Real Estate Focus: November 2023

A more rigorous Register of Overseas Entities on the horizon

The Economic Crime and Corporate Transparency Act (ECCTA) received Royal Assent on 26 October 2023. Building on previous legislation, it contains wide-ranging reforms to help tackle economic crime in the UK, including extending the scope and requirements of the Register of Overseas Entities (ROE) regime.

To recap, most overseas entities (OEs) that own, or want to own, a freehold estate in land or a leasehold estate for a term of more than seven years must be registered in the ROE and be issued with an overseas entity ID. The ROE registration process can be complicated and includes taking reasonable steps to identify the OE’s  beneficial owners (or, if none, its managing officers) and collecting prescribed information about them. The required information must be verified by an independent “relevant person” before it is lodged for registration.

Currently, to be validly registered in the ROE, an OE must comply with the initial registration requirement and must also annually update  the  information lodged with the initial application for registration, or  confirm that such information has not changed. 

ECCTA adds a third duty that must be complied for an OE to be validly registered in the ROE. That duty is to comply with any statutory demand for information issued by the Registrar of Companies. 

This new duty is not yet in force, and we don’t have an indication as to when that will happen, or how it will work in practice - we await regulations and guidance on such detail. However once in force, compliance will be essential, as the consequences of failing to be validly registered are severe. In addition to committing a criminal offence, the OE cannot be registered at the Land Registry as the legal owner of land or property or enter into a lease exceeding seven years, nor can it sell land, charge it or grant a lease of over seven years, as that disposition cannot be registered at the Land Registry.

The other changes to the ROE introduced by ECCTA include complex further requirements - some retrospective -  to registration obligations where OEs hold property in the UK as a trustee or nominee. Some of these changes aim to close what have been seen as loopholes in the beneficial ownership disclosure regime. 

Again we do not yet have a commencement date for these changes and regulations and guidance as to how these will operate are awaited. However, one thing that we do know for certain is that they will have a significant impact on affected OEs once they are in force.

Real Estate Tax: highlights from the Autumn Statement 2023

Construction Industry Scheme reform

Currently, the scope of the CIS extends to certain landlord contributions to a tenant to carry out works, particularly where they include “Cat. A” works which benefit the reversion. This can cause considerable complexity in new lettings if the landlord is a “contractor”, as most retail and office tenants will not be registered to receive payments gross under the CIS, so that the landlord may need to deduct 30% from the contribution and pay it to HMRC.  

The government has indicated that it intends to introduce regulations to remove “the majority of landlord to tenant payments from the scope of the CIS” from 6 April 2024. At the time of writing, no draft regulations have been published. However, the CIS has long been a challenging area for landlord/tenant contributions and removing the majority of landlord to tenant payments from the scope of the CIS will be a welcome change.

It has also been confirmed that, at this stage, the government will not introduce a grouping arrangement under the CIS. However, the government has confirmed it will seek to “explore other options” to reduce the impact of CIS on certain groups.

Separately, the government has confirmed that it will: (1) add compliance with VAT obligations to the Gross Payment Status compliance test; (2) expand the grounds for ‘immediate cancellation’ of Gross Payment Status to include fraudulent provision of incorrect returns or information in respect of VAT, income tax, corporation tax and PAYE; and (3) introduce digital applications for CIS registrations.

Real Estate Investment Trusts

Two further amendments to the Real Estate Investment Trust (REIT) regime were proposed in the Autumn Statement. The proposals are welcome as they are intended to improve the operation of the tax rules for REITS. They are: 

• enabling co-ownership authorised contractual schemes (CoACS) to qualify as institutional investors; and
• removing the REIT’s exposure to corporation tax when it distributes to holders entitled to 10% or more of the income, if such holders are taxed at a double tax treaty rate. 
  
  The current intention is that these changes will, broadly, take effect from the date that the Finance Bill 2023-2024 receives Royal Assent, likely to be in Spring 2024. They are in addition to the generally favourable amendments referred to in our August 2023 Focus which are also likely to take effect next Spring, these being:

• enabling insurance companies to own a 75% or more interest in a group REIT;

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

Ground rents in residential leases: a retrospective ban?

Following the Leasehold Reform (Ground Rent) Act 2022 which abolished escalating ground rents in most new long residential leases, the government now has plans to go further.

That 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 30 June 2022. With some limited exceptions, landlords of regulated leases must not require their tenants 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”.

The government published a consultation on 9 November 2023 seeking views on proposals to cap ground rents in existing long residential leases. Five options are proposed:

• Capping ground rents at a peppercorn, thus aligning ground rents in existing and new leases. The government acknowledges that while this would deliver the most favourable result for leaseholders, it would have the most significant impact on freeholders, including institutional investors;
• Capping ground rents at an absolute maximum value;
• Capping ground rents at a percentage of the property value;
• Capping ground rents at the original amount specified when the lease was granted; and
• Freezing ground rents at current levels.

Perhaps controversially, the consultation states that “we would not expect to compensate freeholders for lost revenue”, asking consultees if they agree. The consultation closes on 21 December 2023.  

This is one of several residential leasehold reforms in the pipeline. In addition to the Renters (Reform) Bill which is making its way through parliament, the King’s Speech in November promised a Leasehold and Freehold Bill to reform the housing market by (amongst other things) making it cheaper and easier for leaseholders to purchase their freehold or extend their lease and by banning the creation of new leasehold houses. The Bill was introduced to parliament on 27 November 2023.

2024 promises to be a busy year in terms of residential leasehold reforms.

Levelling Up and Regeneration Bill now on the statute books

The Levelling Up and Regeneration Act 2023 (the Act) received Royal Assent in late October 2023. Two parts of the Act are of particular interest from a real estate perspective: 

Rental auctions for vacant high street premises (Part 10)

One aspect of the Act which has already stirred controversy in the real estate market is the grant of power to local authorities to instigate rental auctions for vacant high street premises. The power extends to compelling 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. 

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

If the two conditions are 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 Act does not go into any detail as to the process for the rental auction and leaves this to be determined under future regulations - a consultation on such detail closed on 23 June 2023. However, 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 the contract negotiations and the local authority has power to enter into the tenancy contract in its own name, but so as to bind the landlord rather than itself. The local authority must ‘have regard’ to any representations made by the landlord in deciding terms, although that may be of little comfort to a landlord.

The Act poses some significant questions for landlords. For example, could complex rental arrangements, such as turnover rent, stepped rent and rent free periods, be accommodated in the contract? 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 risks 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 retailers and customers.

Information about interests and dealings in land (Part 11)

Part 11 of the Act gives the government power to require that certain information about land ownership and control is disclosed. 

For Part 11 to apply, the information being requested must be for one of three “permitted purposes”:

• The “beneficial ownership purpose”. Information will be within this purpose if the Secretary of State deems it useful for: (i) identifying individuals who are beneficial owners of land in England or Wales; or (ii) understanding the relationship between these individuals and the land they beneficially own.
  
  There have already been significant changes to disclosure requirements for overseas entities owning or seeking to own property in the UK. It is unclear how disclosure under Part 11 is intended to interact with such other regimes. For example, will registration in the Register of Overseas Entities suffice, or is this to be an entirely separate regime that overseas entities will need to comply with?
• The “contractual control purpose”. Information can be requested under this purpose if the Secretary of State deems it "useful for the purposes of understanding relevant contractual rights." Relevant contractual rights are rights that arise under a contract or a deed, and relate to the development, use, or disposal of land in England and Wales. 
  
  Given that the majority of land transactions involve contractual provisions, this purpose seems to give the Secretary of State an almost unfettered right to request information to understand them. There is a caveat, which is that a relevant contractual right must ‘be held for the purpose of an undertaking’. An undertaking means either a business, charity or the exercise of functions of a public nature.
• The “national security purpose”. The final purpose allows information to be requested if it appears to the Secretary of State that a threat to national security arises in connection with the location of the land, or anything situated or done on it. It can only be requested if such information would be useful in identifying the persons who own or have rights over the land, or are in a position to control or influence the owner of, or person with rights over, the land.

It is clear that the scope of the powers is intended to be very wide-reaching, although we await regulations to find out exactly what this will be.

For further information please contact senior associate Peter Lewis.