Real Estate Focus – May 2022

Queen’s Speech May 2022: real estate highlights

The Queen’s Speech on May 10, 2022 sets out the Government’s legislative programme for the 2022-2023 session, with the Prime Minister stating that: “Together, these measures make this Queen’s Speech one that will help us meet today’s challenges. They will ensure we can continue building back a better Britain after the pandemic, boosting our growth and recovery so that every part of our country can thrive”.

Real estate highlights include:

• A Renters Reform Bill. A key proposal is the abolition of so-called ‘no fault’ evictions by removing section 21 of the Housing Act 1988. This is coupled with reforms to landlords’ grounds for possession, including new and stronger grounds for persistent rent arrears and reducing notice periods for anti-social behaviour. A new Ombudsman for private landlords is also proposed with the aim of resolving disputes without the need to go to court.
  
  A White Paper is to be published shortly setting out details of the proposals.
  
  The Government has also confirmed that it remains committed to further reforms to enfranchisement, the right to manage and commonhold, although there is no mention of a Bill for this session.
• A Social Housing Regulation Bill to improve the regulation of social housing, strengthen the rights of tenants and ensure better quality, safer homes.
• A Levelling Up and Regeneration Bill to “drive local growth, empowering local leaders to regenerate their areas and ensuring everyone can share in the United Kingdom’s success. The planning system will be reformed to give residents more involvement in local development”. The proposals include placing a duty on the Government to set “levelling up missions” and produce annual reports on the delivery of those missions.

Some proposals in the Bill have already proved controversial, such as new powers for local authorities to instigate rental auctions of vacant commercial properties in town centres and on high streets. The British Property Federation has dismissed compulsory auctions as a "political gimmick".

• A Non-Domestic Rating Bill to create a fairer, more accurate business rates system, including shortening the business rates revaluation cycle from five to three years from 2023.

• A Product Security and Telecommunications Infrastructure Bill. Part 2 seeks to reform the Electronic Communications Code to make it fit for purpose. The Bill has been carried over from the previous parliamentary session – see our December 2021 Real Estate Focus for further details.
• An Economic Crime and Corporate Transparency Bill. This will build on the recently enacted Economic Crime (Transparency and Enforcement) Act, which includes provision for a new Register of Overseas Entities owning or intending to buy property in the UK. The Bill will include proposals to broaden the Registrar of Companies’ powers in relation to company creation and data reliability and to introduce identity verification for people who manage, own and control companies and other UK registered entities.
• An Energy Security Bill to deliver the transition to cheaper, cleaner, and more secure energy. This will include introducing state-of-the-art business models for carbon capture usage and storage, low carbon hydrogen and industrial carbon capture, to “fire the starting gun on new, low-carbon technologies”. The British Property Federation has commented that it would like to see the Bill include measures to improve the energy efficiency of homes and buildings.
• A UK Infrastructure Bank Bill to finalise the creation of the UK Infrastructure Bank, a British state-owned investment bank intended to help with the Government's plans to support economic growth in regional and local sectors across the UK and to reach net zero carbon by 2050.

Several draft Bills have already been introduced notably the Levelling Up and Regeneration Bill, of which more below.

The Building Safety Act receives Royal Assent

The Building Safety Act 2022 (BSA) is here. Along with the myriad of statutory instruments and accompanying guidance, this new legislation will usher in the biggest swathe of regulatory changes to the UK built environment in almost 40 years.

The BSA is the Government’s main legislative response to the Grenfell tragedy. It will run alongside the Fire Safety Act 2021. It focuses on the entire lifecycle of a building, covering a number of issues, including:

• changes to the Building Act 1984 and building regulations to improve building control;

• imposing a separate set of additional statutory duties on CDM duty-holders;

• changing the way higher-risk buildings are designed, planned and built, by requiring the duty-holders to capture building information relating to fire and structural safety;

• enhanced rights for property owners, leaseholders and occupiers to bring claims in respect of defective work;

• residential leaseholder protections designed to shift the responsibility for paying remediation costs away from the residents in a building, along with measures to shield leaseholders from all costs related to the remediation of unsafe cladding; and

• a widening of liability for building owners, developers of high-risk buildings and product manufacturers and suppliers.

Although the BSA received Royal Assent at the end of April 2022, the vast majority of its provisions will not come into force for 12-18 months as secondary legislation is developed. However a limited number of changes, including changes to limitation periods in the Defective Premises Act 1972 and section 38 of the Building Act 1984 (which affords a statutory right of action to anyone who suffers damage as a result of a breach of building regulations), take effect two months after Royal Assent, on June 28, 2022.

For further information and a list contacts, please see our briefing on the topic here.

Real estate tax update

The construction industry scheme (CIS)

The CIS can apply to landlord contributions to tenant’s works if they include some element of “Cat A” works which benefit the reversion. This can cause considerable complexity in new lettings as most retail and office tenants will not be registered as a CIS “subcontractor”, so the landlord may need to deduct 30% from the contribution and pay it to HMRC.

This is the subject of a recent Chartered Institute of Taxation (CIOT) submission to HMRC, updating a previous submission in 2017. The CIOT stresses to HMRC that these sorts of payments are not what the CIS was introduced to target; impose particular challenges on the retail and hospitality sectors at a time when the Government is trying to support them; and create difficulties for both landlords and tenants in relation to administration, compliance, and cashflow. The CIOT suggests that HMRC should consider a wider exclusion for contribution payments on the grant, variation or assignment of a lease whether for tenant’s or landlord’s works.

The CIS has long been a challenging area for landlord/tenant contributions and while the CIOT’s submission is welcome, we do not expect HMRC to move quickly on this issue. In the meantime, landlords and tenants must continue to consider whether the CIS is relevant to contribution payments.

Capital allowances – possible reform?

Following the announcement in the Spring Statement that it is considering reforms to how it incentivises and supports business investment, the Government has published a policy paper inviting responses from a range of stakeholders on proposals to reform the capital allowances regime. In particular, the Government is seeking to understand the extent to which the regime plays a role in taxpayers’ investment decisions (including the impact of the super-deduction on decision making, which ends next year), and how the regime could be more competitive and easier to operate.

While the policy paper itself does not provide much in the way of further information beyond what was included in the Spring Statement and the Government’s ‘Tax Plan’, the paper reiterates both the Government’s recognition that the permanent capital allowances available in the UK are not as competitive as those of a number of its international peers, and their stated strategy of doing more to support business investment via capital allowances.

For a copy of the policy paper and details of the Government’s proposed reforms to the capital allowances regime, please see here. The deadline for providing responses is July 1, 2022.

For further information please contact Tax Partner Julia Lloyd.

Levelling Up and Regeneration Bill: rental auctions in the high street?

The Levelling Up and Regeneration Bill (the Bill) had its first reading before the House of Commons on May 11, 2022.

One aspect of the Bill that has caused some controversy is the proposal to grant local authorities the power to instigate rental auctions for vacant high street premises and the power to compel the landlord to enter into lettings with the successful bidder.

The premises that are at risk of local authority intervention are those that are 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 and even light industrial.

Two further conditions must be met before the local authority can intervene in the letting of high street premises:

• The vacancy condition requires the premises to have been unoccupied for a year, or alternatively unoccupied for at least 366 days in the last two years. For the premises to be considered occupied there needs to be a “regular presence of people” at the premises. The Bill offers no details as to what would constitute “regular presence”.

• The local benefit condition, which is met if the local authority considers that occupation would be beneficial to the local economy, society or environment.

The pre-auction process

If the two conditions have been satisfied, the local authority can serve an initial letting notice on the landlord. The initial letting notice is valid for up to 10 weeks. If the premises have not been let within eight weeks of the initial notice, the local authority can serve a final letting notice. The final letting notice is valid for 14 weeks.

During each notice period the landlord is generally not permitted to grant a tenancy or licence of the premises unless it first obtains the local authority’s consent.

The rental auction

The Bill does not go into any detail as to the process for the rental auction and leaves this to be determined under future regulations.

Once a successful bidder has been identified, the local authority will enter into a “tenancy contract” with them. Strikingly, the landlord is not a party to contract negotiations. The local authority must ‘have regard’ to any representations made by the landlord in deciding terms but that may be of little comfort to a landlord.

The Bill gives limited information about the terms of the tenancy and how these are to be negotiated, instead allowing for further regulations to set out the detail. The Secretary of State, in making such regulations, is to have regard to the commercial terms on which short-term tenancies are usually concluded.

The landlord has a limited right of appeal on specified grounds including that either the vacancy condition or the local benefit condition have not been met, or that the landlord intends to occupy the premises for business purposes.

The Bill is in its early stages but landlords are likely to have some significant questions. For example, could complex rental arrangements, such as turnover rent, stepped rent and rent free periods, be accommodated? Will there be minimum criteria that a prospective tenant must reach in order to be deemed the successful bidder, such as a minimum covenant strength? How would the proposals impact on estate management? How would the ‘vacancy condition’ apply in the context of storage leases or rates mitigation tenancies?

The general mood in the industry is that this legislation would lead to badly managed estates, difficult landlord/tenant relationships and possibly an inappropriate mix of occupiers who are not well suited to the local area. A key risk is that landlords may become increasingly unwilling to invest in the high street and unmotivated to make it an attractive environment for both retailers and customers.

For further information please contact real estate associate Peter Lewis.