Real Estate Focus – September 2019

Introduction

In this edition we take a look at potential changes to shared ownership, a postponement of the VAT reverse charge, compliance with energy saving requirements, and modification of a user clause in a lease.

A new shared ownership model?

On August 28, 2019, the government published a discussion paper proposing a new national model for shared ownership to help first time buyers.

Currently, shared ownership enables a buyer to acquire a share in a home of between 25 per cent to 75 per cent, paying rent on the remainder. The initial share can be increased in 10 per cent increments up to full ownership – known as “staircasing”.

The government considers that the housing market has changed significantly since shared ownership was first introduced 40 years ago and that, as a result, the current model is no longer fit for purpose.

The proposals for a new model include:

• That staircasing should be more flexible and enable people to buy further shares at smaller increments than the current 10 per cent - even shares as small as 1 per cent.
• That technology should be used to make additional investment seamless, cheaper and as straightforward as transferring money into a savings account.
• Making it easier to sell a shared ownership home by removing the current pre-emption clause in favour of landlords. This gives a landlord the exclusive right to market the property for the first eight weeks of sale to give the opportunity to sell to somebody else who needs help getting onto the housing ladder. However, evidence indicates that this process can be slow and cumbersome. It is proposed that pre-emption is replaced by a landlord’s time-limited right of first refusal, which would speed up the sale process while preserving the landlord’s ability to resell as shared ownership if it wished to do so.
• The introduction of a standard model for all shared ownership providers to remove the current complexity and create a standardised and consistent product.

The overall aim of the government is to encourage the growth of the shared ownership market by making it more attractive not only to consumers but also to private investors and lenders. The proposed changes are to be welcomed – let us hope they survive these turbulent times.

VAT reverse charge on construction services delayed to October 1, 2020

On September 5, 2019, an order was made to defer the commencement date of the VAT reverse charge on construction services from October 1, 2019 to October 1, 2020.

As reported in the July edition of Real Estate Focus, the reverse charge was announced in the Autumn 2017 Budget and a Statutory Instrument subsequently provided that a reverse charge, which shifts the responsibility for accounting for VAT to the recipient of the supply, would apply to business-to-business supplies of construction services (subject to certain exceptions) with effect from October 1, 2019.

The deferral will be welcome news for businesses in the construction sector, some of whom have been lobbying for the implementation date to be delayed due to the fact that some construction companies were unaware of the new requirements and the possible cash flow impact that the changes could have.

For further information please contact tax special counsel Julia Lloyd

Climate penalties

The Energy Savings Opportunity Scheme (ESOS), implemented in July 2014, applies to large UK companies and non-public sector organisations (and their corporate groups) subject to certain exemptions.

ESOS requires qualifying companies:

• to carry out energy saving assessments of their total energy consumption
• to conduct energy audits of their operations, buildings and transport
• to identify where energy savings can be made in their business.

The deadline for notifying the Environment Agency (EA) of compliance with the first phase of ESOS was December 5, 2015 (Phase 1). The deadline for compliance with the second phase is December 5, 2019 (Phase 2).

ESOS is supplemented by the EU emissions trading scheme (EU ETS) and, until recently, the CRC Energy Efficiency Scheme (CRC) which has now closed.

As ESOS was relatively new and still bedding in at the time of the Phase 1 deadline, there was confusion about what data was required and, in some instances, whether ESOS applied at all. This led to numerous instances of non-compliance and missing data.

The EA published a list in September 2018 “naming and shaming” non-compliant companies and setting out the fines issued under ESOS, CRC and EU ETS. This was updated on July 22, 2019. The total sanctions levied under ESOS Phase 1 amount to almost £290,000, with the largest fine reaching £45,000.

The latest update reveals that 25 fines totalling almost £147,000 have been levied since March 2019 under the three schemes.

The EA has indicated that it took a more tolerant approach in relation to compliance with ESOS Phase 1 due to the unfamiliarity of UK companies with its application and requirements. However, it is likely that the EA will take a more stringent approach to enforcement of Phase 2 where companies fail fully to comply.

We advise clients to ensure that they understand their obligations under ESOS (and EU ETS) so that they are in a position to comply with ESOS Phase 2 by the fast-approaching deadline of 5 December 2019. The naming and shaming list demonstrates that the EA is enforcing climate change regulations and, in the light of the new UK statutory net zero carbon emissions target, it is likely that this will continue.

For further information please contact EMEA head of environment, health and safety, Caroline May

Tribunal modifies restriction on use in lease

The Upper Tribunal has the power under section 84 Law of Property Act 1925 to discharge or modify a restriction as to the use of freehold land provided one of the grounds in that section is made out. The case law in this area indicates that this is reasonably well known.

It is perhaps less well known that this jurisdiction also extends to covenants in leases restricting use, once 25 years of a lease term of more than 40 years have expired. Shaviram Normandy Ltd v Basingstoke and Deane BC [2019] UKUT 256 (LC) is a rare example of that jurisdiction being exercised.

The tenant in this case acquired the headlease of an office building that had fallen into disrepair with a view to converting it into flats. The headlease was granted in 1985 for a term of 150 years and included a covenant restricting the use of the building to offices only.

The local council as landlord refused to agree to the tenant’s request to vary the headlease to allow residential use as it wanted the building to remain as office accommodation. This was despite the fact that the council, as planning authority, had already granted planning permission for the flats and, as landlord, had previously marketed the property on the basis of its potential for a change of use.

The tenant applied to the Tribunal under section 84 for the modification of the restriction in the headlease to permit residential use.

One of the main issues, based on the criteria set out in section 84, was whether the office use restriction secured any practical benefit of substantial value or advantage to the landlord. Following an extensive review of the factual background, the Tribunal found that it did not and exercised its discretion to direct that the user clause in the headlease be modified by the addition of the words “or as a residential building comprising 114 flats”.

The success (or otherwise) of applications to discharge or modify restrictive covenants under section 84 is heavily fact-dependent. Nevertheless, it is interesting that the Tribunal exercised its discretion in this case against the strong wishes of the landlord and with the result that the development potential of the building was released.

Will this set a precedent?