Real Estate Focus: April 2022

Abolition of ground rents in new leases now imminent

The Government announced on April 22, 2022 that the Leasehold Reform (Ground Rent) Act 2022 (the Act) will come into force on June 30, 2022, banning ground rents in most new residential leases from that date. 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 points 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.

The Commercial Rent (Coronavirus) Act 2022: guidance on the arbitration scheme and an updated code of practice

As reported in our March Real Estate Focus, 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. It 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 not only traditional rent, but also service charges, insurance rent, interest and VAT for the relevant “protected period”. The “protected period” in each case began on March 21, 2020 (the date that businesses were first required to close under the first national lockdown in England and Wales) and continues up to the date on which restrictions were removed from that tenant’s sector. Any unpaid rent accruing before or after the relevant protected period, apportioned on a daily basis, is not protected by the Act.

The mandatory arbitration scheme is established by Part 2 of the Act. It provides that if parties have not reached an agreed resolution to the payment of protected rent debts by March 24, 2022, there will be a six month window during which either the landlord or the tenant can apply to the arbitration scheme for a determination as to what, if any, relief the tenant should be given in relation to the protected rent debt.

There has been some criticism of the scheme, not least that it is unclear how it will operate in practice and that there is a risk of inconsistency of approach between arbitrations. Statutory guidance published by the Government in early April 2022 on how arbitrators should exercise their functions under the Act will therefore be warmly welcomed.

The Government has also issued a new version of its Commercial Rent Code of Practice Following the COVID-19 Pandemic, first published in June 2020.The new version has been updated so that it is aligned with the Act.

The Government’s intention is that, where possible, rent debt accrued as a result of the pandemic should not force an otherwise viable business to cease operating. Contractual commitments should be respected as far as possible while achieving a proportionate balance between the interests of landlords and tenants. The Code:

• sets out guidance on negotiation and behaviours, with a view to assisting businesses to resolve unpaid rent debt and to promote best practice within landlord and tenant relationships. Unlike the mandatory arbitration scheme, this guidance applies to all business tenancies.
• provides guidance on the Act itself, including statutory guidance on how landlords and tenants are to make a reference to arbitration. The Code points out that, although this guidance will be of most relevance to landlords and tenants with disputes that are in scope of the Act, non-eligible landlords and tenants may also find it useful to refer to the Act’s underlying principles when attempting to resolve unpaid rent debt through negotiation.

For further information on the Commercial Rent (Coronavirus) Act 2022 and the mandatory arbitration scheme, please contact partner David Stevens or associate Greg Rouse in our Real Estate Litigation Team.

Countdown to higher energy efficiency standards in the commercial PRS

A reminder that it is now less than a year before minimum energy efficiency standards (MEES) requirements for landlords of commercial premises in the private rented sector (PRS) are extended.

MEES for landlords in the PRS have been in force since April 1, 2018. These provide that, with some exclusions and exemptions, a landlord cannot grant a new – or renew an existing – 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 not been able to continue to let a sub-standard property. Landlords of commercial premises with tenancies already in place on April 1, 2018 must also comply with that requirement from April 1, 2023. It is estimated that 10% of non-domestic let buildings are below the ‘E’ rating.

The Government does not intend to stop there and intends to raise the energy efficiency bar still further. Responses to recent consultations are “currently being analysed”. The consultations propose:

• A framework for a minimum EPC B rating for privately rented non-domestic buildings in England and Wales by 2030. The Government proposes a phased implementation, with the introduction of two ‘compliance windows, starting in 2025 – 2027.
• A minimum EPC rating of C in the domestic private rented sector, the preferred option being to require new tenancies to achieve a C rating from 2025 and all tenancies from 2028.
• Improvements to home energy performance through mortgage lenders. The consultation includes proposals to improve awareness of the energy performance of lenders’ portfolios and a target-based approach for improving the energy performance of such portfolios.
• A national performance-based framework for rating the energy and carbon performance of large commercial and industrial buildings. It is proposed that the rating will be introduced in three phases. Phase one would apply to offices. Phases two and three would apply to the remaining commercial and industrial sectors such as health, education and retail.

For further details please see our April 2021 Real Estate Focus or contact Counsel Lucy Bruce Jones.

Cladding crisis: the Government responds

Following the Grenfell Tower tragedy in June 2017 and the long running Public Inquiry into it, the Government has been under pressure to respond to the cladding crisis, which has left many residents of high rise dwellings feeling unsafe in their own homes.

The Rt Hon Michael Gove MP heading up the Department for Levelling Up, Housing and Communities (DLUHC) has responded by establishing the Building Safety Fund (BSF) and also by requiring homebuilders to sign up to a “building safety pledge” (the Pledge). The BSF was introduced in May 2020 to cover costs related to the removal of dangerous non-asbestos cladding materials (non-ACMs) in high-rise buildings in England (ensuring that leaseholders do not bear the cost of addressing safety risks associated with non-ACM cladding in tall buildings). Discussions between the Home Builders Federation (HBF) and the DLUHC have been taking place over the last few months culminating recently in the publication of the Pledge.

Which parties have signed up to the Pledge?

So far approximately 53 house builders have signed up and agreed to pay for the removal of dangerous non-ACM cladding in high-rise buildings between 11 and 18 metres high. They have agreed to repair or pay for mitigation works to address life-critical fire safety investigations in which they had some development interest. The final deadline for signing up to the Pledge was April 5, 2022.

The Government has further stated that it will impose enforcement provisions against non-signatories to the Pledge, although the legality of the measures suggested to date have been called into question. The enforcement measures suggested include planning restrictions and restraints and also disqualification from public procurement contracts.

Signatories to the Pledge have already recorded further exceptional charges in their financial statements. For example, one house builder has stated that it would put aside capital of between £80mn and £120mn for alterations to any of its mid-rise buildings that require fire safety work and another has put aside an additional £80mn (in addition to approximately £165mn which it had previously set aside for fire safety work). Yet another has stated that it would be able to remediate every mid-rise block with fire safety issues that it has built in the past 30 years without exceeding the £75mn it has already put forward for this purpose.

What is expected of house builders?

Michael Gove had previously made clear that developers and manufacturers should be expected absorb the cost of remediation work in respect of non-ACM cladding on buildings between 11 and 18 metres high, and has made clear his strong opposition towards the financial burden associated with the remediation costs of non-ACM cladding being placed on leaseholders. Mr Gove has also requested that information is provided transparently on all buildings with historic fire safety defects over the last 30 years.

Additional measures

• Building Safety Levy

Developers of certain buildings considered ‘higher risk’ (as defined in the Building Safety Bill), may also find themselves subject to a building safety Levy (the Levy). Such ‘higher risk’ buildings are residential buildings or care home over 18 metres or 7 storeys high. The Levy and the remediation tax (see below) form part of the Government’s building safety package, aimed at ensuring house builders bear the costs of removing any unsafe cladding in high-rise buildings.

Recently, the Levy has been extended to raise up to an estimated £3 billion over ten years from developers for the removal of non-ACM cladding. The Secretary of State can vary the extent of the Levy over time.

• Remediation tax

The Government has also implemented a new 4% tax on residential property developers with annual profits in excess of £25 million, further to fund the removal of non-ACM cladding. This tax has been effective since April 1, 2022 and will apply to profits arising from residential property development recognised in accounting periods ending on or after that date.

It has more recently been reported that the Government is no longer requesting house builders to contribute towards the £4 billion cladding remediation fund (part of the BSF), which it estimates will be the total cost for remediation works in relation to cladding on buildings between 11 and 18 metres. However, it is worth noting that negotiations between Government and house builders on the BSF are expected to re-commence later this year, when it is expected that the cladding remediation fund mentioned above (and the possibility of house builders’ contributions to this fund) will be discussed.

Updates

On April 13, 2022, Michael Gove was able to reach a legally-enforceable deal with the signatories to the Pledge, which secures £5 billion worth of funding for the removal of safety critical cladding in high-rise buildings, with developers committing £2 billion to fix their own buildings and the industry generally contributing £3 billion through the Levy expansion.

Conclusion

It is clear that prominent house builders are committing significant funds to remediate costs associated with non-ACM cladding works and safety critical remediation works. This is in response to growing public criticism, political pressure and the need to avoid the possibility of another Grenfell tragedy.

The financial pressure for some of the smaller or privately owned house builders has been intense and, for all house builders, the commitment is a substantial one. Negotiations in relation to house builders’ contributions to the BSF are expected to re-commence later in the year between the HBF and DLUHC to establish further details and enable implementation of Pledge commitments.

For further information please contact partner Caroline May, EMEA Head of Environment, Health and Safety.