Real Estate Focus: March 2022

A new register of overseas entities owning UK land

The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on March 15, 2022. Part 1 of the Act (Part 1) makes provision for the registration of overseas entities who already own, or wish to own, land in the UK.

The primary objectives of Part 1 are: “to prevent and combat the use of land in the UK by overseas entities as a means to launder money or invest illicit funds” and “to increase transparency and public trust in overseas entities engaged in land ownership in the UK”. It seeks to achieve this by establishing a new register of the “beneficial owners” of such entities: the register of overseas entities.

In broad terms:

• Any overseas entity that owns, or wishes to own, land in the UK will be required to be registered in the new register of overseas entities.
• This will involve the overseas entity providing information about its registrable beneficial owners or confirming that it has none. This information must be updated annually. Additional information must be disclosed where a registrable beneficial owner is a trustee.
• The new regime is retrospective: overseas entities that acquired UK land on or after January 1, 1999 but before the date on which the relevant provisions of the Act come fully into force will have a limited transitional period of six months in which to register.
• A failure to register or to comply with the requirement to update the register annually will mean that an overseas entity:
  • cannot be registered at HM Land Registry as the legal owner of UK land; and
  • where already registered as legal owner, cannot sell, charge or grant a lease of the land for a term of more than seven years as any buyer, chargee or lessee will not be able to register the disposition at the Land Registry.
• Compliance will be enforced through restrictions on the title registers of land owned by overseas entities. There will also be criminal sanctions for non-compliance and for delivering misleading, false or deceptive information.

Part 1 is not yet in force as regulations are required to underpin the new regime. However there are some initial steps that overseas entities which already own UK land should begin to consider and that overseas entities planning to enter into UK property transactions should keep in mind.

For further information and some practical considerations please see our Briefing on the new regime.

The Commercial Rent (Coronavirus) Act 2022 receives Royal Assent

As widely anticipated, 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.

The Act 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 (see below for further details of the scheme). The “protected rent debts” include not only traditional rent, but also service charges, insurance rent, interest and VAT for the relevant “protected period” that the tenant was mandated to close its premises or cease trading.

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 – the latest date in England being July 18, 2021. Any unpaid rent accruing before or after the relevant protected period, apportioned on a daily basis, are not protected by the Act.

The new regime replaces the temporary restrictions on landlords pursuing rent arrears through forfeiture, or Commercial Rent Arrears Recovery or the commencement of winding-up petitions, which have now ended.

For further details please see our November 2021 Real Estate Focus.

The Commercial Rent (Coronavirus) Act 2022: guidance on the mandatory arbitration scheme

The Government recently released a working draft of statutory guidance for arbitrators in relation to the exercise of their functions under the mandatory arbitration scheme introduced by the Commercial Rent (Coronavirus) Act 2022.

By way of background, the Act provides that if parties have not reached an agreed resolution to the payment of protected rent debts by the date the Act comes into force (March 24, 2022), there will be a six month window (although this could be extended by further legislation) 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. That relief can include:

• writing off the whole or any part of the debt;
• affording more time to pay the whole or any part of the debt - up to 24 months – and allowing payment in instalments; and/or
• reducing any interest due on the debt (including writing off any interest).

The Act provides that in order to be entitled to some form of relief under the arbitration scheme, the tenant will effectively have to demonstrate that the viability of its business would be undermined if it was required to pay the protected rent debts in full. If the arbitrator determines that the tenant’s business is, or would become, viable if relief was awarded, the arbitrator will then consider the proposals put forward by each party and must make an award in favour of the proposal which is most consistent with the principles in the Act (or, if no proposal is consistent, come to its own decision). Those principles include prioritising the viability of the business of the tenant but not at the expense of the landlord’s solvency, and disregarding the possibility of either party borrowing money or restructuring its business.

The draft guidance provides considerably more detail than the Act on the procedure of the overall arbitration scheme. The usual procedure for arbitrations governed by The Arbitration Act 1996 (which includes the need for formal statements of claim and defence followed by disclosure of documents and witness statements) has been replaced by a streamlined 3-stage arbitration procedure:

• Stage 1 – pre-arbitration and referral;
• Stage 2 – the arbitrator’s assessment of whether the dispute is eligible for arbitration under the scheme; and
• Stage 3 – the arbitrator’s assessment of whether the tenant is entitled to relief from payment of the ‘protected rent debt’.

At the time of writing the final version of the guidance has not been published. We will publish a more detailed briefing once that is available.

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.

Real estate tax checklist – upcoming changes to keep in mind

While the Spring Statement was relatively quiet on the real estate tax front (other than noting a review of the capital allowances regime with the aim of incentivising investment, particularly in the renewable energy space) April 1, 2022 is an important date as it sees the introduction of a range of measures that we have highlighted in previous issues of Real Estate Focus. These include:

• Changes to the UK REIT regime. These changes include:
  • allowing REITs to be unlisted where one or more “institutional investors” hold at least 70% of the REIT’s ordinary share capital; and
  • disapplying the “holders of excessive rights charge” in respect of property income distributions (PIDs) paid to investors who are entitled, under relevant UK domestic REIT withholding tax rules, to gross payment. Note that this does not apply to investors entitled to be paid gross by virtue of provisions outside the REIT code, such as by making a treaty relief claim.

Further reforms to the UK REIT regime are also on the table and could be taken forward quickly if adopted.

• The introduction of the Residential Property Developer’s Tax. RPDT is part of a package of measures to help pay for remediation work required as a result of defective cladding. Broadly, the tax is in addition to the usual corporation tax and applies at a rate of 4% on profits exceeding a £25m annual group allowance arising from residential property development activities relating to UK land held as trading stock (so that it does not affect investors, including build-to-rent investors).
• VAT and termination payments/dilapidations. HMRC’s updated policy in respect of VAT on termination payments/dilapidations will take effect from April 1, 2022, after almost 18 months of uncertainty. Following extensive dialogue with the real estate sector, HMRC has confirmed that genuine dilapidations will remain outside the scope of VAT, unless there is evidence of value shifting from rent to dilapidations. It has also confirmed that termination payments to end a lease will be exempt, subject to the landlord having opted to tax, regardless of whether the termination payment was set out in the lease or negotiated separately.
• Continued review of the UK funds regime. April 1, 2022 will see the launch of the UK’s qualifying asset holding company regime. This is designed to remove some of the perceived tax barriers to using the UK as an asset-holding company jurisdiction of choice for certain eligible investors. However, while these companies could become widely used in infrastructure and credit funds, they will not benefit from UK tax advantages in respect of UK real estate. A wider funds review is under way and one suggestion is that we may see a form of unauthorised contractual fund for UK real estate, but there is little detail at this stage.
• Things to watch for. The SDLT consultation on mixed use and multiple dwellings remains on-going, as does the VAT review in relation to fund management fees. We will keep you updated in respect of any developments.

For further information please contact Property Tax partner Julia Lloyd.