Real Estate 2024 Comparisons

UK real estate law is derived from common law and statutory legislation. In relation to the latter, the primary legislation comprises:

• the Law of Property Act 1925, which reduced the number of legal estates to two and streamlined the transfer of interests in land for purchasers;
• the Land Charges Act 1972, which updated the process for registering charges against unregistered land; and
• the Land Registration Act 2002, which updated the law of land registration and stipulated the registration of shorter leases.

Reference will be made throughout this guide regarding the extent to which real estate law has been reformed since the primary legislation and new statutory legislation or regulations were introduced.

With UK interest rates at a 15-year high and inflation out of control, 2023 was a challenging time for the real estate sector, as the cost of borrowing increased and property values fell. This, coupled with a sharp decline in consumer spending due to the cost-of-living crisis, resulted in a very subdued UK economy.

With any distressed property market, there are always investors with capital waiting in the wings to take advantage of new opportunities. It is predicted that the real estate sector will see a wave of increased activity in 2024 as inflationary pressures ease, and interest rates are forecasted to not only stabilise at a reduced rate but possibly decrease further.

2024 will see unprecedented change, whether in the form of domestic legislative reforms, global politics, global stability or a change of UK government. These vast changes will directly impact on the UK economy, consumer spending and investor appetite for risk. As regards which real estate sectors will see the most activity, these will likely include the industrial and residential sectors, as there is potential for rental growth, while the office and retail sectors continue to decline. CBRE Group reported that office investment in 2023 was at its lowest level in 20 years, with only GBP6.5 billion invested in the first three quarters of 2023. With the emphasis on environmentally sustainable buildings, office space in good locations with outdoor space is likely to see rental growth due to its scarcity. It is also predicted that technology companies will seek new office space, as (for example) artificial intelligence is likely to see its largest growth in 2024 due to increased private equity investment. 

The Building Safety Act 2022

This Act is now in force, imposing far-reaching legal responsibilities on those who:

• commission building work;
• are involved in design and construction; and
• manage structural/fire safety in relation to high-risk buildings.

The reforms came into force in stages, including in April 2023 and October 2023. Current high-risk buildings capable of occupation had to be registered with the Building Safety Regulator (BSR) by 30 September 2023. New high-risk buildings completed after 1 October 2023 must be declared as safe by the BSR prior to occupation. 

The real issue continues to be costs or remedial works. The government issued a second consultation in January 2024 on a new building safety levy to raise revenue for dealing with defective cladding, which closed on 7 February 2024. There is no indication of when the levy will be launched, but the expectation is to raise GBP3 billion over ten years.

The Economic Crime (Transparency and Enforcement) Act 2022

This Act has been rushed through parliament due to the Ukraine conflict. The objective is transparency with regards to ownership of land in the UK by overseas entities (a legal entity governed by the law of a country outside the UK). The overseas entity must register its beneficial owner details on the Register of Overseas Entities to enable it to register any proprietorship at HM Land Registry. Where an overseas entity owned land in the UK when the Act came into force, it had six months to register its beneficial owner details in the Register of Overseas Entities. The deadline was 31 January 2023. After this date, any application to register a disposal at the Land Registry is caught by a restriction preventing registration of any disposal in the Register of Overseas Entities, unless the overseas entity is registered.

There has since been a further round of legislation, namely the Economic Crime and Corporate Transparency Act, which became law on 26 October 2023. The Act makes two principal changes to the Register of Overseas Entities, which will come into effect in 2024 – namely, it expands the scope of registrable beneficial interest for the purpose of the ROE and expands the information that must be delivered to Companies House. The changes are aimed at addressing the criticism that the true beneficial owners of a foreign entity were not being identified.

The Act will also deliver significant reforms to Companies House to improve transparency over UK companies and other legal entities to enhance national security.

The Act will reform the role of Companies House and improve transparency for UK companies and other legal entities, in order to enhance national security and to combat economic crime, by ensuring the UK operates a more reliable companies’ register. 

The Act has brought in new powers for Companies House to improve its role in combating financial crime. New provisions in March 2024 include:

• identity verification checks for directors and people of significant control, and challenging of filings where the information is suspicious, false or misleading;
• a new requirement to obtain a registered email address and seek confirmation that the company has been formed for a lawful purpose; and
• Companies House having wider information-sharing powers to volunteer data with law enforcement agencies, regulators and public authorities, as well as wider powers to remove information from its register.

The Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024 were placed before Parliament in February 2024. These are expected to be passed in May 2024 and will permit the Registrar of Companies to impose a penalty on a person if it is satisfied beyond reasonable doubt that they have committed an offence pursuant to the Companies Act 2006.

Real Estate Investment Trusts

The real estate investment trust (REIT) regime has continued to evolve during 2023–2024 (see 5.3 REITs).

Minimum Energy Efficiency Standards

The Minimum Energy Efficiency Standards (MEES) have applied to all new leases and renewals since April 2018. However, from April 2023, a landlord will be considered in breach if they let commercial property that has an EPC rating below E. It was expected that the minimum standard would be raised to a rating of B by 2030, but this may now occur at a slower rate than announced as consultations continue, with further legislation in 2024 to implement government policy. 

The Charities Act 2022

Some of the provisions in this Act relating to the disposal of land by charities came into force in June 2023, and on 7 March 2024 the final phase of provisions came into force. This will mean that requirements under Section 23 of the 2022 Act (amending Section 122 of the Charities Act 2011 relating to the statements to be included within a disposition instrument) must be implemented. There will be no need for a trustee to certify compliance with the Charites Act 2011.

HM Land Registry

There is a new form for prescribed clauses in a lease for a term longer than seven years, and, unless these are adopted, from November 2023 HM Land Registry will have rejected the lease. The new prescribed clauses also make it clear whether a party is an overseas entity. 

The Levelling-up and Regeneration Act 2023

This Act received Royal Assent on 26 October 2023, though a lot of the measures will not come into effect until further guidance and secondary legislation is passed. This Act, however, marks the beginning of wide-ranging planning reforms, with the expectation that these extensive reforms will make the planning system (which dates back to the Town and Country Planning Act 1947) a much easier, simpler, fairer and quicker system. The reforms clearly target meeting the demand for housing, with an inevitable impact on other sectors, such as the office, commercial and energy sectors. Sweeping changes of this nature will require the government to commit resources and skills.

The Act also include proposals for the Secretary of State to obtain disclosure of the ownership of land. In December 2023, the government published a consultation (which closed on 21 February 2024) on transparency of land ownership involving trusts, in order to seek comments and to widen access to information held in the Register of Overseas Entities as well as ownership of land in the UK. This area will be subject to further reform.

The Act grants powers to local authorities to implement rental auctions for vacant high-street properties. How the regime will work remains to be seen.

The Act also sets out a framework for reform of the Community Infrastructure Levy and for replacing this with a new regime – the Infrastructure Levy – based on gross development value rather than floor space. These changes will be published at some point in 2024. 

The Landlord and Tenant Act 1954

The Law Commission has announced a review of the commercial leasing rules, including (most importantly) the Landlord and Tenant Act 1954. The Commission is due to publish a consultation paper on the review by the autumn of 2024. 

The Renters’ Reform Bill

This was recently introduced to reform the private rental sector, including the abolition of Section 21 “no fault” evictions and measures to deal with rental increases. It will likely be passed in the autumn of 2024.

Biodiversity Net Gain

From 12 February 2024, all developers must understand the requirements of biodiversity net gain (BNG). The objective is to create and improve natural habitats by measuring the impact of development on biodiversity, and developers will have to deliver a net gain of at least 10% more than there was before the development.

The Leasehold and Freehold Reform Bill

The objective here is to reform home ownership in the UK, which includes making it easier for existing leaseholders to extend their leases or buy the freehold, as well as greater transparency in relation to costs (such as service charges).

The Leasehold Reform (Ground Rent) Act 2022

This Act limited ground rents on new long leases to a peppercorn, and the government has been consulting on broadening this to a retrospective cap on ground rents for existing leases. The consultation ended on 17 January 2024. 

Law Society

The Law Society is consulting on a new draft code for the signing and exchanging of property contracts, with the objective being to allow the use of new technologies. It is likely that the new code will be mandatory for Conveyancing Quality Scheme residential transactions, but will likely not be mandatory for commercial agreements.

The Law of Property Act 1925 creates two categories of property rights within England and Wales:

• freehold rights, where a proprietor has absolute control of a property and any dealings with it, as they own it in its entirety; and
• leasehold rights, where a proprietor does not own the property but is granted exclusive use of it subject to terms (including the period of occupation) agreed to in the lease.

Title to real estate is transferred by a sale contract and transfer. No special laws apply to the transfer of any specific types of real estate.

A lawful and proper transfer of title is effected by submitting a duly executed transfer deed to HM Land Registry under cover of an AP1 form. This transfers the legal interest in the property from the seller to the purchaser. On receipt of the deed, the Land Registry will register the legal interest of the new proprietor and generate an electronic register of the property showing the purchaser as the new owner of the property. This registration process is stipulated by the Land Registration Act 2002. Since November 2022, AP1 applications to change the register have been electronic through the Digital Registration Service, and the process of manually competing an AP1 and uploading it to the portal has been withdrawn.

It is possible to obtain title insurance. However, this is not common, as the expectation is that a purchaser will fully interrogate and investigate the title.

Real estate due diligence is carried out at all stages of a transaction. This is usually undertaken as follows.

The purchaser’s conveyancer will interrogate the title to the property being purchased, and will raise enquiries of the seller to:

• understand what rights the property has the benefit of and is subject to;
• identify any covenants or restrictive covenants to which the property is subject that may affect the use of the property (eg, it would not be advisable to complete the sale of a property that has a total restriction on the property being used as an office if it is the client’s intention to use the property for this purpose); and
• highlight any security registered against the property, which will need to be discharged prior to completion of the transaction.

The purchaser’s conveyancer also undertakes searches against the property, namely:

• a contaminated land search to identify any contamination issues;
• a drainage and water search to identify whether the property is connected to the mains water and drainage system;
• a coal and mining search to identify whether the property is located on or close to a mining area;
• a chancel repair search to identify any chancel repair liability; and
• a local authority search to identify any planning permissions or building regulation approvals/issues.

The purchaser’s conveyancer also raises standard enquiries in respect of the property for the seller to reply to (see 2.5 Typical Representations and Warranties).

In commercial property transactions, the seller is asked to provide replies to commercial property standard enquiries (CPSEs). These raise questions regarding, for example:

• boundary disputes and maintenance;
• compliance with statutory obligations and planning permissions;
• environmental issues;
• VAT position; and
• capital allowances.

The answers provided in the replies to CPSEs constitute warranties provided by the seller to the buyer.

The buyer’s remedies for misrepresentation are rescission and/or damages, depending on whether the misrepresentation was fraudulent, negligent or innocent.

An investor must consider proposed changes in legislation (including tax) that may impact on the financial viability of the transaction, given that an investor’s objective is to derive capital growth and/or secure income. 

From April 2020, new legislation has meant that a landlord will only be allowed a 20% tax credit for mortgage interest paid. This has two main implications for landlords:

• if the landlord is a higher-rate taxpayer, only a 20% tax refund will be given (not the higher rate of tax paid); and
• it may force landlords into a higher tax bracket, as they will have to declare the monies paid on the tax return.

This change is affecting investment by landlords in buy-to-let properties.

In April 2023, the rate of UK corporation tax on income and gains increased from 19% to 25% for companies with profits in excess of GBP250,000. This increase will affect UK and non-UK corporate investors. This may encourage investors to consider the UK REIT as a means of holding UK real estate. In December 2022, the UK government removed the requirement for a REIT to own a minimum of three properties, provided the portfolio contains a single property valued at GBP20 million.

Further changes to REITs were proposed in 2023 to improve the tax rules, and these reforms will take effect in 2024 with the passing of the Finance Act 2024, which attained Royal Assent on 22 February 2024. One of the changes is that investors will not be treated as being “holders of excessive rights” (which can give rise to tax liabilities for the REIT) if such holders are taxed at a double tax agreement at a set rate.

The annual tax-free allowance for capital gains tax (CGT) dropped from GBP12,300 to GBP6,000 in April 2023. This means that, when a property is sold, one will only pay tax on gains over this amount. This was expected to drop further in April 2024, to GBP3,000. This will discourage investors in property.

Stamp duty land tax (SDLT) is also a consideration for property investors (see 2.10 Taxes Applicable to a Transaction). A 3% penal rate of SDLT applies on top of the standard rate for each subsequent purchase by a purchaser who owns one or more dwellings. SDLT is also payable where non-residential or mixed-use land is purchased for more than GBP150,000.

Land is considered contaminated where substances either are causing or could cause:

• significant harm to people, property or protected species;
• significant pollution of surface waters or groundwater; or
• harm to people as a result of radioactivity.

Generally, the person who caused or allowed the contamination to occur is liable for it unless they cannot be identified or the local council/environmental agency considers them exempt. The council may decide that the landowner or the person who occupies the land is liable for the contamination. Owners or occupiers who cause contamination remain liable after the disposition of the land, whereas an owner/occupier who is not a polluter has no liability when their ownership or occupation of the property ceases.

A local authority search will identify the permitted use of a parcel of land and whether this use has planning permission.

Where the property does not have planning permission for the permitted use, the seller/occupier of a commercial property can obtain a lawful development certificate for existing use or development, provided it can show that the property has been used for that purpose for a continuous period of ten years or more. A local authority can take no enforcement action once ten years have elapsed from the date of the breach (ie, the date on which the unlawful use of the property started).

An indemnity policy is usually readily available for providing cover to protect against the risk of any enforcement action.

In relation to a building completed more than four years ago, where the building has been used as a dwelling for more than four years, a lawful development certificate can be obtained.

It is possible to obtain authorisation from the local authority in respect of change of use, and it is always recommended that, prior to any development work, clients obtain the relevant planning permission from the local authority. This planning permission will include the permission required to undertake the planned works and to use the property following completion.

The Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020 introduced substantial changes to the Town and Country Planning (Use Classes) Order 1987. These changes came into force from 1 September 2020. The key changes are:        

• Classes A, B1 and D1, applicable to retail, office and non-residential institutions, and to assembly and leisure, have been removed and replaced with a new Class E;
• there is also a new Class F1 and F2 relevant to education, learning and non-residential local community institutions; and
• some uses (for example, as a public house, cinema and bingo hall), which used to have their own class, have now moved into the sui generis category.

The above changes are subject to transitional arrangements.

A compulsory purchase order (CPO) of property enables councils, central government, utility companies, etc, to purchase land if it is in the public interest to do so. “Public interest” could include:

• town-centre regeneration;
• housing developments;
• road-building projects;
• rail-building projects; and
• airport expansions.

If a CPO is granted, the landowner is paid compensation for the loss of the property.

Notice is served on the landowner of a proposed CPO, and approval from the government/parliament is then obtained. This notice will set a time limit for the landowner to lodge any objections. These are considered by the relevant authority, which then decides whether the CPO should be granted.

If a CPO is granted, the purchase will proceed, and the landowner will be compensated. The compensation is usually equivalent to the market value of the property together with reasonable moving costs, SDLT for buying an equivalent home, and reasonable legal and lender’s fees.

SDLT is payable by the buyer on all property transactions in the UK. The rates of SDLT are determined by the price of the property and the designated use of the property (ie, whether it is commercial or residential).

Multiple dwellings relief (MDR), where purchasers of residential property acquire more than one dwelling in a single transaction or linked transactions, is abolished for transactions with an effective date on or after 1 June 2024. For contracts which exchanged on or before 6 March 2024, MDR will continue to apply, even where completion of the purchase takes place on or after 1 June 2024. This is subject to there being no variation of the contract after 6 March 2024. 

MDR will continue to apply to contracts that are substantially performed before 1 June 2024.

For linked transactions which include the purchase of dwellings both before and after the change, those pre- and post-change transactions will be treated as unlinked for the purposes of MDR.

Residential Property Rates

SDLT is usually payable on property prices above GBP250,000. From September 2022, the SDLT rates are:

• GBP0 to GBP250,000 – 0%;
• GBP250,001 to GBP925,000 – 5%;
• GBP925,001 to GBP1.5 million – 10%; and
• more than GBP1.5 million – 12%.

Relief for First-Time Buyers

First-time buyers pay no SDLT on properties worth up to GBP425,000; thereafter, the usual rates apply.

Residential Leasehold Sales and Transfers

If a new residential leasehold property is purchased, SDLT is payable on the purchase price (premium) of the lease as if it was the sale price of a freehold property. The level of rent due under the lease is not taken into account.

Higher Rates of SDLT

A 3% penal rate of SDLT applies on top of the standard rate for each subsequent purchase by a purchaser who owns one or more dwellings.

SDLT is also payable where non-residential or mixed-use land is purchased for more than GBP150,000. For between GBP150,000 and GBP250,000, the rate is 2%, and thereafter 5%.

Non-residential property includes:

• commercial property (eg, shops or offices);
• agricultural land;
• forests;
• any other land or property not used as a residence; and
• six or more residential properties bought in a single transaction.

A “mixed-use” property is one that has both a residential and non-residential element (such as a flat above a shop).

SDLT rates on non-residential and mixed-use land are:

• GBP0 to GBP150,000 – 0%;
• GBP150,001 to GBP250,000 – 2%; and
• more than GBP250,001 – 5%.

Non-residential Leasehold Sales and Transfers

If a new non-residential leasehold property is purchased, in the event that the total rent of the lease over the duration of the lease is GBP150,000, SDLT at a rate of 1% is payable above GBP150,000.

• GBP0 to GBP150,000 – 0%;
• GBP150,001 to GBP5 million – 1%; and
• more than GBP5 million – 2%.

SDLT Reliefs and Exemptions

Reliefs

The following reliefs can be applied for:

• first-time buyer;
• multiple dwellings;
• a building company buying an individual’s home;
• employers buying an employee’s house;
• local authorities making compulsory purchases;
• property developers providing amenities to communities;
• companies transferring property to another company;
• charities;
• right-to-buy properties; and
• registered social landlords.

Exemptions

SDLT is not payable and no SDLT return needs to be filed if:

• no money or other payment changes hands for a land or property transfer;
• property is left in a will;
• property is transferred because of divorce or dissolution of a civil partnership;
• freehold property is purchased for less than GBP40,000;
• a new lease of more than seven years is purchased or assigned, provided that the premium is less than GBP40,000 and the annual rent is less than GBP1,000;
• a new lease of less than seven years is bought or assigned, provided that the amount paid is less than the residential or non-residential SDLT threshold; and/or
• an alternative property financial arrangement is used.

SDLT on Residential Property Owned by a Corporate Vehicle

SDLT is charged at 15% on residential properties costing more than GBP500,000 that are bought by certain corporate entities. However, the 15% rate does not apply to property bought by a company acting as a trustee of a settlement or property bought by a company to be used for:

• a property rental business;
• property developers and traders;
• property made available to the public;
• financial institutions acquiring property in the course of lending;
• property occupied by employees;
• farmhouses; and
• a qualifying housing co-operative.

In addition, there is a 3% surcharge on residential properties bought by companies.

SDLT on Shares in a Company

SDLT is payable at a rate of 0.5% of the entire transaction. SDLT will be payable on transactions, including a change of control of a company if shares are sold.

Value-Added Tax (VAT)

The sale of real estate is exempt from VAT unless the seller has opted to tax the land and buildings. Most new-build commercial properties will attract standard-rate VAT at 20%. If, however, a property is acquired with a sitting tenant, the “transfer as a going concern” exemption will apply, provided that both parties are VAT-registered, and hence no VAT will be payable on the purchase price. This exemption only applies where the buyer opts to tax the property before transfer.

HMRC has made some changes to the process for opting a property for tax – namely, HMRC will no longer issue an acknowledgement of the option for tax application. The requirement for a person to notify HMRC of the exercise of an option to tax will remain, and can be charged within 30 days of that VAT. 

Capital Gains Tax (CGT)

CGT is payable by an individual on the disposal of residential real estate in the UK (other than the individual’s main residence) in respect of the gain (profit) made, at a rate of 28% for a higher-rate taxpayer and at a lower rate for a basic-rate taxpayer. A 20% CGT rate applies for commercial property.

A UK-based company will pay corporation tax at a rate of 25% on the investment gain (subject to any indexation allowance, which now only accrues up to 31 December 2017) on the disposal of a commercial or residential property.

Since April 2023, the tax-free allowance dropped from GBP12,300 to GBP6,000, dropping further to GBP3,000 in April 2024.

The CGT exemption for non-resident investors in respect of non-residential property was removed from April 2019, albeit with exemptions.

“Non-resident” CGT (NRCGT) is payable at 28% on any post-April 2015 gains made on UK residential property by individuals who are non-resident for tax purposes.

From 6 April 2019, NRCGT was extended to post-April 2019 gains in respect of commercial property, albeit with certain exemptions.

There are currently no restrictions on foreign investors acquiring property in the UK.

See under The Economic Crime (Transparency and Enforcement) Act 2022 in 1.3 Proposals for Reform.

Acquisitions of commercial property are generally financed by borrowing from institutional banks/lenders. However, many companies also purchase property using their available resources, without the need for any finance.

There are also a number of private companies that offer finance to developers to assist with projects and development opportunities.

A lender will require a first legal charge to be registered against the property as security for the advanced loan.

If the purchaser of a property is a company, the lender will usually require a debenture over the company’s assets. If a holding company (ie, a company that does not trade) purchases a property, the lender will usually require a lease between the holding company and its trading company so that the monthly repayments under the mortgage can be secured.

There are no restrictions other than compliance with the anti-money laundering legislation. 

A modest fee is payable for registering security over property or a company. This fee is payable to either the Land Registry in respect of a legal charge/mortgage or to Companies House in relation to a debenture or charge over shares. In addition, enforcement of security would attract court fees and legal fees.

Before an entity can give valid security over its real estate assets, a private company director will need to ascertain their director’s duties and whether the transaction is for the company’s benefit. They also need to confirm that the company is solvent in accordance with the Companies Act 2006. If the corporate benefit of giving security cannot be established, a director could be in breach of their duties to the company. Directors are encouraged to record the basis of their decisions in board minutes and identify the corporate benefit. It is also advisable to ask the company’s auditor to confirm the company’s solvency.

Provided the lender has secured its mortgage through registration of a legal charge against the property asset with the Land Registry, there are usually no obstacles to enforcing its security in the case of a default. A lender will usually enforce the security by the appointment of a Law of Property Act (LPA) receiver, who will manage the disposal of the property asset and repayment of the debt (together with the cost of realisation) from the sale proceeds.

At the point of enforcement, no further steps can be taken to give priority to the lender’s security above that of other creditors. Priority of security is a matter to be addressed by a deed of priority when making the loan.

The rules governing the priority between two different security interests over the same asset vary for different types of assets.

In order for a particular security interest to take priority over an earlier security interest, one or a combination of the following circumstances must usually apply:

• the later security is a “better” type of security (legal rather than equitable, fixed rather than floating);
• the holder of the later security was not aware or is deemed to have been unaware of the earlier security; and/or
• the later security has been better perfected or was perfected first.

Secured creditors will usually agree on the priority of their respective secured interests contractually by virtue of a deed of priority, which will rank the priority of the secured interests on enforcement.

A lender cannot generally be liable for environmental damage unless it is responsible for the cause or knowingly permits the damage. A lender does, however, need to be mindful that, if it takes possession of the property at enforcement of its security, it may then have a liability relating to any environmental issues as an owner of contaminated land or as a knowing permitter.

The secured interests of a lender are not affected by the insolvency of a borrower. However, during an administration, a lender may not start or continue legal proceedings against the company and/or enforce security without leave of the court.

From April 2020, new legislation has meant that a landlord will only be allowed a 20% tax credit for mortgage interest paid. This has two main implications for landlords:

• if the landlord is a higher-rate taxpayer, only a 20% tax refund will be given (not the higher rate of tax paid); and
• it may force landlords into a higher tax bracket, as they will have to declare the monies paid on the tax return.

Government plans and development aspirations are contained in policy statements, including the National Planning Policy Framework (NPPF), which applies only to England. This provides the programme for generating local plans for housing and other developments. It is against the background of these local plans that applications for planning permission are determined.

The local planning authorities (LPAs) are also motivated to prepare a local plan which sets planning policies in a local authority area. If there is no local plan, LPAs will be deemed to adopt a “presumption in favour of sustainable development”. The NPPF was revised in light of the Levelling-up and Regeneration Act 2023. See 1.4 Proposals for Reform.

The LPA will decide whether a proposed development of a property should be permitted.

The developer seeking to obtain planning permission will submit plans and specifications of the intended work to be undertaken to the relevant LPA.

Planning permission is required for most new buildings, major alterations to existing buildings, and significant changes to the use of a building or piece of land. When planning permission is granted, it is usually subject to strict conditions with which a developer must comply.

Building Regulations Approval

Building regulations are minimum standards for design, construction and alterations to almost every building. A landowner applies to its local authority building control department for building regulations approval. Examples of where building regulations approval will likely be required include:

• when erecting a new building;
• when extending or altering an existing building; and
• when providing services and/or fittings in a building (such as washing and sanitary facilities, hot water cylinders, foul water and rainwater drainage, replacement windows and fuel-burning appliances of any type).

When the work is carried out, it must meet the relevant technical requirements in the building regulations. In addition, the work must not make other fabric, services and fittings less compliant or more dangerous than they were before.

The local authorities for regional areas regulate the use of individual parcels of real estate, subject to prevailing primary and secondary legislation.

It is usual for LPAs to notify any neighbouring properties of a new development project or major refurbishment. Notices are displayed, and the parish, town or community council is usually notified. This enables third parties to provide their comments on the proposed planning permission.

The LPA will then consider any minor changes to the planning permission in light of these comments. Third parties have the right to apply for a judicial review of an LPA decision if they have reason to believe that a decision has been reached unlawfully.

If the LPA refuses permission or imposes conditions, it must provide written reasons. Appeals must be submitted within six months of the date of the application decision letter.

It may be necessary to enter into agreements with local or governmental authorities or agencies, or with utility suppliers, to facilitate a development project. These agreements can include (for instance) the developer committing to payments towards local infrastructure improvement projects, or the provision of new highways or drainage systems. The objective of such agreements is to mitigate the effects of development.

If the LPA considers that planning has been carried out in breach of the terms of the planning permission, an enforcement notice will be issued. This notice will identify the breach and stipulate what steps the LPA intends to take. Failure to comply with an enforcement notice could result in a fine. Alternatively, a breach-of-condition notice can be given as an alternative to an enforcement notice, in which case the developer is required to remedy the breach of condition.

During the development, the LPA will undertake site visits to inspect compliance with building regulations. Failure to comply can result in enforcement action in the form of prosecution and/or an enforcement notice requiring the alteration or removal of work that contravenes the regulations. If the owner does not comply with the notice, the local authority has the power to undertake the work itself and recover the costs from the owner.

Entities available to investors to hold real estate assets include:

• limited liability partnerships (LLPs);
• private limited companies; and
• public limited companies.

LLPs

LLPs are comprised of members in partnership with limited liability. The relationship between the members is usually governed by a members’ agreement. An LLP is taxed in the same way as a partnership.

Private Limited Companies

Private limited companies are comprised of shareholders who own share capital of the company proportionate to their individual levels of capital investment. Directors (who may or may not include shareholders) are appointed to run the company. The shareholders have personal liability protection, and their relationship is governed by a shareholders’ agreement. This entity is liable for corporation tax, and shareholders only pay tax on dividends.

Public Limited Companies

A public limited company is a limited liability company, the shares of which may be sold and traded to the public and listed on a stock exchange. It can, therefore, raise money by selling shares to the general public.

REITs are a popular means for UK property investment as they benefit from tax exemptions on income and capital gains, especially given the UK corporation tax increase from 19% to 25%. Foreign investors are encouraged to consider REITs as a means of holding UK real estate. In December 2022, the UK government removed the requirement for a REIT to own a minimum of three properties, provided that the portfolio contains a single property valued at GBP20 million.

Further changes to REITs were proposed in 2023 to improve the tax rules, and these reforms will take effect in 2024 on the passing of the Finance Act 2024, which attained Royal Assent on 22 February 2024. One of the changes is that investors will not be treated as being “holders of excessive rights” (which can give rise to tax liabilities for the REIT) if such holders are taxed at a double tax agreement at a set rate.

No minimum capital requirement applies in the case of LLPs and private limited companies. A public limited company must have a minimum issued share capital of GBP50,000, with at least 25% (GBP12,500) of this being paid up in full.

LLPs are governed by UK company law, but differ from limited companies in that members of an LLP can manage their own interests without forming a board.

Private limited companies are governed by the Companies Act 2006, and have a constitution (articles of association) to assist the shareholders and directors in regulating their relationship with the company and each other.

Unlike private limited companies, public limited companies require at least two directors and a company secretary. They are otherwise governed by UK company law. If a public limited company is trading on a stock exchange, it will be subject to the regulations of that exchange.

The costs of annual entity maintenance and accounting compliance vary, subject to the extent of the portfolio of properties owned by each entity.

The law recognises the following arrangements that allow a person, company or other organisation to occupy and use real estate for a limited period of time without buying it outright:

• a lease, which grants exclusive occupation of the property for an agreed period; and
• a licence, which grants occupation of a property without exclusive possession.

There are no specific different types of commercial leases. The nature of any lease, in terms of its duration, rental, break clause, etc, is a matter of negotiation and agreement between the parties.

The Code for Leasing Business Premises came into force in September 2020, with the aim of assisting negotiations in producing comprehensive heads of terms to make the legal drafting process more effective.

The Code for Leasing Business Premises provides a code of practice governing the negotiation of leases between landlords and tenants. On 23 March 2020, the UK government announced that commercial landlords could not pursue forfeiture of a commercial lease for non-payment of rent pursuant to Section 82 of the Coronavirus Act 2020. This prohibition remained in force until restrictions were lifted in March 2022, except for restrictions on rent arrears during the pandemic which had to be decided by arbitration. On 23 September 2022, all restrictions were lifted and the lease forfeiture procedure is now governed by the contractual lease. 

There is no typical length of a lease.

A tenant will generally covenant to maintain and repair the property in a long lease. A tenant will limit its liability by recording the state of repair of the property at the commencement of the lease with a schedule of condition.

It is usual for lease rents to be paid quarterly, namely on March 25th, June 24th, September 29th and December 25th.

Following the COVID-19 pandemic, the parties to a commercial lease will give consideration to more flexible arrangements, such as rent-free periods, break clauses and/or rental based on turnover or performance criteria.

The rent payable under a lease will remain the same for the duration of the lease term, unless there is a rent review clause.

New rent under an existing lease will be determined in accordance with the rent review clause, if such a clause exists. It is usual for the rent review clause to be “upwards only”. The revised rent will be the greater of the rent payable at the time of the rent review and the market rent determined by a surveyor.

Less common rent review clauses provide that the rent will be reviewed in line with inflation.

VAT is only payable on rent at the current rate of 20% if the landlord has opted to tax the property.

A deposit may be payable under a rent deposit deed at the start of a lease. In addition, a tenant will be responsible for the registration of the lease (if it is for more than seven years), as well as for payment of the modest registration fee. SDLT is also payable for a commercial lease, as detailed in 2.10 Taxes Applicable to a Transaction. Subject to negotiation, insurance rent and service charges may also be payable at the outset.

The landlord is responsible for the maintenance and repair of the common areas used by tenants. The landlord will usually undertake to provide these services on the estate and recoup the cost from tenants via a service charge.

A tenant will be responsible for the utilities it consumes, and these will be apportioned according to the space occupied by the tenant, unless the supply is segregated.

The landlord usually insures the property and passes this cost on to the tenant.

The typical risks insured against include:

• fire;
• explosion;
• lightning;
• earthquake;
• storm;
• flood;
• bursting and overflowing of water tanks, apparatus or pipes;
• impact by aircraft and articles dropped from them;
• impact by vehicles;
• subsidence;
• ground slip;
• heave;
• riot; and
• civil commotion.

The tenant is under obligation to use the property in accordance with the legal permitted use. See 2.8 Permitted Uses of Real Estate Under Zoning or Planning Law on the new classes of use. In addition, a lease will usually specify that a tenant cannot use the property for any illegal or immoral purpose.

Further restrictions on use can be agreed upon as part of the lease negotiations. A landlord can restrict the use of the property by agreement with the tenant. For example, if one tenant on an estate has entered into an exclusivity agreement for a specific type of use of a property (eg, an Indian restaurant), the landlord can restrict the use of other properties on the estate within this area in order to comply with the exclusivity agreement.

A lease will prohibit the tenant from undertaking any external or internal structural work to the property without the landlord’s consent. Even internal, non-structural alterations to the property usually require the landlord’s consent in the form of a licence to alter.

One of the key statutory regulations which applies to commercial leases is the Landlord and Tenant Act 1954. This legislation provides business tenants with security of tenure unless the statutory provisions are formally contracted out.

An abundance of statutory regulation applies for residential leases and agricultural tenancies, on which specific advice should always be sought.

A lease usually provides that the landlord can end the lease (forfeit) and regain the property if the tenant becomes insolvent.

If a landlord is concerned about a tenant’s ability to meet its obligations under a lease, it can require a rent deposit for particular rental payments. This usually comprises the payment of up to three months’ rent upfront, which can be used in the event of default. The landlord can also insist on a personal guarantor.

A business tenant is able to remain in occupation after the expiry of the term of a lease if the lease is not contracted out of the security-of-tenure provisions of the Landlord and Tenant Act 1954.

If the lease is protected, the landlord can only bring the lease to an end on the expiry date by providing the tenant with formal notice (of not less than six months and not more than 12 months) that one of the following is applicable to the property:

• the tenant has breached a repairing covenant;
• the tenant has persistently delayed paying the rent;
• the tenant has breached other obligations;
• the landlord has offered the tenant the availability of alternative accommodation;
• a subtenant is in place at the property and possession is required for letting or disposing of the whole property;
• the landlord intends to demolish or reconstruct the property; and/or
• the landlord intends that its own business should occupy the building.

Most commercial leases include the right for a tenant to assign its interest or to sublease. This is subject to obtaining the landlord’s consent by virtue of a licence to assign/sublease. A landlord will permit an assignment subject to conditions, including:

• the new tenant (“assignee”) providing a rent deposit to the landlord (pursuant to a rent deposit deed) as security for performance of the obligations under the lease; and
• an authorised guarantee agreement (AGA) whereby the original tenant (“assignor”) will guarantee the performance by the assignee of the obligations under the lease.

Regarding a sublease, this is a contract between the original tenant and the new tenant (subtenant) whereby the subtenant takes over the rented premises and pays rental directly to the original tenant, and the original tenant remains directly liable to the landlord. The landlord’s consent to the sublease should be obtained with the usual condition for consent being that the subtenant can only use the property for the purposes that the landlord has approved in the lease, and subject to the sublease terms mirroring those of the head lease.

The landlord is typically able to forfeit the lease if one of the following events occurs:

• any rent is unpaid 14 days after becoming payable, whether it has been formally demanded or not;
• any breach of any condition or tenant covenant in the lease; and/or
• the tenant becomes insolvent.

Additionally, both parties may have a contractual right to break the lease or negotiate a surrender of the lease.

Commercial leases granted for a period of more than seven years are required to be registered at the Land Registry, and registration needs to be completed within two months of the completion of the lease. The responsibility for registration lies with the tenant, as it protects the tenant should the property change ownership.

A lease for seven years or less can be noted on the landlord’s title. Any Land Registry fees are to be paid by the tenant and, prior to registration, any SDLT which is payable (see 2.10 Taxes Applicable to a Transaction) will need to be paid and a certificate obtained for filing at the Land Registry.

A landlord can commence forfeiture proceedings to end the lease prior to the expiry date on the grounds of the tenant’s default. How long the process takes is dependent on various factors, including whether the tenant seeks relief from forfeiture.

A lease could be terminated by a third party (eg, the government) if the public interest so required. For such a process to take place, the requisite public law requirements/criteria would need to be met and, where relevant, compensation would be payable.

On termination of a lease, a landlord is entitled to pursue a tenant for damages to be compensated for the loss arising out of the tenant’s breach of the lease terms, whether that be non-payment of rent or failure to maintain/repair the premises or wider damage to the property.

The issue faced by the landlord is demonstrating the diminution in value of its property due to the damage or disrepair, coupled with the landlord’s general duty to seek to mitigate its losses. The landlord would have the rent deposit at its disposal, to seek to recover some of the losses sustained. The landlord also has to be mindful of the extent to which any property damage is covered by property insurance.

Lump-sum or fixed-price contracts comprise a total fixed price for all construction work. They are the most commonly used form of contract.

Cost-plus contracts comprise payment of the actual costs, consumptions or other expenses relating directly to the construction work.

Measured contracts define the buildings that will be covered by the work, the period over which work may be required and an estimate of the likely total value of the work.

The “traditional” procurement method, often referred to as “design bid build”, is the most commonly used method of procuring construction work. This is where design consultants are appointed to design the project in detail, and contractors are invited to tender for the construction of the designed project. The design consultants are responsible for the design and the contractor is responsible for the construction work.

The “design and build” procurement method, as its name suggests, is where the contractor is appointed to design and construct, as opposed to a traditional contract where the client appoints design consultants to design the development and a contractor is then appointed to construct the project.

A percentage (often 5%) of the amount certified as due to the contractor on an interim certificate is deducted from the amount due and retained by the client. The reason for the retention is to encourage the contractor to discharge its duties fully under the contract.

Limitations and Exclusion of Liability

The three most common methods of limiting liability are:

• caps on liability, where the amount payable in the event of a breach is capped;
• net contribution clauses, where a claimant must pursue a claim against all parties responsible for damage to seek full recovery of loss; and
• exclusion clauses, which, if agreed to and upheld, would negate any liability for loss or damage (liability for death or personal injury cannot be excluded).

Collateral Warranties

Collateral warranties are agreements that are related to another “primary” contract. They extend the duty of care by one of the contracting parties to a third party that is not a party to the primary contract. For example, an architect of a new development owes a duty of care to an occupier of the development despite there being no contractual relationship between the architect and the occupier.

Schedule-related risk is the risk that construction work may take longer than scheduled. Delay can lead to cost risk; hence this is usually managed by the contract, including a clause to pay liquidated and ascertained damages (LADs) to the client if the contract is delayed. LADs are not penalties; they are damages pre-determined at the outset of the contract based on a real calculation of the actual loss the client is likely to incur if the completion date is delayed.

Performance Bonds

A performance bond is used in relation to construction projects as a means of insuring a client against the risk of a contractor defaulting on the contract obligations. A performance bond is provided by a third party up to an agreed amount.

Parent Company Guarantees

A parent company guarantee (PCG) is also a form of protective security in the event of default on a contract by a contractor controlled by a parent company (or holding company). These are particularly helpful when a small contractor is retained who is part of a more financially viable parent company.

Escrow Accounts

Escrow accounts are also used as holding accounts for construction project funds. They are usually set up by a solicitor acting on behalf of one of the parties. The terms of the agreement will specify that the payments must be protected, so as to provide security should a party default on payment.

No information is available on this topic.

Contractors and/or designers are permitted, subject to an express agreement, to exercise a lien or otherwise encumber a property in the event of non-payment, and this can only be removed upon payment of the outstanding fees.

The sale of real estate is exempt from VAT unless the seller has opted to tax the land and buildings. Most new-build commercial properties will attract a standard-rate VAT of 20%.

If, however, a property is acquired with a sitting tenant, the “transfer as a going concern” exception will apply, provided that both parties are VAT-registered, and hence no VAT will be payable on the purchase price. However, this exemption only applies where the buyer opts to tax the property before transfer. See 6.7 Payment of VAT.

Mitigation of tax liabilities (such as SDLT or CGT) arising from the transfer of property requires specialist tax input and is specific to circumstances. However, investors need to be mindful that the manner in which the legal title to the property is held, whether as an individual or as a corporate entity, will affect the applicable tax rates, available reliefs and options for mitigating any liability. For example:

• if a property is owned by a company, then rather than transfer the property, shares could be sold, which would attract no SDLT; or
• if property assets are transferred within a corporate group structure where SDLT relief is available or assets are held in a partnership between connected parties, and the partnership is then incorporated, SDLT can be avoided.

See 2.10 Taxes Applicable to a Transaction.

Business rates will be payable on the occupation of business premises, such as:

• shops;
• offices;
• pubs;
• warehouses;
• factories; and
• holiday rental homes or guesthouses.

The domestic rates will be payable to the local council in March of each year in respect of the amount required in the following tax year.

The following are examples of available reliefs from business rates:

• small business rate relief;
• rural rate relief;
• charitable rate relief;
• enterprise zone relief;
• hardship relief;
• exempted buildings and empty buildings relief; and
• transitional relief if one’s rates change by more than a certain amount at revaluation.

The Non-resident Landlord Scheme

A landlord who resides abroad for more than six months of the year must pay tax on any rental income received from a property in the UK. If the landlord is a company or trustee, the rules relating to their usual place of abode apply. The tax is collected using the Non-resident Landlord (NRL) Scheme. The tax can be paid by either the letting agent or tenant.

There are tax benefits to owning real estate, but these require specialist tax advice/input.