Real Estate Focus – August 2023

Developer alert - mandatory Biodiversity Net Gain: what is it, how is it calculated and when is it in force?

Biodiversity net gain (BNG) is a concept that aims to leave the natural environment in a measurably better state than it was before development by delivering improvements through habitat creation and enhancement and avoiding or mitigating harm as far as possible. BNG will affect developers, land managers and local planning authorities (LPAs).

The Environment Act 2021 makes BNG mandatory for developers from November 2023 in relation to most major developments, from April 2024 for “small sites” (as defined), and from November 2025 for nationally significant infrastructure projects. 

BNG requires a biodiversity gain plan to be submitted and approved by the LPA before development can lawfully commence. The biodiversity gain plan must set out how a development will deliver BNG by addressing how adverse impacts on habitats will be minimised or mitigated to create “biodiversity value”. 

The LPA may only approve a biodiversity gain plan if the biodiversity value of the proposed development exceeds the pre-development biodiversity value by at least 10%. If the development itself cannot achieve that, a developer will be able to purchase biodiversity units from an off-site habitat market. If units cannot be sourced from local habitat markets, developers will be able to purchase their required units in the form of statutory biodiversity credits (SBCs), which will be invested in habitat creation.

In May 2023, the Government published guidance on what can - and cannot - count towards a development's BNG. Amongst other things, the guidance explains that habitat creation or enhancement counts towards BNG even if it is required to comply with a statutory obligation or policy, for example environmental impact assessment compensation.

The Secretary of State will be responsible for setting up a system of SBCs and Natural England for selling them. The Department for Environment, Food and Rural Affairs (Defra) will set the price at which the SBCs will be sold to developers and intends to publish the confirmed prices when BNG becomes mandatory. In the meantime, further guidance was published in July 2023 on calculating the costs of SBCs. The guidance provides preliminary indicative prices and information on calculating those prices. 

Overall, allowing developers to buy SBCs is intended as a last resort if they are unable to deliver BNG on-site or off-site. In the longer term, Defra aims to minimise their use and to phase them out once the biodiversity units market has matured.

Proceeds of crime: a cautionary tale for landlords

A recent (unreported) case before the Manchester County Court is likely to send shudders down the spine of landlords.

The aim of the anti-money laundering regime and the Proceeds of Crime Act 2002 is to target and clamp down on illegal activities. This does not  just mean terrorist financing – their reach extends far beyond that, as a landlord of commercial premises in Manchester discovered to its cost.

In the case in question the landlord, T&M Property Investment Limited, had granted a lease of premises  to a tenant, the permitted use being a cafe. The tenant changed that use and carried out related alterations without obtaining the necessary planning approvals under the Town and Country Planning Act 1990.

Manchester City Council issued an enforcement notice requiring reinstatement of the premises and cessation of the unlawful use. Non-compliance with an enforcement notice served by a local planning authority is a criminal offence and even if the breach is by a tenant, its  landlord can  also be made liable for such non-compliance. Nevertheless, in this case the enforcement notice was ignored and neither the tenant nor the landlord took any steps to remedy the situation. 

The Council prosecuted the landlord for non-compliance. This resulted in a conviction and a fine of £18,750 plus costs. To make matters worse, an application was made, under section 6 of the Proceeds of Crime Act 2002, requesting that gains made from the criminal activity be recovered. Rents paid to the landlord totalling over £174,000 were treated as such gains and therefore confiscated.

A local councillor commented that “This case… shows that landlords can’t hide behind their tenants – they will be held responsible for criminality in their property” – and this is the case even if the terms of the lease impose a contractual requirement to comply on the tenant.

Further changes to strengthen fire safety in non-domestic premises now imminent

On 1 October 2023, a number of changes will be made to the Regulatory Reform (Fire Safety) Order 2005 (the FSO) to strengthen the fire safety regime applicable to all non-domestic premises in England and Wales, including multi-occupied residential buildings. 

The changes represent the next phase in the Home Office’s plan to reform and strengthen fire safety in the built environment, and will be introduced under section 156 of the Building Safety Act 2022 (the BSA 2022). The new obligations will be placed on the responsible person (the RP), which is the primary duty holder under the FSO and will ordinarily be the entity that has control of the premises in question.

In summary, the changes to be introduced are as follows:

• Where buildings contain two or more domestic premises, the RP must give residents of the premises comprehensible and relevant information about fire safety. This should include information about the protective and preventative measures in place at the premises and the name and details of the RP;
• an outgoing RP must give the incoming RP the fire safety information it holds in respect of the premises, including records of fire risk assessments and reviews and the details of any entity that is an Accountable Person (as defined under the BSA 2022) (Accountable Person) in respect of the premises;
• all RPs must take reasonably practicable steps to ascertain the existence of other RPs and/or any Accountable Person(s) that have duties in respect of the same premises; and
• RPs must record the fire safety arrangements in place for the relevant premises and record the identity of the individual or organisation engaged by them to undertake/review fire risk assessments in respect of the premises.

The Government also plans to introduce a requirement to ensure that any person carrying out a fire risk assessment on behalf of a RP is “competent”. Unlike the changes above, this requirement will not come into force on 1 October 2023 and the Government will be providing guidance in advance of introducing it. However, RPs should still ensure that the fire risk assessors they engage have sufficient training, experience and knowledge to undertake the risk assessment for the specific building in question.

For further information please contact, EMEA Head of Environment, Health & Safety Caroline May, or Associate Andrew Swarbrick.

Real estate tax summer update

REITs: further amendments to the Real Estate Investment Trust (REIT) regime were proposed as part of the draft legislation published by HMRC on 18 July 2023. The proposals are welcome as they are generally intended to improve the operation of the tax rules for REITS. They include: 

• enabling insurance companies to own a 75% or more interest in a group REIT;
• allowing exemption for gains on disposals of interests in co-ownership authorised contractual schemes (CoACS) that are UK property rich;
• requiring certain institutional investors of a REIT to be widely held where they are themselves members of a closely held REIT;
• confirming that it is possible to trace through an intermediate holding company that is placed between a REIT and an institutional investor; 
• clarifying that the leverage rules work off property finance costs in the UK, rather than (as currently) property finance costs anywhere in the world; and
• confirming that gains from disposals of UK property rich companies are not included in calculations for corporate interest restriction purposes. 

The current intention is that the proposed changes will, broadly, take effect from the date that the Finance Bill 2023-2024 receives Royal Assent, likely to be in Spring, 2024. The Government has stated that, in addition to engaging on the detail of these provisions, it “will continue to consider the case for other reform options”.

UK-Luxembourg double tax treaty: an amended UK-Luxembourg double tax treaty has now been ratified by both the UK and Luxembourg. This will become effective for UK income and capital gains tax purposes in April 2024 and on 1 January 2024 for income withheld at source. While a new double tax treaty  between these jurisdictions has been on the cards for some time, particularly following the implementation by the UK of a non-resident capital gains tax on disposals of UK property rich entities, news that the change is now imminent may have a potential knock-on effect for the way in which UK real estate is held.

Please see our briefing on the treaty for further information and contact details.