Real Estate Focus: February 2020

Introduction

In this edition we take a look at a new lease code, property tax changes, a case on private nuisance and the mandatory requirement for biodiversity net gain in the Environment Bill.

New RICS Code for leasing business premises

The Royal Institution of Chartered Surveyors (RICS) has just published a new Code for Leasing Business Premises in England and Wales. The aims of the new Code are to improve the quality and fairness of negotiations on lease terms and to promote the use of comprehensive heads of terms.

There is already a Code for Leasing Business Premises, the current edition of which was published in 2007. However there have been concerns that the existing Code, which is voluntary, has not been widely adopted. The most significant change introduced by the new Code is its status – it is an RICS Professional Statement and elements of it are mandatory for RICS members acting as agents or advisers on the grant of a lease.

In addition to the mandatory provisions, the Code contains “negotiation best practice” on the key elements of a lease, which RICS members must observe – departures are only permitted in exceptional circumstances that they may be required to justify. A failure to do so may have disciplinary consequences and may also result in a finding of negligence in the event of legal proceedings.

The Code comprises four elements:

• The Code itself
• Template heads of terms
• A checklist for use when a landlord or agent prefers to use their own form of heads of terms
• A supplemental guide – effectively, a useful summary of the main issues that the parties need to consider when agreeing a lease

In terms of the mandatory requirements, the most significant is that the agreed terms must be recorded in written heads of terms covering, as a minimum, 16 specified key areas. As to the recommended good practice, there is no major overhaul of the equivalent provisions in the existing Code but amendments have been made, including changes to reflect recent case law, new legislation and market practice.

The new Code is effective from September 1, 2020. It will be interesting to monitor whether landlords and tenants will generally issue Code-compliant instructions to their RICS-regulated advisers and, if they don’t, how the resulting tensions will be resolved in practice.

Can peeking be a private nuisance?

If visitors on the Tate Modern public viewing platform can see straight into the interior of neighbouring flats with floor to ceiling windows – and take full advantage of the fact – does this amount to an actionable private nuisance?

This was the question for the Court of Appeal in Fearn and others v Board of the Trustees of the Tate Gallery [2020] EWCA Civ 104.

Four long leasehold owners in a new development adjacent to Tate Modern whose flats are directly opposite the Tate Modern’s viewing gallery sought an injunction requiring the Tate to prevent members of the public from observing their flats, alleging that this unreasonably interfered with their enjoyment of their flats and amounted to a nuisance.

The Court of Appeal held that a private nuisance is a violation of real property rights and had no hesitation in concluding that mere overlooking is not capable of giving rise to a cause of action in private nuisance. The real issue in cases of overlooking was invasion of privacy. It would be preferable to leave it to Parliament to formulate any laws that are perceived to be necessary to deal with overlooking, rather than to extend the law of private nuisance.

Property tax update

Non-resident corporate landlords: Move to corporation tax on property rental income

With effect from April 6, 2020, non-UK resident corporate landlords (NRLs) will become subject to UK corporation tax, rather than income tax, on their property rental income. This is the second key legislative change to the taxation of UK real estate for NRLs to come into effect recently and follows the introduction last year of corporation tax on gains on UK property-related investment assets held by NRLs (NRCGT).

These changes together have a significant impact on both new and existing UK property holding structures. While the implementation of NRCGT generally crystallises a tax charge at the point of disposal (which could be some time away), the NRL transition to corporation tax will have an immediate impact on post-tax net rental returns.

Key aspects of the corporation tax regime and the transition for NRLs include that:

• The provisions of the loan relationship and derivative contracts legislation will apply to a NRL’s loans and derivative contracts, and thereby the corporate interest restriction rules, the hybrid mismatch rules and the derivative contract disregard regulations will all become relevant for NRLs.
• Carried forward income tax losses as at April 5, 2019 will transfer into the corporation tax regime and will be available to offset corporation tax profits going forward
• The UK corporation tax loss restriction rules will apply to any corporation tax losses arising on or after April 6, 2020.
• Existing capital allowances pools will still be available and will transfer into the UK corporation tax regime on a tax neutral basis at their tax written down value as at April 5, 2020.
• Deductions under the Non-Resident Landlord Scheme will still apply to payments made to NRLs who have not been granted approval for gross payment.

HM Revenue & Customs (HMRC) published guidance on this transition to UK corporation tax in January 2020. Amendments to the operation of the Non-Resident Landlord Scheme allow an irrevocable election for finance costs to be limited to a fixed allowance of 30 per cent of the UK rental income (net of expenses other than finance costs) and deducted as an expense when calculating the amount to be withheld.

Updated SDLT guidance: Application of section 75A

HMRC has updated its guidance on section 75A Finance Act 2003. This section broadly applies where: A person (V) disposes of an interest in land, another person (P) acquires it, there are a number of transactions involved in connection with the disposal and acquisition and the total SDLT payable as a result of the transaction is less than would have been payable on a notional transaction from V to P.

While section 75A has been understood to be an anti-avoidance provision, the update to the guidance removes statements that the anti-avoidance provision will not apply where a transaction has been taxed appropriately. Several existing pages of guidance have been removed, including pages that included lists of transactions where HMRC considered that section 75A was, or was not, likely to apply. HMRC has also set out its revised view on the meaning of “involved in connection with”, for the purposes of determining whether a transaction or step is a “scheme transaction”.

While it is helpful to see the guidance updated following a period of uncertainty, the question of the application of section 75A to transactions that include multiple steps remains unclear. In particular, the lack of examples of specific situations or a “white list” of transactions where HMRC considers that section 75A should not apply may mean that taxpayers and their advisers will continue to be uncertain about the application of the section to particular transactions. We understand that HMRC will continue to give non-statutory business clearances in relation to section 75A, where appropriate.

For further information please contact Julia Lloyd, Counsel, or another member of our Real Estate Tax Team.

Environment Bill 2020: What does the mandatory requirement for biodiversity net gain mean for new developments in England?

The Environment Bill returned to Parliament on January 30, 2020 and makes biodiversity net gain (BNG) mandatory for all new developments in England. This is arguably a step change in focus and priority for the natural environment, going beyond the familiar realm of protection and now requiring positive gains.

Law and policy already protects existing habitats, but in relation to improving or enhancing habitats; there is currently no legal requirement, only encouragement, in the National Planning Policy Framework to secure BNG.

How will the BNG requirement work in practice?

Before submitting a planning application, developers will need to undertake habitat surveys and assess a site’s existing biodiversity. A biodiversity gain plan will need to be submitted with the application demonstrating a 10 per cent increase in biodiversity after development, compared to the existing level of biodiversity predevelopment. Defra’s biodiversity metric is one tool that can be used for this purpose. For some development proposals, particularly environmental impact assessment (EIA) developments, this will not involve much extra work. For other developments it will be an extra validation list requirement to be prepared and submitted.

On urban brownfield sites, achieving a 10 per cent BNG might be relatively easily achieved, albeit space will always be at a premium in balancing competing requirements. BNG can be obtained by creating new habitats or enhancing existing ones, and can be located on or off site, or a combination of both. Developers will be familiar, for example, with BNG measures such as providing green roofs, green walls, street trees or sustainable drainage systems, ‘swift bricks’ and bat boxes, artificial badger sets, hibernacula, and hedgehog highways in developments. Off-site measures can sometimes be secured from ‘habitat banks’ which comprise areas of enhanced or created habitats which generate biodiversity unit ‘credits’. A public register of compensatory habitat sites will be established. On sites that already include important habitats, it may well be more difficult to create 10 per cent BNG. Working with the Local Planning Authority (LPA) and local wildlife charities at pre-application stage may well be necessary to find a workable solution.

Developers will be concerned that achieving 10 per cent BNG could affect development viability already under pressure from affordable housing and other requirements. In response, the government has said it will "do more work to address viability concerns" in relation to BNG and is considering several "narrow exemptions" to the policy, including for certain brownfield development.

Will LPAs have the expertise to assess biodiversity gain plans? In the short term, probably not, and the government has accepted that there will be “challenges in the short term” but have also said that LPAs and the planning inspectorate will have access to the right training, guidance, ecological expertise and systems required to deliver BNG.

BNG will be secured via planning conditions and obligations.

Where can I learn more about BNG?

The National Planning Practice Guidance “Net Gain” paragraphs were updated in July 2019 and include guidance relating to BNG. Reference is made to how a baseline is established, how BNG is subsequently measured, how it fits with the mitigation hierarchy, where BNG can be located and how it can be secured. There are also links within it to Defra guidance on BNG.

For further information please contact Sarah Fitzpatrick, Head of Planning.