Real Estate 2022

Last Updated May 05, 2022

UK

Law and Practice

Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm established in December 2005 and based in London and Dudley, dealing primarily with corporate and commercial work and commercial property and litigation. Its client base includes European and Anglo-US companies, national and regional clients, as well as individuals. The firm’s real estate department is best known for secured lending work on behalf of HSBC Bank PLC, NatWest Bank PLC and RBS, as well as all aspects of commercial property work on behalf of its SME client base, spanning a number of key industry sectors, including pharmaceutical and healthcare, manufacturing, engineering, IT, hospitality and leisure. It advises on a wide range of property-related matters, including commercial acquisitions and disposals, commercial leases, secured lending and corporate support and on a broad range of specialist areas, such as property investment and finance, development schemes, compulsory purchase issues and construction.

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.

There was a real surge in transactional activity in 2021 in real estate across most sectors compared to 2020, including hospitality and logistics. Hospitality bounced back once travel restrictions were lifted, given the stored-up demand. The reoccurring theme in 2021 and one set to continue in 2022 is the demand for large sheds to accommodate supply chain issues or online retail distributions or cater for the automotive industry as it gears up to implement the UK Government’s commitment to zero emission vehicles, which will require the mass production of electric batteries for cars. ESG focused legislation, when it arrives in 2022, will be a key consideration for investors and lenders in respect of all classes of real estate. Finally, 2022 will see the impact of the Commercial Rent (Coronavirus) Act 2022 as parties to commercial leases seek to agree on the issue of accrued rent arrears due to business closures during the pandemic.

Real estate investors, developers and lenders have started increasing investment in technology to keep abreast of technological advancements in real estate, whether Proptech, blockchain or decentralised finance (“DeFi‟). Even those slow to change were forced by the pandemic to quickly adopt technology, and these new technologies were put to the test when large workforces suddenly had to work remotely, operate virtual tours, communicate on new channels, and manage their day-to-day operations solely through technology.

The trend of companies investing in digitalisation continued during 2021. The use of blockchain technology and smart contract platforms to deal with the processing of payments, transfer of property deeds, etc (through smart contract platforms, which are a transparent, authentic and secure means to manage a transaction) whilst in its infancy is likely to expand

A proportion of the real estate sector is reported to have uncovered weaknesses in their company’s digital capabilities and areas for improvement. There are increased concerns regarding cybersecurity and data privacy. More investment and collaboration are required for these technologies to be fine-tuned and used to their full potential in an integrated manner. It will be some time before disruptive technologies replace convention in the real estate market in the UK, even though the COVID-19 pandemic has emphasised how important it is to invest in technological advancement and the growth of 5G in 2021 will improve that connectivity. Property investors need to make their spaces more attractive to occupiers, considering not only the functionality of buildings but also their digital offerings.

Recent Changes/Reforms

New legislation

Leasehold Reform (Ground Rent) Act 2022

The Act received royal assent in February 2022. The key provisions are:

  • restriction on rents on new long residential leases (a term exceeding 21 years) to one peppercorn annually;
  • the restriction does not apply to business leases, statutory lease extensions for houses/flats, community housing and home finance plan leases;
  • Any breach will be punishable by a financial penalty of between GBP500 and GBP30,000.

Commercial Rent (Coronavirus) Act 2022

Restrictions on landlords forfeiting leases, exercising Commercial Rent Arrears Recovery or winding up companies have now elapsed. This Act governs the recovery of rent arrears accrued in respect of tenant businesses forced to close due to lockdowns. The parties to the lease have six months from 24 March 2022 to refer the historical rent arrears to arbitration and how to deal with repayment, failing which the landlords will have the usual remedies to recover those arrears at their disposal.

Building Safety Bill

The Bill is designed to protect leaseholders from the costs of removing unsafe cladding. The protections have been described as a “waterfall”, with developers responsible for the costs first, then building owners and finally, the leaseholders.

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 a law of a country outside of 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 comes into force, it will have six months to register its beneficial owner details on the Register of Overseas Entities.

Residential developer property tax

This will apply from 1 April 2022 to companies with residential development profits in excess of GBP25 million per annum, which will be taxed at 4%.

National Security and Investment Act 2021

This Act came into force on 4 January 2022 and introduced a new foreign direct investments regime that replaces the Enterprise Act 2002 in relation to transactions involving national security concerns. There are 17 sectors that will require mandatory notification and clearance prior to the completion of a transaction involving a company carrying out activities in those sectors, which comprise defence, energy, transport, technology and artificial intelligence (refer to Notifiable Acquisitions Regulations 2021). Real estate transactions could be impacted where the property is used for defined “sensitive purposes”.

Registration of trusts

In October 2021, the rules requiring trusts to register with the Trust Registration Service were extended and trusts now falling within the rules have until 1 September 2022 to register. These will include all UK express trusts and non-UK express trusts that acquire land in the UK or have a trustee resident in the UK.

HM Land Registry

From November 2022, AP1 applications to change the register will be made electronically through the Digital Registration Service, and the current process of manually competing an AP1 and uploading it to the portal will be withdrawn.

Practice Guide 82 is a new guide collating in one place the requirements for electronic signature and lists a table of documents that can be signed using:

  • mercury signatures;
  • signing platform; or
  • other forms of electronic signature (ie, typed, scanned manuscripts).

Wider planning reforms

The above marks the beginning of wider planning reforms set out in a White Paper currently in consultation, with the expectation that these more extensive reforms will make the planning system, dating back to the Town and Country Planning Act 1947, a much easier, simpler, fairer and quicker system. The reforms clearly target meeting the demands for housing with an inevitable impact on other sectors such as the office, commercial and energy sectors, yet there is little reference to these sectors. Sweeping changes of this nature will require the government to commit resources and skills. It is now a waiting game to see the extent of the planning reforms and whether these are progressive or regressive. The reforms include:

  • growth zones – land that is suitable for “substantial development‟;
  • renewal – land that is suitable for “development‟ (smaller scale);
  • stripped-back local plans – local authorities will be granted 30 months to produce local plans; and
  • the abolition of Section 106 agreements and a change to the existing Community Infrastructure Levy. A year on from the white paper in the Queen’s Speech on 11 May 2021, a Planning Bill to implement the White Paper planning reforms was announced.

Replacement of LIBOR

The London Inter-Bank Offered Rate (LIBOR) ceased on 1 January 2022. Risk Free Rates (RFRs), robust alternatives to LIBOR, are already available. These include the Sterling Overnight Index Average (SONIA). See 3.10 Consequences of LIBOR Index Expiry.

Property law reforms

The UK government has announced the most significant property law reforms in 40 years. The consultation was launched by the Department for Levelling up, Housing and Communities and ended on 22 February 2022. The reforms to the leasehold and commonhold property sector are designed to attempt to redress the imbalance in home ownership across the country.

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. There are no special laws that 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. From November 2022, AP1 applications to change the register will be electronic through the Digital Registration Service, and the current process of manually competing an AP1 and uploading it to the portal will be 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 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 make this use of the property); 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 if the property is connected to the mains water and drainage system;
  • a coal and mining search to identify if 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).

Apart from an added layer of delay, eg, in obtaining search results, the standard due diligence process did not change during the pandemic.

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

  • 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 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 tax payer, 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 impacting investment by landlords in buy-to-let properties.

Land is considered contaminated where substances are either 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 to provide 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 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 keys changes are:

  • Classes A, B1 and D1, applicable to retail, office and non-residential institutions, and assembly and leisure have been removed and replaced with a new Class E;
  • there is also a new Class F.1 and F.2 relevant to education, learning and non-residential local community institutions; and
  • some uses, such 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, then 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, stamp duty land tax for buying an equivalent home, and reasonable legal and lender’s fees.

Stamp Duty Land Tax (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).

Residential Property Rates

SDLT is usually payable on property prices above GBP125,000. However, as a result of the pandemic, the UK government announced that homeowners would not pay stamp duty on homes worth up to GBP500,000 for a nine-month period, which was extended for a further three months.

From 1 October 2021 the SDLT rates reverted to the pre-pandemic rates:

  • GBP0–125,000 – 0%
  • GBP125,001–250,000 – 2%
  • GBP250,001–925,000 – 5%
  • GBP925,001–1.5 million – 10%
  • >GBP1.5 million – 12%

Relief for First-Time Buyers

First-time buyers pay no SDLT on properties worth up to GBP300,000; thereafter the usual rates apply.

Residential Leasehold Sales and Transfers

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

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.

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:

  • GBP0–150,000 – 0%
  • GBP150,001–250,000 – 2%
  • >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, then SDLT at a rate of 1% is payable above GBP150,000.

  • GBP0–150,000 – 0%
  • GBP150,001–5 million – 1%
  • >GBP5 million – 2%

SDLT Reliefs and Exemptions

Reliefs

The following reliefs can be applied for:

  • first-time buyers;
  • 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 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 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 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.

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 tax payer or a lower rate for a basic-rate tax payer. A 20% CGT rate applies for commercial property.

A UK-based company will pay corporation tax at a rate of 19% 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.

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. The Economic Crime (Transparency and Enforcement) Act 2022 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 (being a legal entity governed by a law of a country outside of 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 owns land in the UK when the Act comes into force, it will have six months to register its beneficial owner details on the Register of Overseas Entities.

Acquisitions of commercial property are generally financed by borrowing from institutional banks/lenders. However, many companies can also purchase property from 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 loan advanced.

If the purchaser of a property is a company, then 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, then a 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.

The UK does not currently have a domestic legal framework that specifically governs inward foreign direct investment (FDI).

A modest fee is payable to register security over property or a company. This fee is payable to either the Land Registry in respect of a legal charge/mortgage or 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 have regard to their director’s duties and whether any 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 its 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 local planning authority (LPA) receiver who will manage the disposal of the property asset and repayment of the debt (together with 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 when making the loan by a deed of priority.

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 the contaminated land or 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.

LIBOR ceased from 1 January 2022. Risk Free Rates (RFRs), which are robust alternatives to LIBOR, are already available. These include SONIA.

The transition, however, is not as simple as amending references to LIBOR to SONIA or another suitable risk-free rate. Given the significant difference between LIBOR and RFRs, the transition will impact the process of the loan document in relation to:

  • how interest will be calculated;
  • how to factor the change of risk and spread the adjustment on both sides;
  • what consents will be required among lenders to change the benchmark;
  • the timing of the transition and method of calculation adopted in relation to the RFR having regard to the impact on hedging; and
  • how costs are dealt with for the transition to a RFR.

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 development. It is against the background of these local plans that applications for planning permission are determined.

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‟. See 1.4 Proposals for Reform.

The LPA will decide if 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 is likely to be required include:

  • erecting a new building;
  • extending or altering an existing building; and
  • 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 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 government authorities or agencies, or utility suppliers, to facilitate a development project. These agreements range from 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, then 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 either 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, private limited companies and public limited companies.

Limited Liability Partnerships

Limited liability partnerships (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.

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.

Limited liability partnerships 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 to regulate 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 which 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 new Code for Leasing Business Premises came into force in September 2020 and aimed to assist negotiations in producing comprehensive heads of terms to make the legal drafting process more effective.

The new Code for Leasing Business Premises provides a code of practice to govern the negotiation of leases between landlords and tenants. The UK government announced on 23 March 2020 that commercial landlords cannot 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 31 March 2021.

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 25 March, 24 June, 29 September and 25 December.

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 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 charge 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 an 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), then the landlord can restrict the use of other properties on the estate within this area to enable the exclusivity agreement to be complied with.

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.

As for residential leases and agricultural tenancies, an abundance of statutory regulation applies, 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 tenant goes into administration, the moratorium imposed would mean that any forfeiture action would be placed on hold.

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, then 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 to occupy the building for its own business.

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 tenant (Assignor) will guarantee the performance by the Assignee of the obligations under the lease.

With regards to a sublease, this is a contract between the tenant and a new tenant (Subtenant) whereby the Subtenant takes over the rented premises and pays rental directly to the first tenant, and the first 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.

Restrictions on landlords forfeiting leases, exercising Commercial rent Arrears Recovery or winding up companies have now elapsed. The Commercial Rent (Coronavirus) Act 2022 governs recovery of rent arrears accrued in respect of tenant businesses forced to close due to lockdowns. The parties to the lease have six months from 24 March 2022 to refer to arbitration the historical rent arrears and how to deal with repayment, failing which the landlords will have at their disposal the usual remedies to recover those arrears.

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 if the property should 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 upon various factors, including whether the tenant seeks relief from forfeiture.

It is possible that 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.

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 the contractors 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 then a contractor is 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 who 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 the fact that there is 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.

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.

At the commencement of a construction project, a number of consents and approvals are required, whether in relation to planning or building regulations. During the work, various inspections are undertaken to ensure compliance with the requisite consents/approvals prior to obtaining a completion certificate from the local authority and in relation to health and safety in accordance with the Construction (Design and Management) (CDM) Regulations 2015. The requisite insurance policies must also be in place prior to inhabitation.

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 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 tax rates applicable, reliefs available and options to mitigate 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, eg, 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. Relief is also available if purchasing a property where the transaction includes a block of flats or other residential property comprising multiple occupations, such as student accommodation let by the room. See 2.10 Taxes Applicable to a Transaction. Enterprise investment schemes are a popular choice to mitigate CGT liability but again require careful tax advice.  

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

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

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 reliefs from business rates are available:

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

The UK government also announced business rates relief for the hospitality, tourism and nursery sectors in March 2020 due to the pandemic.

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.

Capital Gains Tax

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

A UK-based company will pay corporation tax at a rate of 19% 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.

Individuals pay non-resident CGT (NRCGT) at 28% on any post-April 2015 gains made on UK residential property if they 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 tax benefits to owning real estate, but these require specialist tax advice/input.

Hawkins Hatton Corporate Lawyers Ltd

Unit 3 Castle Court 2
Castlegate Way
Dudley
West Midlands
DY1 4RH
UK

+44 1384 21684

+44 1384 216841

hsandhu@hawkinshatton.co.uk www.hawkinshatton.co.uk
Author Business Card

Trends and Developments


Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm established in December 2005 and based in London and Dudley, dealing primarily with corporate and commercial work and commercial property and litigation. Its client base includes European and Anglo-US companies, national and regional clients, as well as individuals. The firm’s real estate department is best known for secured lending work on behalf of HSBC Bank PLC, NatWest Bank PLC and RBS, as well as all aspects of commercial property work on behalf of its SME client base, spanning a number of key industry sectors, including pharmaceutical and healthcare, manufacturing, engineering, IT, hospitality and leisure. It advises on a wide range of property-related matters, including commercial acquisitions and disposals, commercial leases, secured lending and corporate support and on a broad range of specialist areas, such as property investment and finance, development schemes, compulsory purchase issues and construction.

Introduction

Whilst the impact of the pandemic continues to affect all sectors of the economy, it is arguable that it has had the most profound and lasting effect on real estate. This is because the changes emerging on the high street or in distribution centres or office space have been hastened. These changes are the backdrop to the nature of transactional activity in real estate during the last 12 months and are unlikely to change. 

PWC reported that the volume of commercial real estate transactions in 2021 resurged after the pause in March 2020. The first half of 2021 saw the total volume of deals up 74% compared to the same period for 2020 and 10% compared to 2019. PWC reported that hotel transaction volume was up 280% compared to 2020 and 13% in 2019. The explanation for this would be the lifting of travel restrictions and the enormous demand for leisure. 

PWC also reported that whilst transaction volumes in the office sector were up by 45% compared to 2020, they remained 16% below 2019 levels. If the hospitality sector, which was hit the most by the pandemic, is any measure of investors’ appetite, then the expectation is that transaction volume in the office sector will return in 2022, especially as more workers return to the office space and there is more certainty on how office space will be utilised. 

Large Sheds

2022 will continue to see investors exploiting new alternatives to conventional real estate, with logistics facilities being a firm favourite. The demand for large warehouses or distribution centres (“Large Sheds”) has been rising, and this is only likely to be further heightened by the conflict in Ukraine that, inter alia, places supply issues once again on the worldwide stage. 

The online world is competitive to the point that for retailers to retain customers, they need to offer fast delivery times, hence the demand for large, automated distribution centres and innovative solutions to supply chain issues in the retail sector. 

However, demand for large sheds is not confined to retail as the need for space is also fuelled by manufacturing and assembly, especially with the move to electric vehicles. Historically, large sheds were mainly used as part of assembly lines or a prelude to modern factories. Finding these spaces is not an easy task especially given the timeline required to find the right location and construct the large shed. Developers are taking the opportunity to build sheds speculatively, knowing that there will be a buyer or someone prepared to take a lease upon practical completion. 

It is not just a question of whether there will be enough land to accommodate large sheds but instead whether the UK road network is resilient enough to cope with the increase in users, although the new working from home practice may balance the increase in road use. 

Gigafactories

In keeping with the increased demand for large spaces is the worldwide focus on a transition to clean and green energy in line with various commitments made at COP26. A number of governments, businesses and investors signed a commitment to work towards all sales of new vehicles being zero emission by 2035. Real estate has a fundamental role in determining whether the UK can meet its goals set for zero emission vehicles. Gigafactories have emerged as a new category for real estate investment. The term is used to describe a factory with the capacity for mass production of batteries for electric vehicles at an affordable price. The development of the first gigafactories in the UK is already underway with work on the GBP2.6 billion gigafactory on the former site of Blyth Power Station and plans for a GBP2.5 billion gigafactory at the Coventry Airport site. One of the issues will be finding large spaces as the key players in the motor industry all compete to be the forerunners in this new emerging market. In line with the overall objective, these sites will need to be powered by a vast supply of green power and linked to good transportation as skilled labour is recruited. 

Service Stations

With the push towards electric cars by 2035, charge points will become a more prevalent feature whether at home, work or at a service point. Conventional service stations will, therefore, need to transform to accommodate consumers visiting more frequently and staying for much longer periods to cater for the electric vehicles to be charged. The GRIDSERVE forecourt near Braintree, Essex is an example; it can accommodate 36 electric vehicles charging concurrently. This is just one of 100 UK-wide electric service stations planned. What this means for real estate is that there is a vast array of opportunities for investors to invest in land, which could be utilised to meet the government’s ambitious electric charge point roll-out. 

Office Space

As the dust settles following repeated lockdowns, it is clear that there will be no complete return to pre-pandemic work practices within the service sector. Businesses are well equipped to address any fall in productivity due to flexible or hybrid working practices. Whilst most businesses will retain an office, the manner in which this space is utilised or how it can be adapted to encourage workers back to the office is the all-important question. Developers and investors are already identifying opportunities for re-purposing office buildings, and this trend will only continue as the landscape of office space has changed for good. 

Environmental, Social Governance (ESG)

Real estate investors and lenders will need to be live to ESG legislation which will be passed in 2022. Demand for real estate assets will be very much influenced by compliance with:

  • environmental – in real estate, this will be focused on energy efficiency and pollution or emissions; commercial property with tenants will be expected to achieve a minimum Energy Performance Certificate rating of B by 1 April 2030 (rather than the current requirement for an E rating);
  • social – the impact the use of a building would have on a community or the well-being of its residents; and
  • governance – this is more difficult to define but would include the diversity and culture of any party associated with the governance of the property.

Leases

The pandemic exposed the inflexibility of most commercial leases; hence the balance is slowly shifting to more turnover-only leases, whereby leases will include performance criteria or shorter lease terms and break clauses. By being flexible and sharing information, landlords and tenants can create sustainable and affordable leases. 

There is still uncertainty about the fallout will be from the substantial rent arrears accrued for commercial tenants since the pandemic. This issue will now slowly start to be addressed with a relatively short timeframe (six months from 24 March 2022) for the parties to refer to arbitration for any dispute over historical accrued rental pursuant to the Commercial Rent (Coronavirus) Act 2022. If the rent arrears issue cannot be resolved, then landlords will have the usual remedies to enforce rent arrears at their disposal, which include forfeiture and winding up tenant companies. The true impact of the pandemic will become clearer in the next six months regarding commercially leased premises and whether there will be a sudden mass exodus and empty units. 

Hawkins Hatton Corporate Lawyers Ltd

Unit 3 Castle Court 2
Castlegate Way
Dudley
West Midlands
DY1 4RH
UK

+44 1384 216840

+44 1384 216841

hsandhu@hawkinshatton.co.uk www.hawkinshatton.co.uk
Author Business Card

Law and Practice

Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm established in December 2005 and based in London and Dudley, dealing primarily with corporate and commercial work and commercial property and litigation. Its client base includes European and Anglo-US companies, national and regional clients, as well as individuals. The firm’s real estate department is best known for secured lending work on behalf of HSBC Bank PLC, NatWest Bank PLC and RBS, as well as all aspects of commercial property work on behalf of its SME client base, spanning a number of key industry sectors, including pharmaceutical and healthcare, manufacturing, engineering, IT, hospitality and leisure. It advises on a wide range of property-related matters, including commercial acquisitions and disposals, commercial leases, secured lending and corporate support and on a broad range of specialist areas, such as property investment and finance, development schemes, compulsory purchase issues and construction.

Trends and Development

Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm established in December 2005 and based in London and Dudley, dealing primarily with corporate and commercial work and commercial property and litigation. Its client base includes European and Anglo-US companies, national and regional clients, as well as individuals. The firm’s real estate department is best known for secured lending work on behalf of HSBC Bank PLC, NatWest Bank PLC and RBS, as well as all aspects of commercial property work on behalf of its SME client base, spanning a number of key industry sectors, including pharmaceutical and healthcare, manufacturing, engineering, IT, hospitality and leisure. It advises on a wide range of property-related matters, including commercial acquisitions and disposals, commercial leases, secured lending and corporate support and on a broad range of specialist areas, such as property investment and finance, development schemes, compulsory purchase issues and construction.

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