UK real estate law is derived from common law and statutory legislation. In relation to the latter, the primary legislation comprises:
Real estate in the UK has been resilient in the face of Brexit and COVID-19, although the landscape has changed. In 2022 all business sectors, including real estate, faced new challenges primarily as a consequence of the war in Ukraine coupled with the legacy of supply chain issues stemming from the pandemic, which have seen prices rise and inflationary pressure at an all-time high. These issues have significantly impacted the construction sector and the retail sector as the cost-of-living crisis is limiting consumer spending, including online. The office market also remains uncertain, as hybrid working has become the new norm and cities are littered with empty or only partially occupied offices. Pressure has also increased on the landlords’ market due to legislative demands, such as the new Energy Efficiency Standards introduced for commercial landlords, and the Renters’ Reform Bill in relation to the private rental sector. Rising interest rates have resulted in a fall in the demand for borrowing across the real estate sector. However, the sector remained active in 2022 due primarily to the fact that cash-rich investors are taking advantage of the fall in property prices and affordability issues experienced by investors with high levels of debt. ESG legislation will remain a consistent theme in the year ahead as lenders can be seen working in partnership with businesses to facilitate the investment needed to meet future requirements.
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 2022 with blockchain technology and smart contract platforms being used to deal with the processing of payments, transfer of property deeds, etc. The use of smart contract platforms – a transparent, authentic and secure means to manage a transaction – while presently 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 conventional methods 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 has improved connectivity. Property investors need to make their spaces more attractive to occupiers, considering not only the functionality of the buildings but also their digital offerings.
Leasehold Reform (Ground Rent) Act 2022
The Act received royal assent in February 2022. The key provisions are:
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 had six months from 24 March 2022 to refer the historical rent arrears to arbitration and decide how to deal with repayment, failing which, the landlords could use the usual remedies at their disposal to recover those arrears.
Building Safety Act 2022
This is now in force, imposing far-reaching legal responsibilities on those who commission building work, are involved in design and construction, or who manage structural/fire safety in relation to high-risk buildings. The reforms are coming into force in stages, including in April 2023 and October 2023.
The consultation on a new building safety levy to raise revenue to deal with defective cladding closed on 7 February 2023.
The Fire Safety (England) Regulations 2022 (the “2022 Regulations”) came into force in January 2023 and implemented the recommendations made in the Phase 1 report of the Grenfell Tower Inquiry.
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 in the Register of Overseas Entities of any disposal, unless the overseas entity is registered.
Residential developer property tax
This has applied since 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 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 falling within the rules had until 1 September 2022 to register, or within six months of creation. These included all UK express trusts and non-UK express trusts that acquired land in the UK or had a trustee resident in the UK.
Minimum Energy Efficiency Standards (MEES)
The 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 is expected that the minimum standard will be raised to a rating of B by 2030.
Charities Act 2022
Provisions in this Act relating to the disposal of land by charities are due to come into force shortly. The proposals are designed to make transactions smoother and less cumbersome.
HM Land Registry
Since November 2022, AP1 applications to change the register have had to be made electronically through the Digital Registration Service.
Practice Guide 82 is a recent guide collating in one place the requirements for electronic signatures and listing a table of documents that can be signed using:
There is a new form for prescribed clauses in a lease for a term longer than seven years and, unless these are adopted, HM Land Registry will not register the lease. The new prescribed clauses also make it clear if a party is an overseas entity.
Wider planning reforms
The Levelling-up and Regeneration Bill brings together the Levelling-up White Paper and the Planning White Paper. This 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. It is now a waiting game to see the extent of the planning reforms and whether these will be progressive or regressive.
Replacement of LIBOR
The London Inter-Bank Offered Rate (LIBOR) ceased on 1 January 2022. Risk Free Rates (RFRs), robust alternatives to LIBOR, including the Sterling Overnight Index Average (SONIA), are available. See 3.10 Consequences of LIBOR Index Expiry.
Property law reforms
The Law Commission has announced a review of the commercial leasing rules including most importantly the 1954 Landlord and Tenant Act. The Commission is due to publish a consultation paper on the review by December 2023.
Levelling-up and Regeneration Bill
The Bill includes powers for the secretary of state to require HM Land Registry to collect additional information on the ownership of property. It also deals with a new infrastructure levy, planning and compulsory purchase.
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.
The Economic Crime and Corporate Transparency Bill
The Economic Crime and Corporate Transparency Bill will deliver significant reforms to Companies House to improve the transparency of UK companies and other legal entities so as to enhance national security, including the requirement to verify the identity of directors and people with significant control.
The Law of Property Act 1925 creates two categories of property rights within England and Wales:
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. 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 raise enquiries of the seller to:
The purchaser’s conveyancer also undertakes searches against the property, namely:
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:
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:
This change is impacting 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 Real Estate Investment Trust (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.
Additionally, 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, you will only pay tax on gains over this amount. In April 2024, this will drop further to GBP3,000.
Land is considered contaminated where substances are either causing or could cause:
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:
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:
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).
The HMRC consultation in relation to changes to the way SDLT is calculated for purchases of mixed property – that is, purchases which consist both of residential and non-residential property – and Multiple Dwellings Relief, available on the purchase of two or more dwellings, closed in February 2022 and the outcome is still awaited.
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:
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. 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.
Non-residential property includes:
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:
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.
SDLT Reliefs and Exemptions
The following reliefs can be applied for:
SDLT is not payable and no SDLT return needs to be filed if:
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:
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.
HMRC has made some changes to the process for opting a property for tax namely that HMRC will no longer issue an acknowledgement of the option to tax application. The requirement for a person to notify HMRC of the exercise of an option to tax will remain and within 30 days of that VAT can be charged.
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 has dropped from GBP12,300 to GBP6,000. In April 2024, it will drop further to GBP3,000.
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 (ie, 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 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 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 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 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 local planning authority (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:
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.
LIBOR ceased to exist from 1 January 2022. Risk Free Rates (RFRs), which are robust alternatives to LIBOR, are available. These include the Sterling Overnight Index Average (SONIA).
The transition, however, is not as simple as amending references from LIBOR to SONIA or another suitable risk-free rate. Given the significant difference between LIBOR and RFRs, the transition will impact the loan document in relation to:
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‟. 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:
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 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 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:
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 to govern the negotiation of leases between landlords and tenants. The UK government announced on 23 March 2020 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 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 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:
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), then 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.
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 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:
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.
With regards to 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:
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 governed recovery of rent arrears accrued in respect of tenant businesses forced to close due to lockdowns. The parties to the lease had six months from 24 March 2022 to refer to arbitration any historical rent arrears and how to deal with repayment, failing which, the landlords 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 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 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:
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 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.
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 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, for example, 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, such as:
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:
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 taxpayer, or 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.
The annual tax-free allowance for CGT has dropped from GBP12,300 to GBP6,000 since April 2023. In April 2024, it will drop further to GBP3,000.
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.
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Current Market Challenges
No one could have predicted that the legacy of the COVID-19 pandemic would be a forever-changed landscape in the UK real estate sector. A clear demonstration of this is the unoccupied office space all around the UK, despite employers encouraging workers to return to the office. Hybrid working is here to stay and this will take its toll on the office market and its desirability to investors.
Equally, the retail sector continues its decline as consumers struggle to make ends meet due to the increase in the cost of living and other crippling inflationary pressures. These economic conditions have also impacted the industrial sector, as large online retailers have halted the acquisition of sites to build “large sheds” due to a decline in online consumer spending. If the decline continues as it has since 2022, the focus needs to shift to new investment strategies and the repurposing of retail units or office space
The cost and benefits of sustainability
The rental sector has also changed due to various legislative and tax reforms which have made it less attractive for investors to retain commercial or private rented accommodation. This decline may continue, as investment is needed to improve properties in order to meet the new minimum energy efficiency standards, recorded in an energy performance certificate (EPC), by 1 April 2030. There is also pressure to comply with wider environmental, social and governance (ESG) requirements, such as the reduction of pollution or emissions or being responsible about the impact a property’s use has on the surrounding community. There is real focus on businesses paving the way to a net-zero carbon world in a responsible and inclusive manner.
International property agents, Savills, estimated in 2021 that 60% of office space in the UK met the higher energy efficiency accreditation. However, this accounted for less than 10% of the total office space in London, which highlights the extent of the issues faced by property owners, tenants and lenders alike in terms of compliance.
Away from London, commercial units in more industrialised parts of the UK will face an even bigger uphill battle to meet the government’s aspirations regarding carbon emissions.
Investors need clarity now on the extent of the retrofit required by 2030 for a commercial property and the impact this will have on valuation, cash flow and marketability, as EPC-compliant units will attract tenants and secure lender support.
As the cost of borrowing has continued to rise, there has been a sharp decline in the demand for commercial loans. However, without investment, a business cannot achieve growth – hence pro-active lenders are joining forces with investors to formulate funding programmes for sustainability.
The current economic conditions have also led to an adjustment to commercial property values. This fall in values, albeit marginal at this stage, will enable cash-rich investors to take advantage, as the buyers they would usually compete with (those prepared to take on debt to acquire property) no longer have the same appetite or long-term view.
Property with strong green credentials will hold its value, in particular in the office market, whereas retail values have been on a downward spiral for some time. These retail properties may be ideal for shrewd investors who intend to repurpose the property for other use, such as leisure or residential.
There are many threats to the UK real estate market with the most obvious being the cost of borrowing and looming recessionary fears, which are already depressing commercial property prices. Lenders will want to maintain a balanced portfolio, which is why certain areas of the country will be disproportionately affected by the changes to the EPC regime, by way of example. This will inevitably result in the repricing of properties on industrial estates and on high streets – in a negative way if you are holding the wrong class of asset in that sector.
There has been a real downturn in tenant demand for commercial space, although this trend has not been seen in warehousing space. The latter appears to be bucking the trend, as businesses are onshoring due to ongoing supply chain issues. In the high street, by contrast, retailers and hospitality are suffering from less footfall due to the change in working patterns, with more people continuing to work either full time from home or on a hybrid basis. This has also impacted large commercial office space, the future of which will have to be reconsidered when leases come up for renewal. In the short term, empty units or half-filled office units are depressing the office sector. This means that a lot of businesses will seek to scale back at least some of their office space in the coming year. This is increasing the appetite for smaller purpose-built units with good travel links, as people are now considering not owning cars if the commute is no longer five days a week. As a result, landlords are increasing incentive packages to tempt prospective tenants.
Three factors appear to be responsible for driving up inflation in the UK – Brexit, the Russia-Ukraine conflict, and global supply chain issues. These factors have directly translated into increased construction costs which have been seen in the cost of rebuilding many properties. This trend will not dissipate within the next 18 months as the rising cost of imports in the UK will impact on commercial buildings and residential housing stock. In addition, businesses might not be retaining adequate insurance cover for their properties, not realising the full cost of repair or the increased expense involved in replacing damaged fixtures and fittings, or even the property itself. Thus, it is going to be increasingly important to check that insurance policies are consistently updated, that the terms are fit for purpose and that business owners are not underinsuring.
Unpredictable weather trends
The continuing unpredictable weather trends also make it necessary to review a building’s insurance policy to ensure it covers fire, flooding and subsidence. Weather-related losses due to fire for commercial property and flooding for residential property are among the key threats to property in certain parts of the country.
The National Underground Asset Register (NUAR)
An innovation soon to be introduced in the UK in the real estate property sector will improve decision-making. This is the new National Underground Asset Register (NUAR), a digital UK map of underground pipes and cables for water, power and telecoms intended to reduce accidental damage, which estimates suggest cost the UK up to GBP2.4 billion ever year. This will offer immediate practical assistance to developers and utility providers alike once it is rolled out to the whole of the UK after its first deployment phase.
Many council planning departments in the UK are starting to adopt planning policy on building reuse rather than demolition. This will see a shift to repurposing buildings in an effort to reduce the carbon footprint of properties and encourage sustainable developments. But will this work if it simply adds more leisure and office space to an already congested market? The uncertainty in the year ahead will no doubt create winners and losers, but forced sales are still expected to be limited unless they are located in high streets or large office space or older industrial buildings.
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