The government has launched the Building Safety Bill, which sets out a new regulatory regime for high-rise residential and other in-scope buildings, based on Dame Judith Hackitt’s review, following the Grenfell tragedy. The Bill, which has had its first reading in the House of Commons, will, as currently drafted:

  • establish the Building Safety Regulator within the HSE to provide oversight for all buildings and to introduce a more stringent regime for higher-risk buildings during design, construction, and refurbishment;
  • introduce amendments to the Defective Premises Act 1972 to allow claims to be brought for historical defects that make a dwelling unfit for habitation, extending the limitation period from 6 years to 15 on a retrospective basis;
  • extend the Act to cover all work on residential property that makes a dwelling unfit for habitation;
  • introduce a stronger and clearer framework for the regulation of construction products and ‘pave the way’ for a National Regulator for Construction Products to be established in the Office for Product Safety and Standards; and
  • introduce wider improvements including changes to the Architects Act 1997, the Regulatory Reform (Fire Safety) Order 2005 (the Fire Safety Order) and the Housing Act 1996, and provisions to establish a New Homes Ombudsman.

See building regulatory system and building safety bill.

 

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The Government has announced that new legislation will be introduced in this Parliamentary session to ring-fence outstanding commercial rent arrears built up by tenants due to the COVID-19 pandemic and to introduce measures to guide tenants and landlords to come to an agreement on how to deal with the money owed, either by waiving some of the total amount or agreeing a longer-term repayment plan. If agreement cannot be reached, the new legislation will put in place an arbitration process to make a formal award that will be legally binding and must be adhered to by both parties.

Until these new rules come into force the existing measures to protect commercial tenants from eviction will be extended from 30 June 2021 to 25 March 2022. The Government has also extended the restrictions on landlords using Commercial Rent Arrears Recovery (CRAR) to recover unpaid rent to 25 March 2022 as well, which increased the total number of days’ outstanding rent required for CRAR to be used to 544 days. Statutory demands and winding up petitions will also remain restricted for a further 3 months until September to protect tenants from enforcement action where their debts relate to the COVID-19 pandemic. The extensions will apply to all businesses, but the new measures introduced by legislation will only cover those businesses impacted by closures. This means that rent arrears accumulated before March 2020 and after the date when relevant restrictions on trading are lifted, will be actionable by landlords as soon as the tenant protections are lifted.  There is no restriction introduced on landlords suing for rent arrears as a simple debt claim.

The Government’s announcement will come as a surprise and significant disappointment to landlords, especially those who will have engaged proactively to seek a joint approach to navigate the effects of the COVID-19 pandemic but have met with tenants simply refusing to pay or using the existing measures as an opportunity to seek to restructure their lease obligations. The announcement is likely to be seen as strongly pro- tenant and there will be concern amongst landlords that by continuing the existing measures for a further 9 months it will do nothing to unlock the stalemate or allow the market to recover.  Further, by applying the measures to different business sectors depending on the impact of closures, as opposed to a uniform application (like in the previous interventions), this is likely to create some confusion as to whether or not the measures apply to certain properties which could potentially cross different business sectors.

The announcement follows the Government’s call for evidence which sought views on how the commercial real estate sector should move forward from the COVID-19 pandemic, and it is expected a formal response will be published in due course. The Government has also reiterated its intention to review landlord and tenant legislation relating to the commercial property sector later this year to consider a broad range of matters including Part II of the Landlord and Tenant Act 1954 (security of tenure), different models of rent payment and an analysis of the COVID-19 pandemic on the market. We will provide further updates when the Government publishes its proposals.

For further information on the Government’s announcement, please view the press statement.

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The Government is consulting on the design of the new Residential Property Developer Tax, ahead of its inclusion in the 2021-22 Finance Bill. The tax is one of two revenue raising measures to help pay for the Government contribution to the costs of remediation of unsafe cladding.

As previously announced, the new tax is time-limited and is to apply to the largest residential property developers in relation to their income from UK residential development.

The consultation runs until 22 July 2021.

See residential property developer tax consultation.

 

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Further to our update on the Government’s residential leasehold reforms, the Leasehold Reform (Ground Rent) Bill was introduced into the House of Lords on 12 May 2021. The bill seeks to fulfil one of the proposals set out in the Law Commission’s enfranchisement report and follows on from the Government’s press release made earlier this year, to tackle the inconsistency and ambiguity of ground rents for future residential leaseholders.

In particular, the key details of the bill include:

  • restricting the charging of ground rents to zero on new long residential leases;
  • prohibiting the charging of administrative charges in relation to ground rent;
  • the restriction will have prospective (not retrospective effect) and will apply only to future long residential leases;
  • certain types of leases will be exempt from the restriction, including business leases and some parts of the community-led housing sector;
  • a breach of the restriction will be considered a civil offence with a financial penalty of between £500 to £5,000 enforceable by trading standard authorities; and
  • leaseholders will be able to recover unlawfully charged ground rents through the First-Tier Tribunal.

The bill is the first of two pieces of legislation designed to implement leasehold reform, with the second piece of legislation on changing the enfranchisement procedure expected in the next 12 months. The Government is also keen to revive commonhold ownership and on the 13 May 2021 launched the Commonhold Council, an advisory panel of leasehold groups and industry experts to help inform the Government on the future of home ownership.

Residential developers and investors may want to consider the impact of the bill on their current and future schemes.

We will provide further updates as the bill makes its way through Parliament.

 

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The COVID-19 pandemic and its consequences have had a turbulent effect on the retail, leisure and hospitality sectors in the UK. Government regulations in response to the pandemic have required tenants to close their premises to the public for long periods of time, causing profits to plummet, whilst landlords have been faced with rent ceasing to be paid and few remedies remaining available to them due to Government restrictions prohibiting leases being brought to an end by forfeiture for non-payment of rent and preventing the use of statutory demands and winding up petitions based on non-payment of rent until summer 2021.

There has been particular dispute and discussion as to upon whom (landlords, tenants and/or insurers) the burden of the financial detriment caused by the pandemic should fall. For this reason, the recent judgment in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB) is important as it tackles head-on the thorny issue as to whether rent remains due and payable by tenants of commercial premises in spite of the circumstances of the pandemic.

What was the background to the case?

The landlords applied for summary judgment against the tenants in claims for rents due during the pandemic under three leases of commercial premises. The tenants were substantial commercial entities which ran cinema, bingo and retail businesses. Between March and December 2020, Government regulations meant that the tenants were required to close their premises and were unable to trade for certain periods of time. At other times during the pandemic it was legally permitted for the tenants to open, subject to complying with certain restrictions, but they took the view that it was not commercially feasible to do so.

The leases were in standard form, including a rent cesser clause to the effect that if access to the premises should be destroyed or damaged by specified insured risks so as to render them unfit for occupation or use, then the yearly rent should be suspended. Each lease required the tenant to pay a proportion of the premium incurred for the landlord’s insurance of the premises and the tenants had done so. The landlords had also taken out insurance policies which indemnified them in respect of loss of rent resulting from the interruption of or interference with the business following any human infectious or human contagious disease.

The tenants accrued rent arrears and the landlords brought an action for non-payment of the arrears.

What did the court decide and why?

The tenants put forward a range of different defences for not paying rent ,predicated on the basis that the terms of their leases had been overtaken by wholly unforeseeable events when they were forced to close their premises during the pandemic. However, each of these arguments failed, and the court granted summary judgment in favour of the landlords.

In very simple terms, the court decided:

  1. The Code of Practice introduced by the Government on 19 June 2020 and subsequently updated on 6 April 2021, which strongly encourages commercial landlords and tenants to negotiate ameliorative measures for tenants, is voluntary. The Code clearly stipulates that tenants who are in a position to pay rent should do so, and that tenants continue to be liable for payment obligations under their leases, unless terms are renegotiated.
  2. Standard-form rent cesser clauses in leases are typically triggered by an event which causes the relevant premises to be physically damaged or destroyed and that was not the case here. Closure and an inability to trade due to the pandemic does not constitute physical “damage” or “destruction”.
  3. Further, it is not appropriate to imply terms into rent cesser provisions so as to interpret the operative words “damage” or “destruction” to include an inability to trade due to the pandemic. Whilst the pandemic was unprecedented, it was not wholly unforeseeable. Standard-form, professionally drafted documents are intended to cover the parties’ entire legal relationship. The leases included express rent cesser provisions which were limited to physical deterioration and therefore it was not necessary to imply any terms to give the leases business efficacy.
  4. The landlords’ “loss of rent” insurance does not entitle tenants to withhold rent. Because the rent cesser clauses were not operative, the insurance policy did not compel the insurer to pay the landlords sums equivalent to the rent. The landlords were the insured parties and the policy provided for them to be indemnified against loss of rent, but they had suffered no loss. Nor did the fact that the tenants had paid for the landlords’ insurance premiums mean that tenants could expect insurers to pay for their rent.
  5. Business interruption policies have been a standard feature of the insurance market for many years, providing a well-known means for both landlords and tenants to protect their business turnover against the inability to trade from their premises. A tenant’s failure to take out their own business interruption insurance did not mean they could rely on a landlord’s business interruption insurance policy, as that insurance is for the benefit of the landlord.
  6. There is no such thing as a “temporary frustration” which effectively suspends a contract for a period of time. Frustration has the effect of discharging a contract and ending it. The tenants could not therefore argue that the pandemic temporarily frustrated their leases so that rent was not payable for periods when their premises were closed.

What are the practical implications of this decision for landlords and tenants?

Although the decision should be considered by landlords and tenants in the context of the particular terms of their leases, this judgment explores in detail nearly every conceivable argument for non-payment of rent during the pandemic and so the court’s unambiguous rejection of those arguments will no doubt provide comfort to landlords and encourage more proactive engagement from tenants in future rent arrears discussions.

It is not yet known whether the tenants will make any applications for permission to appeal the decision.

We also await with interest the outcome of the Government’s recent “call for evidence” on the withdrawal or replacement of the protections it has put in place to protect commercial tenants during the pandemic which expire on 30 June 2021, which could significantly change the situation for rent arrears again.

 

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Earlier this year, the UK Government reconfirmed its intention to bring forward residential leasehold reforms following the Law Commission’s recommendations last year. The proposed changes are expected to benefit up to 4.5 million leaseholders.

The news will no doubt be welcomed by leasehold homeowners who have been campaigning for changes to what they perceive to be unfair ground rent laws. However, the impact on developers, house builders and landlords, is less clear, but it is likely to affect the legal structuring of both the ownership and the ongoing management of new residential developments.

In this article, we consider what the proposed reforms are, when they are expected to come into effect and some of the potential implications on developer landlords or investors.

What are the proposed reforms?

The key points of the reforms are:

  1. To give leaseholders of flats and houses the right to extend their leases up to 990 years without needing to pay a ground rent to their landlord. Currently, leaseholders of houses can only extend their lease term once for 50 years with a ground rent, whereas leaseholders of flats can extend multiple times for 90 years for nil rent.
  2. “Marriage value” (reflecting the increase in value of the property following a lease extension) is to be abolished.
  3. An online calculator is to be introduced making it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease.
  4. Changes will be introduced to ensure that leasehold owners of retirement properties have the same rights as other homeowners.

When do the changes come into effect?

The short answer: we don’t know yet. At this stage, the proposed legislation is only at consultation stage and we do not yet have details of the legislative timescale. Even if the legislation is brought forward, it will take some time to go through the Parliamentary process, so the changes will not take effect immediately.

What is the position on ground rents in leases that have already been granted?

The prohibition on ground rents is expected to be forward looking and apply to future leases only. Therefore leases that have already been granted remain unaffected. If a developer is already in the process of constructing a build-for-sale residential scheme and has granted some leases which reserve a ground rent then the ground rent will continue to be payable under these leases.

What about contracts that are exchanged before the legislation is implemented?

The position is less clear in relation to contracts that are exchanged but not completed before the legislation is implemented (i.e. where the price has been agreed on the basis of a ground rent being paid but the lease has yet to be granted). There is very little detail in the Government’s announcement and so it is hard to assess the full impact until the draft legislation is published. The key, as always, will be in the detail but for now, developers should consider doing everything they can to get the relevant phases of the development completed and the leases granted before the prohibition comes into effect.

How will landlords be compensated if “marriage value” is abolished?

The current proposals deal with the rights to extend leases but do not deal with payments to landlords. Therefore it is not currently clear how the loss of value to the landlord of the ground rent income will be compensated. Currently, when extending their leases, leaseholders pay a premium to reflect the benefit to them of replacement of a ground rent with a peppercorn rent. There is then a valuation process that deals with how “marriage value” is calculated and shared with the landlord.

Will there be a replacement of this element to fully compensate landlords? It remains to be seen. In the absence of any compensation built into the calculation, for developer landlords or investors who might be relying on the income generated from ground rents there may be an argument that this effectively is a compulsory acquisition of the landlord’s property without compensation. In reality, we expect that, this will instead mean that the sale price increases to reflect the fact that the purchaser does not have to pay an annual ground rent, but it remains to be seen whether the market will be sufficiently buoyant at the point of sale to follow economic logic in this way.

Clearly the detail of the legislation will need to be scrutinised when the draft legislation is tabled and debated. However, given that the proposals recommended by the Law Commission in July 2020 purported to move the law in favour of leaseholders, it will be interesting to see what steps (if any) are taken to protect the interests of landlords and developers.

We will provide further updates when the Government publishes the draft legislation.

 

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There is just over a week left to participate in the Government’s consultation on the withdrawal or replacement of the protections it has put in place to protect commercial tenants during the COVID-19 pandemic. On 6 April 2021 the Government launched a consultation calling for those involved in the commercial property sector to participate in a survey on what should happen when the current restrictions placed on landlords come to an end on 30 June 2021. The consultation is open to all those with an interest in commercial property and will end at 11.45 a.m. on 4 May 2021.

Since 26 March 2020 landlords of commercial property have been subject to statutory restrictions on their ability to recover rent arrears from their tenants. These include a moratorium on forfeiting leases for rent arrears, restrictions on the use of the commercial rent arrears recovery (CRAR) process and a prohibition on issuing winding up petitions or statutory demands for debts resulting from the COVID-19 pandemic . These measures are due to end on 30 June 2021 and the Government is unlikely to simply continue them in their current form. Equally, the effect of the restrictions has been to severely restrict the ability of landlords to recover rent arrears from their tenants for the duration of the measures, but the arrears themselves have not been forgiven, and so there is a concern that when the restrictions end there will be a rush of enforcement action taken by landlords. The Government has therefore stated that the consultation will “support the government’s decision making on the best way to withdraw or replace these measures while preserving tenant businesses and the millions of jobs that they support . If there is evidence that productive discussions between landlords and tenants are not taking place, and that this represents a substantial and ongoing threat to jobs and livelihoods, the government will not hesitate to intervene further.”

Reference to “productive discussions between landlords and tenants” is to the Government’s “Code of Practice for commercial property relationships during the COVID-19 pandemic“, which although voluntary encouraged landlords and tenants to engage proactively with each other during the pandemic to seek fair solutions to the respective challenges they each faced during the pandemic. The Code of Practice was clear that “tenants who are able to pay their rent in full should continue to do so” but equally that where they cannot “landlords should also provide support to businesses if they too are able to do so“. The Code of Practice was updated on 6 April 2021 to introduce a new template form for tenants to complete to form the basis of discussions with their landlords, the intention being to ensure that information provided to landlords would be of a consistent standard and quality and would help facilitate discussions.

The Government’s consultation therefore seeks to gather information on how the Code of Practice has been applied in practice, and whether landlords and tenants (and their funders) have actually engaged to support each other, including amending lease terms and granting rent concessions and waivers. The Government is concerned about the potential impact on the economy of significant rent arrears and the risk of widespread enforcement action by landlords once the measures end in June, and based on the results the Government will consider whether further measures are required to “preserve viable business and the jobs that they provide“.

Although a possibility, it does seem unlikely that when 30 June 2021 arrives the Government will either simply continue the existing restrictions in their current forms or allow them to expire without putting in place some sort of transitional protections. Other options being considered by the Government include:

  1. A continuation of the current measures for a limited time but targeted to business based on the impact that the pandemic has had on their ability to trade.
  2. Encouraging further more formal discussions between landlords and tenants, including by way of mediation and adjudication.

The current restrictions have severely impacted landlords from deploying their usual methods of collecting rents from their properties, and some landlords and tenants will have simply refused to engage under the Code of Practice. The voluntary nature of the Code of Practice has recently been affirmed by the High Court in a number of recent decisions relating to debt claims brought by landlords for unpaid rents. The High Court has been clear that the Code of Practice is voluntary and does not affect the existing legal framework, and as such will not present any obstacle to a landlord with a clear case for payment.

We will await with interest the outcome of this Government consultation and the impact it will have on continuing landlord and tenant relationships, and would encourage everyone with an interest to have their say and participate in the survey.

 

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The Housing Secretary has announced:

  • new funding for the replacement of unsafe cladding for all leaseholders in residential buildings 18 metres (6 storeys) and over in England;
  • a new scheme for buildings between 11 and 18 metres for cladding removal, where needed, through a long-term, low interest, Government-backed financing arrangement;
  • plans for a ‘Gateway 2’ developer levy, to apply when developers seek permission to develop certain high-rise buildings in England;
  • a new tax for the UK residential property development sector;
  • the Government will bring forward legislation this year to tighten the regulation of building safety and to review the construction products regime to prevent malpractice arising again.

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The Government has confirmed that it will be renewing the measures it introduced to protect tenants in the commercial property sector unable to pay their rent due to the COVID-19 pandemic. Currently, commercial tenants benefit from a prohibition on landlords forfeiting commercial leases for non-payment of rent. This measure was due to expire on 31 March 2021, and despite the Government confirming in December 2020 that this would be the final extension to protections from the threat of eviction, the Government has announced that the restriction on forfeiture will in fact be extended until 30 June 2021.

The Government has also renewed the restriction on landlords using Commercial Rent Arrears Recovery (CRAR) to recover unpaid rent, which was due to expire on 31 March 2021, but has now been extended until 30 June 2021. This measure will increase the total number of days’ outstanding rent required for CRAR to be used to 457 days if CRAR is to be used between 25 March and 23 June, increasing to 554 days’ if CRAR is to be used between 24 and 30 June.  It is not yet clear whether the Government will extend the measures introduced by the Corporate Insolvency and Governance Act 2020 restricting the use of statutory demands and winding-up petitions which is due to expire on 31 March 2021.

Continue Reading Commercial property evictions ban extended until 30 June 2021

SDLT break extended

The temporary increase of the nil rate SDLT band to £500,000 will continue until the end of June 2021. From 1 July to 30 September 2021 the nil rate band will sit at £250,000. Above £500,000, the standard SDLT rates and thresholds remain in force.

The holiday will not just benefit individual buyers, but companies can benefit from these changes as well, where they are not subject to the flat 15% rate. However, taxpayers should be aware that the holiday applies only to residential property and the rules concerning higher rates for additional dwellings will continue to apply (but with the 3% rate available to £500,000).

Corporation tax on the profits of big business to rise from 19% to 25% in April 2023

The UK corporation tax rate is set to rise to 25% in April 2023 for profits above £250,000.  Smaller businesses with profits of £50,000 or less will be protected from the hike and will continue paying corporation tax at the current level of 19%.

Continue reading at MayerBrown.com

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