Real Estate Focus – July 2019

Introduction

In this edition we provide updates on proposed reforms to residential leases; a new register of overseas entities; property taxes; and the effect of Brexit on leases.

Ban on leasehold houses and restricted ground rents: all systems go

On June 27, 2019 the Ministry of Housing, Communities and Local Government published the outcome of a 2018 consultation on far-reaching proposals for leasehold reform, together with details of next steps.

It is confirmed that the government will legislate to:

• Ban long leases of new houses, so that they can only be sold on a freehold basis. There will be some exemptions, including shared ownership properties, retirement properties, equity release arrangements and home purchase plans. Once in force (and there will be no transitional period), the ban will apply not only to freehold land but also to leasehold land acquired on or after December 22, 2017, when the ban was first proposed.

  Non-compliant leases will not be registrable at the Land Registry and the tenant will be entitled to “zero-cost enfranchisement” with possible civil penalties thrown in for good measure.

• Restrict ground rents in new leases of houses and flats to a peppercorn (zero financial value). Again there will be some exemptions including retirement properties and mixed-use leases (but not mixed-use developments).

  Ground rent above a peppercorn will be unenforceable and there will also be fines for breaches.

• Give leasehold house owners a right of first refusal if their landlord wants to sell.
• Give freeholders similar rights to leaseholders to challenge the reasonableness of estate charges and to appoint a new manager. A right to manage for freeholders will also be considered.
• Improve how leasehold properties are sold, such as imposing a maximum turnaround time of 15 working days for the provision of leasehold information to a prospective buyer and a cap on the fee chargeable for it.

As to timing, the legislation will be introduced “as soon as Parliamentary time allows” – whenever that will be in the current political climate.

Confirmed: Brexit does not frustrate a lease

The European Medicines Agency (EMA) announced that it has settled its dispute with the Canary Wharf group and will not now be appealing against February's High Court judgment in Canary Wharf (BP4) T1 Limited and others v European Medicines Agency [2019] EWHC 335 (Ch). According to an announcement on its website, the EMA has sublet the entirety of the premises in dispute until the expiry of its lease in 2039.

In that much anticipated judgment, the High Court rejected the EMA’s argument that its 25-year lease of a substantial office building in Canary Wharf - reportedly commanding an annual rent of approximately £14m - would be terminated by frustration if the UK leaves the EU.

The High Court decision now stands, which is good news for the UK commercial property industry, although as it turned principally on a consideration of the particular political and legal constraints on the EMA as an EU agency, it is not of wide application. However the judgment included a detailed analysis of the law as it applies to frustration of leases and reiterated how difficult it is for frustration to arise.

The lesson for tenants is that if they wish to take a lease of premises for a particular purpose or for a specific appointment or future event only, they should seek to include in the lease an express break clause entitling it to terminate the lease should unforeseen circumstances arise, rather than rely on the common law of frustration.

Property tax update: VAT and SDLT

VAT reverse charge on construction services

From October 1, 2019, construction services will be subject to a VAT reverse charge due to the implementation of The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019.

The VAT reverse charge is a mechanism for preventing the avoidance of VAT by suppliers who charge and collect VAT from the recipient but fail to account for that VAT to HMRC. The VAT reverse charge will apply to business-to-business supplies of “construction services” (substantively the same services as are caught by the Construction Industry Scheme) where the recipient is not the final consumer.

Certain services will be excepted, ensuring that the reverse charge only applies to construction services supplied to other construction businesses. In particular, end users (that is, a business which uses the construction services for any purpose other than making further supplies of construction services) and intermediaries (that is, a business which makes an onward supply of construction services without materially altering or processing the services received) will be excluded from the scope of the provisions.

These exceptions are particularly important: property developers and property owners may be able to rely on the “end user” exception and the “intermediary” exception may be available in relation to payments between landlords and tenants where the landlord or tenant commissions construction services and on-supplies those services to the other.

The new legislation will affect all supplies made on or after October 1, 2019. We therefore recommend that appropriate drafting is included in contracts which are entered into now but which provide for construction services that may be invoiced on or after October 1.

SDLT surcharge for non-UK resident purchasers of residential property

By way of background, the government has been consulting on a proposed 1 per cent Stamp Duty Land Tax (SDLT) surcharge for non-UK residents purchasing UK residential property. The consultation considered, among other things, the appropriate “residency” test for these purposes, and asked for views on a range of proposals.

The government has been considering the feedback to the consultation and draft legislation was anticipated in the near future. However, contrary to expectation, there is no reference to the surcharge in the Finance Bill 2019-2020 which was published on July 11, 2019.

We understand that the government now expects to consult on draft legislation once it has fully considered the responses to the original consultation. At this stage, no date has been set for implementing this measure.

For further information please contact Tax Of Counsel Julia Lloyd

A more burdensome register of overseas entities?

A report by a Joint Committee of the House of Lords and House of Commons has recommended numerous changes to the draft Registration of Overseas Entities Bill published last year. If the proposed changes are adopted, the registration regime will be considerably more onerous than originally envisaged.

The long-heralded draft Bill was published on July 23, 2018. Its purpose is to “prevent and combat the use of land in the UK for money laundering purposes by increasing the transparency of beneficial ownership information relating to overseas entities that own land in the UK”. It aims to achieve this through a new publicly available register of the beneficial owners and controllers of such entities - the first of its kind - to be held by Companies House.

In broad terms the draft Bill proposes that:

• Any overseas entity that owns, or wants to own, UK land - residential or commercial - will be required to identify its beneficial owners, register their details in the new register and update that information annually.
• “Overseas entities” include companies, partnerships, corporations sole, governments and public authorities – in fact, any entity that has a legal personality under the law by which it is governed.
• The registration requirement will be retrospective and overseas legal entities that already own UK land will have 18 months to register or to sell.
• The register will record beneficial ownership above a certain threshold. For example, in the case of a company limited by shares, a person holding more than 25 per  cent of the shares in the company would be a registrable beneficial owner.
• Where another legal entity is the registrable beneficial owner, disclosure of ownership further up the chain will be required until the individual (or individuals) who exercises control over the legal entity is identified.
• A failure to register and to update the register annually will mean that an overseas entity:
  • Cannot register at the Land Registry as the legal owner of land.
  • Where already registered as legal owner, cannot sell, charge or lease the land for a term of more than 7 years as any buyer, chargee or tenant 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 delivering misleading, false or deceptive information.

Sounds rigorous? The Joint Committee report concludes that the draft bill does not go far enough. Recommended changes to plug “loopholes” include:

• That land held though trusts should also be registrable under this regime or elsewhere
• Lowering the 25 per cent threshold for recording beneficial ownership 
• That the register should be updated before any disposition is made, in addition to the requirement to update annually
• The introduction of checks to verify the information submitted to the register
• Civil penalties for breaches and enforcement of fines against land.

The new register is still on course to go live in 2021.

STOP PRESS: The government published a response to the report on July 18, 2019 stating that it is “committing to act on a number of areas as a result of the recommendations from the Committee and report, further improving the draft Bill”.