings and other land;
2. used for certain activities set out in Schedule 1 (see below);
3. expected to have present from time to time (and at the same time) 200 or more individuals; and
4. are not excluded under Schedule 2.

Enhanced duties (as opposed to standard duties) will apply to premises (referred to in the Bill as “enhanced duty premises”) which will from time to time have present 800 or more individuals at the same time (though certain qualifying premises will be treated as standard duty premises even if they meet this threshold, such as schools and places of worship).

What is a qualifying event?

An event is a “qualifying event” if:

1. it takes place in premises which consist of a building, other land or a combination of the two;
2. it allows members of the public to access the building for the event;
3. it is likely that, at some point during the event, 800 or more individuals may be present at the same time;
4. it employs individuals in security roles to check tickets, payment and passes; and
5. it is not excluded under Schedule 2.

Who are persons responsible?

For a qualifying premises, the person responsible is the person with control of the premises in connection with their use under Schedule 1. The explanatory notes give examples of an organisation operating a theatre, or the company which holds the lease for and operates a shopping centre as being responsible persons. However, where a party is appointed as a contractor, or only has limited control over premises (for example, a security guarding company providing door staff), it is unlikely these people would be considered responsible persons. 

For qualifying events, the responsible person is the person with control of the premises at which the event is to be held, and the relevant circumstances will need to be considered to determine who is responsible at any one event. The explanatory notes give the example of a concert held in a part of a building and the company putting on the event taking control of the area of the part – this company would be considered the responsible person in this instance.

What are the Schedule 1 uses?

Categories of use in Schedule 1 are very wide, and include shops, premises used for the sale of food and drink, nightclubs, premises used for entertainment activities including plays, films, sporting events, sports grounds, recreational facilities, libraries, museums, galleries, halls (which can be hired for events), visitor attractions, hotels, places of worship, health care facilities, aerodromes, childcare facilities, primary and secondary education, further education, higher education and public authority facilities.

Where a premises has more than one use, it is the principal use that is relevant.

What are the requirements?

Those responsible for standard duty premises will need to notify the Security Industry Authority (SIA) (established under the Bill as the regulator) that they are responsible for the premises, and put in place reasonably practicable public protection measures as appropriate for their premises. These include procedures for lockdown, evacuation, invacuation (bringing people onto the premises to shield them), and communicating necessary information to people at the premises. This is all with the intention of reducing physical harm being caused to individuals in the event of an act of terrorism.

Those responsible for enhanced duty premises and qualifying events will, in addition to the standard duty premises requirements, need to consider the vulnerability of the premises or event itself to an act of terrorism occurring at the location. They will also be required to produce documentation setting out the public protection procedures and measures in place, and provide this to the SIA.

How are the requirements enforced?

The Bill confers a number of investigation and enforcement powers on the SIA, who can issue compliance notices and monetary penalties for contraventions, and (in relation to enhanced duty premises) restriction notices. There are also criminal offences for providing false or misleading information to the SIA, for failing to comply with a restriction, compliance or information notice, for impersonating an inspector and for obstructing an inspector.

What is the impact for the real estate sector?

Given the application to a wide range of qualifying premises, this Bill could have a significant impact on commercial leases as it will impose new obligations on landlords and tenants who will be required to comply with the requirements under the Bill. With potential cost implications involved, this could then have a knock-on effect on rent, service charge, insurance and even market value of the property itself. Landlords and tenants will also need to consider who will ultimately be responsible for the requirements, and consequently, on whom the liability will fall if there is a breach.

Investors in property will have further aspects to scrutinise for due diligence purposes to ensure responsibility for the relevant requirements sits with the requisite parties, and their liability for breach is limited.

Developers will need to bear the additional responsibilities in mind which might lead them to re-consider building design (though this is supposedly not what is intended).

Looking forwards…

At the Bill’s second reading concerns were raised regarding the potential cost implications for small businesses impacted, along with the scope of qualifying premises. The Bill will now move to Public Bills Committee which is expected to conclude its consideration by 14 November 2024.

AP Wireless II (UK) Ltd v On Tower UK Ltd: revisiting the lease / licence debate

In AP Wireless II (UK) Limited v On Tower UK Limited [2024] UKUT 263 the Upper Tribunal re-visited the lease / licence distinction, which is important in determining which termination and renewal procedure to use where dealing with an “Old Code” agreement (i.e., those entered into before 28 December 2017).

Facts and Issues

The appeal considered two agreements relating to the installation and operation of telecoms equipment on two separate parcels of land. Both were entered into under the old Electronic Communications Code contained in Schedule 2 of the Telecommunications Act 1984 (the 1984 Code).

The main question to be determined was whether each of the agreements took effect as a lease or a licence, with the First Tier Tribunal (FTT) deciding that both agreements constituted a licence.  

Both agreements qualify as subsisting agreements for the purposes of the new Code by virtue of the transitional provisions contained in schedule 2 to the Digital Economy Act 2017. However, the catch is that paragraph 6(2) of these transitional provisions provides that the termination provisions of Part 5 of the new Code do not apply where the agreement is a lease which is not contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 (the 1954 Act). So where there is a 1954 Act protected lease, the termination and renewal procedures would be pursuant to the 1954 Act. But if the agreement is deemed a licence, termination and renewal would take place under the new Code (with the FTT having the ability to terminate the agreement and order the parties to enter into new agreements).

The first agreement was entered into in 1997 (the 1997 Agreement) and was made in writing, signed by both parties but not made by deed, with a minimum term of 10 years and terminable on 12 months’ notice. The second agreement from 2002 (the 2002 Agreement), was also made in writing, signed by both parties but not as a deed, but was granted for a fixed term of 20 years. On both sites, the telecoms apparatus was housed within a specific compound area.  

The FTT judge determined both agreements to be licences as opposed to leases. His main reasoning was based around the nature of the legal relationship created under the agreements. AP Wireless II (UK) Limited (which acquired the site as freehold owner) appealed the FTT decision to the Upper Tribunal (UT). 

Decision 

The appeal was allowed in part. It was ruled that the 1997 Agreement created a licence, not a lease. Whilst the agreement granted exclusive possession, it did not include the “term certain” element which is crucial to the categorisation of a lease. By contrast, the UT judge ruled the 2002 Agreement to be a lease, not a licence on the basis that it contained all of the characteristics necessary for a lease. 

In his judgment, the UT judge re-visited the question of whether an agreement for the occupation of land created a lease or a licence. The fact that the agreements were subject to the 1984 Code was irrelevant, indeed the Code remains subject to the ordinary laws of landlord and tenant. 

The starting point was Street v Mountford [1985] A.C. 809 which confirmed the relevant criteria for determining whether an agreement is a lease or a licence as being (1) exclusive possession of the relevant land, for (2) a term, (3) at a rent. The judge analysed the various provisions of each agreement in light of these criteria to determine whether or not each was a lease or a licence, eventually coming to the above conclusion. 

Comment 

Whether a 1984 Code agreement is classified as a lease or a licence will have significant impact for both site providers and operators, especially as this will determine the statutory procedure to use on termination and renewal. The UT judge’s decision outlines the importance of the factors to consider when assessing this categorisation, with exclusive possession, a certain term and payment of rent being key.