Real Estate Focus – April 2024

Rates mitigation schemes: update on proposed government clamp-down

It is stating the obvious to say that business rates are a significant financial liability and may be the cause of many businesses sinking rather than swimming. It is therefore not surprising that various schemes to mitigate business rates have evolved.

The government is concerned that some of these schemes go too far and that there is “a small minority who seek to exploit the business rates system, either through false reporting, or through contrived means which circumvent the spirit and intention of the law”. It therefore published a consultation on Business Rates Avoidance and Evasion in July 2023, with two main objectives:

• to test possible reforms to Empty Property Relief, as evidence suggests that abuse of this Relief is the most common form of rates avoidance; and
• to gather further information on wider avoidance practices within the business rates system and so-called “rogue” business rates agents. 

A summary of responses to the consultation was published in March 2024. This “confirmed that business rates avoidance is a significant and multi-faceted issue”.

In the light of the responses, the government has stated that:

• it will extend the Empty Property Relief “reset period” from six weeks to three months, so that  business premises must be re-occupied for at least 13 weeks (rather than 6 weeks) to qualify for a further period of Empty Property Relief. This has already been implemented  by the Non-Domestic Rating (Unoccupied Property) (England) (Amendment) Regulations 2024 (No. 323), which brought the extension into force on 1 April 2024, subject to transitional provisions; 
• respondents to the consultation provided evidence of broader avoidance activity and expressed concerns about the emergence of new avoidance schemes. The government therefore intends to consult on the merits of a ‘General Anti-Avoidance Rule’ (GAAR) for business rates in England, which  would provide greater flexibility to tackle emerging avoidance schemes as they materialise; and
• respondents were clear that ‘rogue’ business rates agents are an established problem, in particular for small business owners with a lack of understanding of the system. The  government intends to increase its  communications to raise awareness of available reliefs and how ratepayers can engage reputable agents.

The proposals relating to Empty Property Relief have drawn particular criticism.  According to a  leading rating surveyor: “The Government does not seem to understand that the significant amount of long-term empty commercial property…is due to a lack of market demand and longer-term socio-economic factors, not because the landlord wants to keep it empty”.   

High street rental auctions inching forward

The Levelling Up and Regeneration Act 2023 (the Act) received Royal Assent in late October 2023.  Part 10 is of particular interest from a real estate perspective as it grants powers to local authorities to instigate rental auctions for vacant high street premises and to compel the landlord to let out the premises to the successful bidder.

The premises that are at risk of local authority intervention are those located in a high street or town centre and which the local authority considers to be suitable for ‘high street use’. This  covers a broad range of uses including shops, offices, restaurants, public entertainment, communal halls and even light industrial. 

The Act omits much of the detail of the rental auction process and other aspects of the regime. However, several provisions of the Act came into force on 31 March 2024 to enable regulations to be made to start plugging the gaps. 

We have no timeline and much is still unclear, but what is clear is that the general mood in the industry towards high street auctions is not a positive one. Given the existing well-publicised pressure on many local authorities, we also doubt that they will have much appetite for them.

Residential snippets

• Second staircases: following months of uncertainty, the government published updated guidance on 29 March 2024, stating that second staircases will be required in all new residential developments over 18 metres in height - lowered from the 30 metres originally proposed. 
  
  The requirement takes effect from 30 September 2026. The government stated that confirmation of the transitional period “provides clarity for developers during a difficult economic climate and projects previously held up at the planning stage can now go ahead with certainty”. 
• Reforms to the regulation of social housing continue: as previously reported, The Social Housing (Regulation) Act 2023 is intended to establish a new approach to regulating social housing landlords. The overarching aim is to “reform the regulatory regime to drive significant change in landlord behaviour to focus on the needs of their tenants and ensure landlords are held to account for their performance”. 
  
  Implementation began last year, when the first of the wide-ranging changes to the existing regulatory regime came into force. These included the imposition of an implied term requiring registered providers of social housing to comply with prescribed requirements about the remedying of hazards, and powers for the Regulator of Social Housing (RSH) to set new standards.
  
  A further tranche of changes came into force on 1 April 2024, including four new standards to be met by social housing landlords:
  • The Safety and Quality Standard, requiring landlords to provide safe, good quality homes and services;
  • The Transparency, Influence and Accountability Standard, requiring landlords to be open, fair and respectful with tenants, who can hold them to account;
  • The Neighbourhood and Community Standard, requiring landlords to engage with other parties to achieve safe and well-maintained neighbourhoods; and
  • The Tenancy Standard, which sets requirements for the management of tenancies and the fair allocation of homes.
  Following an expansion of its powers, the RSH also began carrying out regulatory inspections on social landlords on 1 April 2024.

Mandatory Biodiversity Net Gain: guidance published

In our December 2023 Real Estate Focus we reported on a draft plan template and associated draft guidance published by the government to support entities in complying with the mandatory Biodiversity Net Gain (BNG), introduced for most major developments on 12 February 2024.

A site is required to achieve at least 10 percent BNG in new planning applications in England that result in loss or degradation of habitat. If that cannot be achieved on the development site, then developers can purchase biodiversity units from an off-site habitat market. If units cannot be sourced from local habitat markets, developers can purchase statutory biodiversity credits (SBCs), which will be invested in habitat creation.

The Department for Environment, Food and Rural Affairs (Defra) published guidance on 12 February 2024 about registering a biodiversity gain site, allocating off-site biodiversity gains and buying SBCs. The guidance sets out the following:

• To register a biodiversity gain site, applicants require the title deeds or lease agreement, written authorisation from the landowner or leaseholder (if applying on their behalf), the redline boundary plan, a legal agreement securing the land for at least 30 years, completed statutory biodiversity metric tool calculations, a habitat management and monitoring plan and a local land charge search certificate. It costs £639 to register a BNG site;
• To record allocation of off-site biodiversity gains to a development, applicants need to send Natural England the statutory biodiversity metric calculation for the development project. It costs £45 to apply to allocate off-site biodiversity gains;
• To estimate the cost of SBCs for a development, applicants can use an online statutory biodiversity metric calculation tool service. Applicants need to input the SBC type, which will be either area, hedgerow or watercourse, and the tier; and
• To buy SBCs, applicants will receive a proforma invoice with instructions on how to pay for the SBCs. After the applicant pays for the credits, they will receive a proof of purchase that can be sent to the local planning authority as part of meeting the BNG requirements.

In addition, Defra has published guidance dated 22 February 2024 on how mandatory BNG applies to irreplaceable habitats. This sets out a list of irreplaceable habitats for BNG and that the 10 percent BNG requirement does not apply when irreplaceable habitats are lost. It also provides advice on the following:

• Developers must consider any irreplaceable habitats affected by a development at the design and planning application stage. They must provide a description of and a plan of irreplaceable habitats, minimise impacts and agree suitable compensation for loss or deterioration of irreplaceable habitats;
• Developers must record all irreplaceable habitats on site in the statutory biodiversity metric calculation tool. Developers will need to achieve at least 10 percent BNG on any non-irreplaceable habitat in addition to agreeing bespoke compensation for impacts on irreplaceable habitat, which cannot count towards the BNG requirement; and
• Developers must record irreplaceable habitats in the biodiversity gain plan, including the type, extent and condition of any irreplaceable habitat before development, and expected changes, extent and condition as a result of development, and a compensation plan.

It is reported that The British Property Federation has expressed concerns that current levels of resource, capacity and skills within local authorities are not ready to deal with the introduction of BNG.

Footnote: BNG regulations were extended to include small sites on 2 April 2024. 

For further advice and details of the BNG regime, please contact Partner, Lucy Bruce Jones or associate, Alysha Patel.