I INTRODUCTION TO THE LEGAL FRAMEWORK
i Ownership of real estate
The two main types of ownership of real estate in England and Wales are freehold and leasehold. Freehold is in effect absolute ownership for an indeterminate period, whereas leasehold is a right to possession and use of land for a limited period; the lessor retains its interest and grants the leasehold interest to the lessee for the term of the lease. Ownership of land also includes ownership of any buildings or other structures attached to the land and, as a general rule, includes the subsoil beneath and the airspace above the land.
Generally speaking, freehold interests are more attractive to investors because they are not subject to termination and there are fewer restrictions on the owner, whereas a lessee is constrained by the terms of a lease. That said, long leasehold interests are often held for investment purposes. In central London in particular, properties may be owned by the Crown Estate, trusts, charities or other entities that may choose not to dispose of their freehold interests as a matter of policy, and will instead grant long leases. It is also common for leaseholds to be used when structuring joint ventures, and other arrangements and structures where owners wish to retain an element of control by imposing positive covenants.
A leasehold property held on an investment basis should be distinguished from an occupational lease, which is typically granted for between five and 20 years subject to a market rent, and therefore has a negligible capital value. An investment leasehold interest will most likely be granted for a term of between 99 and 250 years, at a premium. There are generally fewer onerous obligations on the lessee of a leasehold property held on an investment basis. The income generated from most investment properties is in the form of rent paid under occupational leases.
A relatively new form of land ownership called commonhold was introduced in England and Wales by the Commonhold and Leasehold Reform Act 2002. Commonhold comprises a freehold unit within a larger development and membership of the company that manages the common parts. As such, commonhold is suitable for residential flats as well as commercial developments such as shopping centres; however, its use has not been adopted by the property industry and it remains a rarity.
ii System of registration
Most freehold and long leasehold titles are registered at the Land Registry; however, a number of unregistered titles remain, and these will generally only become registered once there has been a dealing with the land that triggers a requirement for ‘first registration’. Trigger events include sales, mortgages and leases granted for more than seven years. Until a trigger event occurs, titles will usually remain unregistered. Registration fees are payable, calculated by reference to the type of transaction and the price paid.
Registration at the Land Registry provides a state guarantee of title. Compensation is payable if loss is suffered as a result of a mistake on the register. Therefore, there is no separate US-style title insurance regime. The registered title has a unique title number and identifies the extent of the land on a plan. The register also provides details of the property, including any rights that benefit it, and identifies the owner and any rights or matters adversely affecting the property, including financial charges. More recently, it also includes the purchase price at which the owner acquired the property and the date of purchase, if done so through an asset as opposed to a share purchase. If the property is leasehold, brief details of the lease are included. Various short leases and rights of occupation are not, however, required to be registered in their own right. These and some other non-registrable interests will bind a purchaser, and should be uncovered by the purchaser’s due diligence process. Accordingly, the information on the register cannot be treated as being totally comprehensive. Documents and other information held by the Land Registry are widely available to the public, although it may be possible to protect certain commercially confidential provisions for a limited period.
iii Choice of law
Dealings with real estate in England and Wales will be covered by the law of England and Wales. Although a contract may include an express choice of governing law, which in general the courts will uphold, English law will still apply in relation to the transactional formalities that involve English and Welsh real estate.
Real estate law in England and Wales is different from real estate law in Scotland, Northern Ireland, the Channel Islands and the Isle of Man, and thus specialist advice will be required where these jurisdictions are involved. Owing to tax planning structures, property ownership vehicles are often incorporated in the Channel Islands.
II OVERVIEW OF REAL ESTATE ACTIVITY
The Prime Minister has confirmed that the UK will leave the EU on 29 March 2019. That much at least would appear to be certain. However, just about everything else in relation to Brexit remains unclear as the negotiations with the EU and the UK’s trade partners continue. A poor result at the general election means that the Prime Minister does not have the ‘stronger mandate’ she had hoped for to drive through Brexit. Instead, a resurgent opposition and divisions within her own party have magnified the uncertainty. Although Brexit has undoubtedly had a negative impact on real estate activity, London and the regions have continued to attract overseas investment, notably from Hong Kong and the Asia-Pacific region generally. Brexit is undoubtedly an event of enormous significance, but it is important to consider it in the light of continuing global economic and political instability. In that context, whether the UK is within the EU or not seems unlikely to affect the attraction of the UK as a place to live and work and where investors wish to spend their capital. London’s position as one of the very few true global cities is assured for the foreseeable future. Although Brexit will undoubtedly cause investors and occupiers to consider alternative locations, both in Europe and globally, the UK’s dominant position in the global real estate market remains undiminished. In addition, overseas investors remain tempted by the continued weakness of the pound and the relatively robust state of the economy, as the UK remains open as a place to do business.
Take-up in the London office market has softened as businesses evaluate their post-Brexit strategies and requirements. Nonetheless, there have still been some significant deals, with Deutsche Bank committing to nearly 500,000 square feet of City space and Facebook confirming its search for up to 700,000 square feet of new space. A handful of large trophy lettings aside, the market is in the process of reinventing itself as the serviced office sector becomes part of the property establishment. A transition is occurring in the City as a more diverse occupier mix competes with the traditional financial and professional services sectors. The new wave of tech and media occupiers are looking for affordable, flexible and well-connected space with higher levels of service provision. The serviced office space boom has also extended to regional centres with a thriving tech and media sector, such as Manchester, Milton Keynes, Cambridge and Oxford.
The retail sector is in a state of flux as traditional retailers continue to go through the process of reassessing and redesigning their space requirements while online retailers have started to experiment with physical space to showcase their products and lifestyle aspirations. Shopping centres and retail parks are also evolving to offer a more general leisure experience with wider food and beverage and leisure activity offerings. The luxury central London retail market continues to benefit from the enhanced spending power of overseas visitors. Although there have been fewer retail insolvencies than last year, the secondary high street market remains oversupplied as it adjusts to the changing demands of consumers. Retailers have also been hit by the rating revaluation and inflationary pressure on wages and other costs. Demand from online retailers for increasingly large high-specification distribution centres has outstripped supply and boosted volumes in the logistics sector. The wider industrial sector remains mixed as favourable exchange rates have, to an extent, offset the uncertainty surrounding post-Brexit trade deals.
The alternative investment market continues to evolve and expand as overseas investors look beyond the traditional office, retail and industrial sectors. The private rented sector continues to be the most popular, and institutional investors have increased their market share. There has also been increased activity in the retirement living market, with the emergence of new luxury developments in central London, as well as the more traditional coastal retirement locations. The hotel sector has enjoyed high occupancy rates as overseas visitors take advantage of their enhanced spending power and the ‘staycation’ domestic market continues to grow. Investment in the sector has also been strong, with investors extending their interest beyond trophy hotels in the luxury central London market. Student accommodation, logistics, data centres and infrastructure have also continued to attract interest from overseas investors.
The slowdown in prime central London residential property has spread to the wider London market as inflated prices, oversupply, Brexit and punitive rates of Stamp Duty Land Tax (SDLT) have all contributed to a shortage of overseas and domestic buyers, although the recently announced SDLT relief for first-time buyers should boost the lower end of the market. Although interest rates remain extremely low, the recent increase to 0.5 per cent will not have helped confidence in a weak market. While London has struggled, the wider UK market has fared better and rising prices can be contrasted with stagnant or falling prices in the capital. Manchester has been a particular hot spot that has benefited from the relocation of both public and private sector jobs from London, the BBC’s move to Media City in Salford being a prime example.
On the financing side, there has been a decline in loan origination for UK property, with banks in particular adopting a noticeably more cautious approach. However, alternative lenders have continued to increase their lending activity and market share. Significant new entrants in the non-bank lending market have included fund managers and insurance companies looking for relatively safe long-term returns.
III FOREIGN INVESTMENT
Overseas investors are able to own, sell and lease real estate in England and Wales without any legal restrictions. A legal opinion may be required to confirm that an overseas investor has legal power to enter into a transaction involving property in England and Wales, to deal with the property and to execute the relevant documents.
IV STRUCTURING THE INVESTMENT
A number of alternative structures are available for direct or indirect investment in real estate in England and Wales. The decision how best to structure an investment is likely to be dictated by tax considerations, and it is important to ensure that appropriate tax advice is sought, taking into account both UK tax legislation and that of the investor’s own jurisdiction. There are, however, a number of advantages and disadvantages to each structure, which may also prove critical depending on the investor’s particular objectives.
i Corporate entity
A company can hold assets in its own name and create floating charges. There is potential for flexibility in terms of share structure, and there can be the advantage of limited liability. More generally, corporate entities are widely recognised, and can promote a strong and legitimate identity. Nonetheless, there is a lack of confidentiality in comparison with other investment structures and the added administrative burden of complying with the relevant regulatory framework. There is also a lack of tax transparency, and it may be expedient to base the company offshore.
ii General partnership
Whereas property co-ownership is not in itself sufficient, the active, joint management of property may constitute a partnership; it is a matter of substance rather than form. The main advantage is tax transparency, while the main disadvantage is the unlimited liability of the partners.
iii Limited partnership
In a limited partnership, investors will be limited partners who are only liable to the extent of their investment. This limited liability is particularly advantageous when coupled with the tax transparency that, to an extent, is offered by a limited partnership. However, a limited partnership must comply with the Limited Partnerships Act 1907, and a limited partner should not become involved in the management of the partnership. This may prove to be unduly restrictive for investors looking to actively manage their real estate investments. The limited partnership regime has been modernised by the introduction of a new private fund limited partnership to help meet the needs of fund managers.
iv Limited liability partnership (LLP)
LLPs are governed by the Limited Liability Partnerships Act 2000 and combine limited liability for members with the tax transparency of a partnership. LLPs are not subject to the same restrictions as limited partnerships, and partners are able to actively manage the business of the LLP. Furthermore, an LLP is a body corporate (having a legal entity separate from that of its members), so there are no issues as to the legitimacy of floating charges. If the LLP is a collective investment scheme, it must be operated by an authorised person in accordance with the Financial Services and Markets Act 2000 (FSMA).
v Property unit trust
A property unit trust is an open-ended fund that allows pooled investment and is tax-efficient. A unit trust is governed by a trust deed, and as such may be an unfamiliar structure to certain overseas investors. One drawback may be the need for authorisation under FSMA. Offshore unit trusts are popular, and can provide further tax advantages as a result of their offshore status; Jersey property unit trusts in particular have been used extensively in recent years. However, there may still be local regulatory supervision, and the fact that the trust must be managed outside the UK may be undesirable for certain investors and difficult to achieve.
vi Property authorised investment fund (PAIF)
PAIFs are open-ended investment schemes that invest in property and are authorised under FSMA. The PAIF regime allows gross dividends to be paid, and was introduced to make property attractive to tax-exempt investors. A number of conditions apply for entry into the PAIF regime, including the need to carry on a property investment business and the genuine diversity of ownership condition. PAIFs benefit from SDLT seeding relief.
vii Offshore vehicle
Offshore vehicles can take advantage of lighter regulatory and tax regimes. As well as Jersey, popular offshore locations include Luxembourg, Guernsey, the Isle of Man, the British Virgin Islands and the Cayman Islands.
viii Listed property company
Investing in a listed property company offers a popular means of investing in UK real estate. Listed property companies can benefit from a high profile and augmented credibility as well as greater liquidity. The drawbacks include stringent regulatory and filing obligations, and a general lack of confidentiality. In addition, listing may be costly and places extra pressure on the company management to perform. The investor also has limited control over the underlying real estate assets.
ix Real estate investment trust (REIT)
The REIT is a relatively new form of property-specific investment vehicle in the UK based on an investment structure first developed in the United States. REITs are tax-efficient, as they are exempt from tax on income and capital gains; distributions of profits are treated as property income in the hands of the shareholders. To gain REIT status, a company must comply with a number of conditions, including a requirement to be listed on the official list of the London Stock Exchange or traded on a recognised stock exchange, and proof of property rental business characteristics.
x Property joint venture
Joint ventures allow parties to share risk, and therefore provide a particularly attractive investment structure while the availability of debt remains constricted and investors are keen to mitigate risk exposure. A property joint venture can be structured in whatever form the parties choose, and in many cases may involve more than two parties. Of course, as well as sharing risk, parties share gains and management, so joint venture provisions need to be considered carefully.
V REAL ESTATE OWNERSHIP
The planning administration in England and Wales primarily consists of local planning authorities (LPAs) and the Secretary of State for Communities and Local Government. The Mayor of London is also able to exercise specific planning powers at a London-wide level, including the power to decide strategically important planning applications himself. Planning administration is governed by various statutes, the most important of which is the Town and Country Planning Act 1990. In general, planning permission is required for development, including material changes of use, although certain restricted types of development are automatically granted planning permission under the Town and Country Planning (General Permitted Development) Order 2015. There are particular planning requirements for conservation areas and listed buildings, as determined by the Planning (Listed Buildings and Conservation Areas) Act 1990. Third parties have a right to make representations about any planning application, which in turn must be considered by the relevant LPA. Applicants are able to appeal LPA planning decisions to the Secretary of State, in which case the Secretary of State will decide the application afresh and on its merits. Third parties have no such right of appeal but they (and applicants) can appeal decisions of the Secretary of State on the grounds of legal error. LPAs have enforcement powers to deal with development which is carried out without or in breach of planning permission. The Planning Act 2008 provides a streamlined decision-making process for nationally significant infrastructure projects, which are projects within the five general fields of energy, transport, water, wastewater and waste, as well as certain commercial and residential projects. A development consent order granted under the Planning Act 2008 provides a single consent for such projects, thereby removing the need for developers to seek planning permission and other related consents separately.
The environmental issue of particular significance to investors is the contaminated land regime, which is set out in Part IIA of the Environmental Protection Act 1990, as amended by the Environment Act 1995. Contaminated land is land that is causing, or may cause, significant harm to the environment or human health, and the regime also applies to water pollution. There is an obligation on local authorities to inspect their land to identify areas of contamination. Where land is deemed to be contaminated and is not being remediated voluntarily, the local authority or the Environment Agency (in England) or Natural Resources Wales (in Wales) is obliged to serve a remediation notice on the relevant persons requiring the clean-up, investigation and monitoring of the contamination. It is a criminal offence to fail to comply with a remediation notice. In general, those who cause or knowingly permit land to become contaminated are responsible in the first instance; however, if no such person can be found, the current owners and occupiers of the site may be liable for remediation costs. While the regulators in the United Kingdom do not take enforcement action as readily as in other jurisdictions, remediation costs can be substantial, and it is often necessary to obtain specialist advice when dealing with land that is or may be contaminated.
The starting point is that a supply of land will be exempt from VAT. However, the seller or lessor can exercise the option to tax, which will make any sale or letting of the property a supply subject to VAT. The standard rate of VAT is currently 20 per cent. The lessor or seller can then recover the VAT charged on supplies of goods and services made to him or her in connection with the property concerned. In addition, supplies of land are generally subject to VAT if the sale involves a new commercial building completed within the past three years, or an incomplete industrial or commercial building.
SDLT is a transactional tax payable by the buyer on the acquisition of a chargeable interest, and applies to any chargeable consideration payable by the buyer on a relevant transaction. The rate depends on the value of the transaction, and the highest rate for non-residential transactions is currently 5 per cent in respect of that part of consideration which exceeds £250,000. Residential properties are subject to rates ranging from 2 per cent up to 12 per cent for higher-value properties where the consideration exceeds £1.5 million, and there is an additional 3 per cent charge on second homes and most buy-to-let properties. The Autumn Budget introduced a new relief for first-time buyers to help boost home ownership. Where the buyer of a residential property costing more than £500,000 is a corporate vehicle, the rate of SDLT is 15 per cent and an additional annual charge may also apply. A new land transaction tax will replace SDLT on property transactions in Wales with effect from April 2018. SDLT is also payable by the lessee on the rental element of a lease on grant, and is charged at 1 per cent of the net present value of the rent payable for the term of the lease. Limited types of transactions are normally exempt from SDLT, including mortgages and personal licences to use or occupy land. There are also a number of reliefs that may apply, including group relief, sale and leaseback relief, acquisition relief, reconstruction relief and charity relief. It is important to consider how best to structure a transaction for SDLT purposes, although the introduction of various anti-avoidance provisions has made it increasingly difficult to implement tax-saving schemes.
The occupier of a business property is responsible for the payment of business rates, which fund local government expenditure and are calculated by reference to the rateable value of the property. Rateable values are usually assessed every five years, and a revaluation took place in 2017 based on 2015 rateable values. This has resulted in a significant uplift, particularly for those businesses in property hot spots such as central London. Following a significant reduction in the relief available, business rates are generally payable on empty properties, and this has become a significant issue for owners in sectors with high vacancy rates.
iv Finance and security
Lenders will generally require security over real estate, the best form of which is a charge by way of legal mortgage. It is necessary to register a mortgage over land at the Land Registry and, if the company giving the security is registered at Companies House, the security must also be registered at Companies House within 21 days of creation. The mortgage will typically impose restrictions on the ability of the borrower to deal with the property and obligations on the borrower to preserve the value of the security. Security is also commonly taken over the rental income derived from occupational leases.
VI LEASES OF BUSINESS PREMISES
In general, the lessor and lessee are free to agree the terms of a commercial lease. The law does not prescribe a particular form or contents of a lease and, subject to the lessee’s security of tenure referred to below, there are relatively few statutory provisions affecting the lessor and lessee relationship under a commercial lease. The Code for Leasing of Business Premises seeks to encourage fairer and more flexible terms for lessees but, despite industry endorsement, remains voluntary. Traditionally, the industry has not enjoyed a reputation for being customer-driven, and leases have tended to be lengthy, complex and onerous for lessees. That is, however, changing as owners seek to meet the needs of their occupiers. The position for commercial leases should be contrasted with that for residential leases, where statute plays a significant role.
Leases can be granted for a wide range of terms. Leasehold interests held for investment purposes are normally held on long leases for a term of between 99 and 250 years. Historically, occupational leases were granted for a term of 20 or 25 years; however, shorter terms of 15 years, 10 years or less have become more common recently. A lessee of an occupational lease may also require a right to determine the lease before the end of the term. For example, the lessee of a 10-year lease may have a contractual right to determine or break the lease at the end of the fifth year of the term.
ii Rent increases
The property industry has traditionally required five-yearly-upwards-only rent reviews to the open market rental value of the property. This guarantees a minimum return of no less than the original rent for the remainder of the term of the lease, even if market rents have fallen. Although there has been some pressure on the property industry to offer leases on more flexible terms, it is still very rare to see rent review provisions that allow for the rent to go up or down in line with the market. An alternative form of rent review is indexation, for example in line with the retail price index or the consumer price index, but this, too, is often on an upwards-only basis. Fixed uplifts in the rent are another possibility, and changes to the rent can also be restricted by agreed caps and collars. An element of the rent, particularly in large retail developments, may also be calculated by reference to turnover. VAT may be charged on the rent if the lessor has exercised the option to tax.
iii Lessee’s right to sell and change of control
There are likely to be restrictions on the lessee’s ability to sell, charge, underlet or share occupation of the property without the lessor’s consent. In a typical occupational lease, consent must not be unreasonably withheld. In considering applications for consent, the lessor will be keen to ensure that a lessee of good covenant strength is responsible for paying the rent. Provisions restricting a change of control of the lessee itself are, however, rare.
iv Lessee liability and security for payment of rent and performance of covenants
The Landlord and Tenant (Covenants) Act 1995 (LT(C)A) introduced a regime whereby lessees of new leases (granted on or after 1 January 1996) are released from liability on an assignment of the lease. The lessee’s guarantor is also released at this point. This is in contrast to the previous regime, whereby the lessee and its guarantor remained liable for the duration of the term of the lease under the doctrine of privity of contract, even after an assignment of the lease. The doctrine continues to apply to old leases (granted before 1 January 1996). The LT(C)A also introduced authorised guarantee agreements (AGAs), which provide the lessor with a guarantee from the outgoing lessee for the incoming assignee’s obligations under a new lease. The AGA is for the duration of the assignee’s term only, so that when the lease is assigned again, the original lessee is released from all liability. The decision in K/S Victoria Street v. House of Fraser (Stores Management) Ltd and others2 confirmed that, although an existing lessee’s guarantor cannot guarantee the liability of an incoming assignee, it can guarantee the outgoing lessee’s obligations under an AGA given by that lessee in respect of the assignee. In EMI Group Limited v. O&H Q1 Limited,3 the court confirmed that a purported assignment of a lease to the lessee’s guarantor was void and of no effect. A lessor will also consider other security, including a rent deposit or bank guarantee.
v Repair and insurance
A lessee of business premises will usually be expected to be responsible for all liabilities in respect of the property, including maintenance and repair costs. Where a property is multi-let, those costs are recovered through a service charge. The lessor generally insures the property, but recovers the cost of the premiums from the lessee. As a result, leases of business premises are often known as full repairing and insuring (FRI) leases. An FRI lease is important for the UK real estate investment market, as it allows the lessor to receive a clear income stream without incurring any expense itself in relation to the property.
vi Collateral warranties
For investors in a property that has been recently constructed, collateral warranties provide investors, funders and other third parties with a contractual link that can be used to enforce the performance of the duties of the professional and construction teams. Third parties can also be given equivalent rights under the Contracts (Rights of Third Parties) Act 1999.
If the lessee fails to pay the rent or is in breach of any of its other obligations, generally the lessor is entitled to bring the lease to an end by forfeiture; however, the lessee is given the opportunity to remedy the breach and can apply to the court for relief. The lessor’s right to forfeit also normally applies if the lessee of an occupational lease becomes insolvent.
viii Security of tenure
The Landlord and Tenant Act 1954 (LTA) provides security of tenure to lessees of commercial properties in England and Wales. If the property is occupied for business purposes, the lessee has the right to remain in occupation at the end of the term of the lease and is entitled to apply for the grant of a new lease on substantially the same terms; however, the lessor may be able to resist the grant of a new lease based on one of the grounds prescribed by the LTA. The most common ground relied on in practice is that the lessor plans to redevelop the property. This ground is not always easy to establish and, if the lessor is successful, the lessee may be entitled to compensation. Security of tenure can be a valuable statutory right for lessees, and can have a significant impact on a lessor’s plans for dealing with its property, including future development plans. It is possible for the lessor and lessee to agree to contract out of the security of tenure provisions of the LTA. To contract out, a notice must be served on the lessee explaining that security of tenure is to be excluded, and the lessee must make a declaration acknowledging this before the lease can be completed. Contracting out tends to be more common in relation to short-term leases. A recent reform ensures that lessees operating a business from home do not acquire security of tenure.
ix Mixed-use developments
Mixed-use developments are generally permitted in England and Wales, and have become a facet of urban renewal. There are specific issues relating to mixed-use developments, including increased levels of statutory protection for residential lessees. Residential lessees’ rights include collective enfranchisement and individual lease extension rights, as well as the right of first refusal and protection in relation to service charges and the management of the property.
VII DEVELOPMENTS IN PRACTICE
i Vote to leave the European Union (Brexit)
Once again, it is hard to look beyond Brexit, and the ongoing negotiations with the EU, as the dominant topic shaping the political, economic and legal landscape. However, from a real estate perspective, the purely legal implications are much less significant than the effect on the real estate investment market. Land law in England and Wales is almost entirely unaffected by membership of the EU and Brexit will not have any direct legal implications for the way in which overseas investors own and deal with UK property. This can be contrasted with environmental law and policy where EU legislation has a significant role, including the environmental aspects of the planning process. Brexit will also have an impact on State aid and procurement, where public authorities are involved in real estate projects.
The government has confirmed that the UK will leave the EU at 23:00 GMT on Friday 29 March 2019. Once implemented, the European Union (Withdrawal) Bill (formerly known as the Great Repeal Bill) will bring the supremacy of EU law to an end by repealing the European Communities Act 1972. A Trade Bill will deal with the UK’s trade agreements and policies and a Customs Bill will provide for a new standalone customs regime. The process of adapting existing EU law will undoubtedly continue for a number of years as the UK picks and chooses the EU-based law it wishes to go forward with.
ii Landlord’s redevelopment works
The most common ground of opposition to a lessee obtaining a renewal lease under the LTA is the lessor’s intention to redevelop. The lessor can oppose statutory renewal if it intends to carry out redevelopment works on the termination of the lease and requires possession of the property to do so. In S Franses Ltd v. The Cavendish Hotel (London) Ltd,4 the High Court confirmed that a lessor satisfied the redevelopment ground where its intended scheme of works was designed purely to achieve vacant possession under the LTA. The key question before the Court was whether the lessor intended to carry out the works, and not why the lessor intended to do so.
Accordingly, the lessor’s underlying motive is irrelevant provided that it can establish the necessary intention to implement the relevant scheme of works. In this case, the lessee occupied part of a building operated by the lessor as a London hotel. The lessor wanted to obtain vacant possession and devised a scheme of works designed solely for the purpose of preventing the lessee from exercising its statutory right to remain in occupation.
iii Refurbishment and rateable value
The Supreme Court has confirmed that a property undergoing redevelopment that is not capable of beneficial occupation only has a nominal rateable value. In Newbigin v. SJ & J Monk,5 the ratepayer was carrying out substantial redevelopment works to its offices and sought to alter the rating list to classify the property as a building undergoing reconstruction with a nominal rateable value of £1. The Valuation Office Agency argued that the statutory presumption that the property was in a reasonable state of repair should apply, even where it was not capable of beneficial occupation. The Supreme Court adopted the principle of reality and held that the property was not capable of beneficial occupation and only had a nominal rateable value.
The decision is good news for property owners and occupiers carrying out redevelopment works, particularly in the light of last year’s rating revaluation that has resulted in a significant uplift in business rates for many business occupiers.
iv Energy efficiency
The government has published guidance on the minimum energy efficiency standards (MEES) that are due to come into force in April 2018. The guidance gives an indication of how MEES will be applied, what energy efficiency works are required to be carried out by a lessor and the application of the exemptions. With effect from April 2018, a lessor will not be able to let a property unless it meets the required energy efficiency rating. The rating for a property is set out in its energy performance certificate. From April 2023, MEES will be extended to cover all existing lettings and not just new lettings. A limited number of exemptions may apply, for example, where all energy improvement works have been carried out and the property still does not meet the required rating, where the cost of the works exceeds the expected savings on energy bills over a seven-year period, where any required third-party consents for the works cannot be obtained or where the improvement works would reduce the market value of the property. In addition, MEES do not apply to short lettings (not exceeding six months) or long lettings (99 years or more).
The prohibition on the letting of substandard property is something that all lessors need to be aware of, and energy efficiency improvement works may need to be carried out if a new letting is to be granted or, with effect from 2023, if the property is to continue to be let. If a lessor lets a property in breach of MEES, there is a risk of enforcement action being taken.
v Penalties and leases
Under English and Welsh law, a contractual provision that imposes an onerous obligation on a defaulting party that is out of proportion to the value of the legitimate interests of the other party in ensuring compliance with the contract is known as a penalty and is unenforceable. The Supreme Court recently restated the law in relation to penalties in Cavendish Square Holding BV v. Talal El Makdessi,6 and the decision was applied in Vivienne Westwood Limited v. Conduit Street Development Limited 7 in relation to a rent concession arrangement. The parties had agreed that the lessee was to pay a discounted rent. However, the concession would cease to apply if the lessee was in breach of any term of the lease and the full rent would become payable with retrospective effect. The lessee was late with a rent payment and the lessor sought to terminate the rent concession. This would have resulted in a significant uplift in the rent for a relatively minor breach of the lease. The Court decided that the condition to the rent concession was unduly harsh and was unenforceable as a penalty. Payment of the full rent by the lessee was out of all proportion to the detriment suffered by the lessor as a result of the lessee’s breach.
vi Real estate practice
The third edition of the Standard Commercial Property Conditions (SCPCs) has been published. The SCPCs form the basis of most contracts for the sale of commercial property and aim to strike a reasonable balance between the interests of the seller and the buyer. The new edition offers a general update to reflect the changes in law and practice since the second edition, published in 2004. Typically, the SCPCs are amended by bespoke drafting negotiated between the parties to deal with the key commercial and legal issues on each particular transaction. Most contracts for the sale of residential property incorporate the Standard Conditions of Sale (fifth edition).
VIII OUTLOOK AND CONCLUSIONS
Brexit will of course remain the dominant political, economic and legal issue for the foreseeable future. The government has triggered Article 50 of the Lisbon Treaty and has confirmed its intention to leave the EU on 29 March 2019. Despite the continued uncertainty and political fallout, the outlook for UK real estate and the wider economy is more positive than many had feared. This cautious optimism depends, of course, on the progress made with the negotiations and the reaction to any agreement reached. The continued availability of a skilled workforce is of fundamental importance to the UK economy and will be a key factor for businesses considering whether to maintain a substantive presence in the UK. In addition, the construction industry has been reliant on labour from Europe for a number of years. In short, any tightening of restrictions on immigration will impact on the UK’s ability both to construct new buildings and also to attract businesses to occupy them. Competition from other countries should not be underestimated and Germany is likely to be the biggest European beneficiary of any movement of the financial services sector from London. In addition to German cities such as Berlin and Frankfurt, Amsterdam, Paris and Dublin are also seen as alternative destinations in Europe. There is also strong competition from further afield and London’s true rivals remain global cities such as Hong Kong, Singapore and New York, all eager to exploit any weakness exposed by Brexit. However, to put this in context, there is at this stage no sense of a mass abandonment and even those businesses implementing a relocation strategy are likely to retain more than a token UK presence for the foreseeable future. In a global market, it is important to retain a sense of perspective as to just how significant Brexit really is in the context of other world events.
On the legal side, practitioners will be anticipating the Court of Appeal’s take on responsibility for liability suffered as a result of fraudulent property transaction. In Dreamvar (UK) Ltd v. Mischon de Reya LLP,8 the buyer’s firm of solicitors was held to be liable for losses suffered by its client as a result of a purported seller’s identity fraud. The firm’s appeal will be heard in 2018. The updating of the Land Registration Act 2002 and other property law reform projects seem likely to be sidelined as parliament focuses on Brexit-related legislation.
The government must work hard to ensure that the UK remains competitive and investment in infrastructure is essential. Although a new runway at Heathrow was confirmed in 2016 as the preferred option for expanding the UK’s aviation capacity, a final decision remains to be taken and a further consultation has been launched. As Crossrail (now known as the Elizabeth line) approaches completion, government backing for Crossrail 2 and the Northern Powerhouse Rail network is still awaited. The government also needs to address the UK’s chronic housing shortage. The Chancellor has announced plans in the Budget to build 300,000 new UK homes a year and the Mayor of London has suggested that London alone needs to build 66,000 new homes every year to meet demand.
Although it is impossible to predict what the next 12 months have in store, the outlook is more positive than the prevailing mood following the outcome of the 2016 referendum. Overseas investors have continued to believe in the strength and resilience of London and the UK, suggesting that they have been able to look beyond Brexit when evaluating their investment strategies. Although risks remain, there will undoubtedly be opportunities as the picture of a post-Brexit world develops.