Real Estate Focus – June 2024

High street rental auctions: what next?

Part 10 of The Levelling Up and Regeneration Act 2023 (the Act) grants powers to local authorities to instigate rental auctions for vacant high street premises and to compel the landlord to let them out to the successful bidder. The overall aim is to regenerate high streets, cut down on anti-social behaviour and to “breathe new life into once-bustling town centres and transform them into vibrant places”.

The Act contains an overarching framework for the policy, with the detail to follow in regulations. On 14 May 2024, the government published its response to a consultation on that detail, setting out its recommendations. These include:

• The publication of detailed prescriptive guidance before the new regime becomes operational (despite the majority of landlord respondents preferring less prescriptive guidance);
• A requirement for auction packs with prescribed content to be prepared within a timing window, with local authorities having the option to outsource the auction/marketing processes to commercial agents;
• A marketing period of at least five weeks and a sealed-bid auction process with no reserve price, the landlord to choose the successful bidder;
• Payment of a tenant deposit of the greater of £1,000 and three months’ rent; 
• Landlords to bring prospective auction properties to a minimum standard at their own expense, comply with MEES, supply gas, electricity and water, with an optional service charge;
• Successful tenants to be allowed to assign (with consent) but not sublet, carry out non-structural fit-out works without consent and structural works with consent. They will also be required to repair to a standard set by a schedule of condition;
• A Permitted Development Right allowing a change from an existing use to a suitable alternative high-street use for the duration of the lease.

Perhaps optimistically, the government states in the response that it expects the first auctions to take place in September 2024 with a “trailblazer” programme for local authorities keen to lead the way. However, timescales are uncertain in view of the General Election. 

Real estate tax update

Following our March Budget 2024 round-up, and ahead of the General Election on 4 July 2024, here is a quick update on where certain real estate tax measures have landed.

• Stamp Duty Land Tax – abolition of multiple dwellings relief (MDR). It was announced in the March 2024 Budget that MDR will be abolished with effect from 1 June 2024 (with grandfathering of contracts already exchanged on or before 6 March 2024 and that complete on or after 1 June 2024).
  
  While we had long been awaiting the outcome of a consultation on reforming this relief, its complete abolition was not something that had been mooted during that consultation process. Despite various representations, the legislation to abolish MDR has been included in the Finance (No.2) Act 2024 which received Royal Assent on 24 May this year, and so this change has now come into force.
• Rate change for disposals of residential property. With effect from 6 April 2024, the higher rate of capital gains tax payable by an individual on gains realised on a disposal of residential property will decrease from 28% to 24%. The basic rate of 18% will remain unchanged. It is expected that this reduction in tax will in fact increase tax revenues, as buy-to-let landlords (for example) are likely to consider selling to take advantage of this lowered rate. The Finance (No.2) Act 2024 includes legislation to bring this rate change into effect.
• New Reserved Investor Funds (RIFs). It was confirmed in the March 2024 Budget that the government would introduce a new type of unauthorised investor fund vehicle for professional and institutional investors, predominantly designed for investment into commercial real estate.
  
  Primary legislation has been passed in the Finance (No.2) Act 2024, and secondary legislation to bring the RIF regime into effect was published in draft in April, with a consultation that ran until 14 May. However, these regulations have not yet been implemented, presumably due to the General Election, and no timeline for their implementation has been announced.
• Changes to the Construction Industry Scheme (CIS). The long-running promise of the simplification of the scope of the CIS in the context of payments from landlords to tenants has yet to bear fruit.
  
  While regulations have now come into effect amending the way in which the rules operate with effect from 6 April 2024, they contain some inconsistencies and contradictions that will need to be addressed.
  
  Uncertainty remains, and the regulations do not yet remove the headache of needing to consider the application of the CIS in the context of payments from landlords to tenants, where the landlord pays the tenant to undertake “landlord” works.

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

The Energy Performance of Buildings Directive: building a sustainable future (in the EU)

The Energy Performance of Buildings Directive came into force on 28 May 2024. While it applies to EU Member States, those with a pan-European portfolio need to be aware of this further divergence in energy performance requirements between the UK and EU Member States. Here is a summary of the ten key provisions:

1. National building renovation plans: before 2026, each Member State must draft a plan which sets out various decadal targets up to 2050, such as the annual energy renovation rate, energy consumption, and greenhouse gas emission reductions.
2. Zero-emission buildings: zero-emission buildings require a very low amount of energy and produce a very low amount of greenhouse gas emissions. From 2028, all new buildings owned by public bodies must be zero-emission buildings, and this target will extend to all new buildings from 2030.
3. Life-cycle global warming potential (GWP): this is an indicator that quantifies the GWP contributions of a building along its full life-cycle. From 2028, the GWP for all new buildings with a useful floor area over 1000 sqm must be disclosed in an energy performance certificate (EPC). From 2030, the GWP for all new buildings must be disclosed.
4. Minimum energy performance standards (MEPS): targets are set that require the gradual decrease in the average primary energy use of all buildings from 2030 to 2050.
5. Solar energy installations: Member States must deploy suitable solar energy installations. Deployment of these installations on both new and existing buildings will be phased depending on the use and size of the buildings.
6. Renovation passports: A renovation passport is a tailored roadmap for the deep renovation of a specific building that will significantly improve its energy performance. By 29 May 2026, Member States must introduce a scheme of renovation passports for voluntary use by building owners.
7. Technical building systems (TBS): By 2030, non-residential buildings must be equipped with building automation and control systems capable of monitoring indoor environmental quality and automatic lighting controls if the effective rated output for the TBS is over 70 kW, with earlier targets set for higher outputs.
8. Infrastructure for sustainable mobility: Member States must ensure compliance with various requirements relating to the number of electric vehicle charging points, car parking spaces with pre-cabling and ducting and bicycle parking spaces available, relative to the number of car parking spaces per building.
9. Energy performance certificates: By 29 May 2026 EPCs must have a (new) A class that corresponds to zero-emission buildings. They must also have an A+ class that corresponds to buildings with a maximum threshold for energy demand which is at least 20 per cent lower than the maximum threshold for zero-emission buildings, and that also make a positive net annual contribution to the energy grid from on-site renewables.
10. Inspections: Member States must establish inspections of the accessible parts of heating, ventilation and air conditioning systems to assess efficiency. An inspection report must be issued at least every five years for systems with generators of an effective rated output of over 70 kW and at least every three years for output of over 290 kW.

Member States have two years to incorporate these provisions into their national legislation, subject to some exceptions.

If you have any questions or would like further information, please see our briefing or contact Caroline May, Partner and EMEA Head of Environment, Health and Safety, or Associate Alysha Patel.

The interaction between the Landlord and Tenant Act 1954 and the Electronic Communications Code: welcome clarity for landowners

Gravesham Borough Council v. On Tower UK Limited  [2024] UKUT 151 (LC) is another illustration of the complexities of the Electronic Communications Code (the Code) and its interaction with Part 2 of the Landlord and Tenant Act 1954 (the 1954 Act).

The Upper Tribunal was asked to consider whether a telecommunications operator that unsuccessfully applied to the court under the 1954 Act for a new tenancy of a mast site, could have a second bite of the cherry by asking the Tribunal for an order imposing a new tenancy of the same site under the Code.

The operator in this case occupied a rooftop site on which it had installed telecommunications apparatus. Occupation was under a business tenancy granted in 1997 which had expired and the operator applied  for a renewal tenancy under the 1954 Act. The landowner successfully opposed renewal as it wished to undertake works to the rooftop to prevent water from leaking into the flats below. The operator, having  failed in its application under the 1954 Act, sought instead to continue its occupation of the site by applying for Code rights to do so.

The Upper Tribunal  held that the proper interpretation of the Code requires that an operator that has exhausted its rights of renewal under the 1954 Act is prevented from making a further application for rights under the Code. To find otherwise “would result in a truly absurd state of affairs in which an operator obliged first to seek renewal under the less favourable regime of the 1954 Act would know that, if they failed, they would then gain access to the more desirable reward of a renewal under Part 4 of the Code”.