A look ahead for UK real estate in 2023
Published on 6th Jan 2023
The new year will be a busy one – including the implementation of new regimes for overseas ownership of UK real estate, energy efficiency and building control
It looks as though 2023 will be a busy year for commercial real estate law. There are many key legislative changes on the horizon: including the new rules for overseas entities which own UK real estate, a tightening of energy efficiency standards, the overhaul of the building control regime and other important considerations for investors, occupiers and developers. We consider below some of the principal issues of particular relevance to housebuilders, leasehold reform, and possible changes for the English private rented sector.
Overseas entities and identity verification
Economic Crime Act transition period ends on 31 January
The Economic Crime (Transparency and Enforcement) Act 2022 was rushed through Parliament in just over two weeks last year in response to the war in Ukraine. This was followed by a swift implementation timetable that has had consequences for many real estate transactions.
A key deadline early in the new year for overseas owners of UK real estate is 31 January 2023 – beneficial owners need to be identified, verified and registrations submitted to Companies House. Once registered, the new regime demands annual updating of the filed information. Failure to comply means fines, potential criminal sanctions for officers and inability to complete major dealings with UK property.
Those buying from an overseas entity, taking a lease for more than seven years from an overseas entity or taking charges over an overseas entity's UK land need to ensure that the entity has complied with its duties under the legislation. After 31 January, the registered titles owned by overseas entities will be burdened by a restriction preventing the registration of these dealings with their land. (For more, see our Insight.)
Further regulations and guidance to supplement the new regime are anticipated. Detail is awaited in particular in relation to how the insolvency exemptions are intended to operate.
Companies House reform
A second round of legislation aimed at tackling money laundering and economic crime is expected in 2023 in the form of the Economic Crime and Corporate Transparency Act, (currently in Bill form).
The most significant change will be the introduction of mandatory identity verification for anyone incorporating and filing with Companies House, fundamentally shifting its role from administrator to gatekeeper. When the changes take effect, it will have profound implications for the way that UK companies are administered. (For more, see our Insight.)
Decarbonisation and commercial real estate
Minimum Energy Efficiency Standards
Energy efficiency rules are getting tougher. From 1 April, it is not just granting a lease of a sub-standard commercial property that puts a landlord in breach of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 – continuing to let a sub-standard property becomes unlawful (although does not invalidate the lease).
To stay within the rules, let commercial property must have an Energy Performance Certificate rating of E or above, or landlords must register an exemption. Breach can mean financial penalties of up to 20% of the property's rateable value. (For more detail, see our Insight.)
Anticipating longer term change
Businesses need to be thinking about their green future, certainly in terms of the immediate April deadline, but also longer term. On the strictly legal side, we can anticipate a tightening of the legislative regime: by 2027, the minimum standard is likely to rise to a C and by 2030, a B.
It is also possible that we may see the introduction of alternative methods of rating properties and requirements for more frequent assessments. Tenants negotiating leases should ensure that they understand whether the terms require them to carry out works to improve environmental standards in consequence of laws passed after the date of their lease. If the burden of carrying out necessary environmental upgrades is to fall on the landlord, the landlord will need to reserve appropriate rights of entry to carry out the required works and the tenant will need to consider the likely disruption to its business.
Improvements to our built environment are unlikely to be driven purely by the need to stay legally compliant. Data from commercial lettings in recent years shows a clear preference for buildings with the greenest credentials, as occupiers look to implement their decarbonisation strategies. Investor landlords also have net zero goals, many of them highly ambitious, driven by investor demand. Constructing buildings to achieve green certifications such as BREEAM and NABERS-UK is becoming more widespread as developers seek to meet the growing appetite for a sustainable future and understand the increasing importance of these new standards.
Decarbonisation goals are also leading to mutual agreements between some landlords and tenants committed to reducing the environmental impact of their building, including obligations relating to sustainable materials, energy efficient plant, renewables and recycling initiatives. With the increasing ability of new technology to offer powerful insights into the optimisation of energy use in the built environment, parties are increasingly agreeing to collect and share data with a view to collaborating on strategies to reduce their carbon footprint. See more on how digital twins are used to add value in this context and the increasing significance of systematic data collection to fuel digital transformation.
However, with Savills estimating that the costs of upgrade to 2030 requirements add an average of £40 per square foot to usual refurbishment costs, the expense may be unaffordable for many outside the big cities.
Real estate investment
From April, the requirement for a real estate investment trust (REIT) to own at least three properties will be dropped provided that it holds a single commercial property worth at least £20 million. There are also planned (but as yet unspecified) changes to the "development rule".
As part of the same group of "Edinburgh Reforms" announced by the chancellor last December "to drive growth and competitiveness in the financial services sector", we can also expect an updated Green Finance Strategy to be published early in 2023 to support the government's aim of ensuring the UK is the "world's premier financial centre for sustainable finance".
The concept of issuing tradeable tokens in a real estate asset or rights in relation to that asset is slowly gaining traction, but there is currently much uncertainty over the legal framework governing tokenised real estate and a lack of awareness of the asset class which continues to hold back wider-scale adoption.
However, there is huge potential in the security, transparency and efficiency of the decentralised blockchain ledger. The ability to fractionalise a historically illiquid asset with a previously limited pool of wealthy purchasers offers transformational opportunities for real estate investment, making the hurdles to adoption well worth the effort to address.
2023 is likely to see the launch of the government's first "Financial Market Infrastructure Sandbox" under the Financial Services and Markets Bill 2022 which will allow participants to pilot the use of developing technologies in a test regulatory environment. This may pave the way for the modification of the legislative framework to accommodate distributed ledger technology-based trading facilities and other innovations, leading to the greater uptake of tokenised real estate in the future.
Read more about the tokenisation of real estate in our three-part series.
Empty shop auctions
Owners of high street retail premises should be aware that Part 8 of the Levelling-up and Regeneration Bill, currently progressing through Parliament, will give local authorities the power to conduct compulsory rental auctions of certain vacant high street premises.
The local authority is given the power to do anything the owner could do in order to let the premises, including granting rights over land outside the premises, and any superior landlord and mortgagee will be deemed to have consented if required. However the protection of the 1954 Act will not apply to these tenancies.
To satisfy the criteria to be considered for auction, the local authority will need to have allocated the area in which the premises are located to be a "designated high street" or "town centre" due to its importance to the local economy. This will be listed as a local land charge. The premises will need to have been unoccupied for a year or 366 days within the previous two years and the local authority must consider that occupation of the premises for a high-street use would be of benefit to the local economy, society or environment. The local authority will need to give the owner notice and the opportunity to let the premises (on genuine terms) prior to the auction.
While the enabling legislation is anticipated during 2023, the regulations to implement the detail will require time.
Reduced land disposal burdens for charities – likely spring 2022
Charities will enjoy reduced burdens when disposing of charity land from the implementation of the relevant provisions of the Charities Act 2022 (likely to come into effect in spring 2023).
Controls will remain in place to ensure effective oversight: for example, professional advice must still be obtained prior to a disposal but there will be a wider pool of potential advisers.
Business rates: 2017 rateable value appeal deadline of 31 March
The 2017 Rating List closes on 31 March 2023 marking the final date businesses can appeal their 2017 rateable value for the period 1 April 2017 to 31 March 2023.
Tenants are often required by the terms of their lease to obtain their landlord's consent before appealing a rateable value so must ensure this is sought in good time if necessary.
Business rates revaluation on 1 April
Business rates are to be revalued on 1 April, based on property values as at 1 April 2021. Predictions by JLL suggest that retailers will see dramatic falls in their rateable value due to the explosion in online shopping, but variation between the sub-sectors of high street, retail parks and supermarkets is to be expected. Conversely logistics will bear substantial increases and offices should expect a moderate rise.
Small businesses will benefit from targeted reliefs. Relief is available for vulnerable sectors (retail, leisure and hospitality), however this is capped at £110,000 per business, limiting effectiveness for larger operations. Other reliefs are also available.
In difficult market conditions, landlords are increasingly finding themselves facing voids which bring not only cessation of the income stream but also business rate liabilities. Reliefs and mitigation strategies are available but caution should be exercised as discussed in our Insight.
The revaluation could also have a big impact on the statutory compensation payable if a landlord wishes to terminate a Landlord and Tenant Act 1954 protected lease on a "no-fault ground", depending on the exact timing of the statutory notices. Landlords considering opposing statutory lease renewals that expire within the next 12 months, or tenants with protected leases that believe their landlord may have redevelopment plans, should seek specialist advice as soon as possible. (For more, see our Insight.)
'At the premises' business interruption insurance cases
Test cases are expected to be heard by the High Court in April to consider whether insurance contracts which provide cover in the event of disease "at the insured premises" triggers a pay-out for businesses suffering loss in consequence of the Covid-19 pandemic, a point that was not directly considered by the Supreme Court in the test case brought by the Financial Conduct Authority in 2021. This new case includes a claim of around £178m by Pizza Express and £15m in relation to London's ExCeL Centre.
Prescribed clauses for leases
The Land Registry will reject a lease for a term longer than seven years which does not include the new form for prescribed clauses from November 2023.
New leases should be checked to ensure that the new form (which makes it clear whether or not parties are overseas entities) is being used.
A more commercial approach to negotiations?
Following a lengthy consultation on changes, there will be a significant update to the Electronic Communications Code contained in Schedule 3A to the Communications Act 2003 (as amended by the Digital Economy Act 2017) which will be brought into force via regulations expected to be passed this year (implementing the Product Security and Telecommunications Infrastructure Act 2022).
Tensions (and litigation) have been rife between operators and landowners which has led to delays or failures to conclude Code agreements and therefore to install, retain or upgrade relevant apparatus. The changes aim to support the more effective roll-out of gigabit capable broadband and 5G networks by:
- Dealing with the issue of unresponsive landowners: operators will be able to obtain Code rights (over certain types of land only) on application to court following repeated failure by the landowner to engage. This follows the introduction of a similar right in relation to multi-let residential property, effective from 26 December 2022.
- Enhancing operator rights to share and upgrade apparatus: rights to share apparatus with another operator have been enhanced, as have the rights to upgrade existing apparatus under a subsisting agreement but only where the apparatus has been installed under land or those installed under land prior to 29 December 2003 where there is no subsisting agreement (subject to conditions).
- Aligning renewal processes: 1954 Act protected tenancies with a primary purpose of conferring Code rights will have the renewal rent assessed on the same assumptions as where a new agreement is granted under the Code.
- Promoting alternative dispute resolution before parties make a court application.
Building Safety Levy consultation closes on 7 February
The details for the Building Safety Levy are expected to be finalised during 2023 and the second consultation on the government's proposals closes on 7 February.
Like the Residential Property Developer Tax introduced on 1 April 2022, the levy is intended to raise funds to remediate unsafe defects in buildings. Under the proposals, local authorities will collect the levy from developers of residential buildings (regardless of the building's height). While affordable homes, care homes and developments of less than 10 units will be exempt, it has not yet been determined whether built-to-rent, purpose-built student accommodation and senior living residences will fall within scope. (For more on the consultation, see our Insight.)
Overhauled building safety regime likely to be operative by October
We can expect the publication of building safety regulations throughout 2023 to support the implementation of the more stringent building control regime under the Building Safety Act 2022 which is planned to come into operation in October 2023. The Act aims to drive an industry culture change with greater accountability and responsibility for fire and structural safety issues throughout the lifecycle of a building.
'Golden thread of information'
Clear digital records with required design and safety information about high rise residential buildings will need to be maintained: providing easily accessible details relevant for emergency responders, ongoing risk management and to enable any later changes to the building to be sensibly reviewed against the original design intent. This is referred to as the "golden thread of information". From planning and design to construction, through to occupation and the later responsibility for ongoing repairs, accountable parties are identified and given formal obligations to identify and manage building safety risks.
The regime also establishes a new Building Safety Regulator to oversee building safety and set building standards. The regulator is also responsible for granting approvals at each stage of a new "hard-stop" Gateway regime which will apply to new developments of high rise residential buildings. Any such development will be unable to proceed to its next stage until it successfully passes the regulatory requirements of each relevant Gateway.
Gateway one (which is already in force) is the early consideration of fire safety at the point of seeking planning permission and Gateways two and three are expected this year. Gateway two provides that no construction can begin until the regulator is satisfied that the designer and the build contractor have delivered statements and plans to comply with the relevant regulatory requirements. Gateway three ensures that the building cannot be occupied until the regulator has certified that the buildings have been correctly constructed and appropriate golden thread information has been supplied to the "Accountable Person" who will be responsible for ongoing repairs and safety of the building. After Gateway three, occupation remains prohibited until an Accountable Person has registered itself and the building with the regulator.
While the golden thread of information and the Gateways are focused on high rise residential buildings (with some aspects including other vulnerable buildings such as care homes and hospitals), the Act will also bring in wider changes to the building regulations to improve design and construction standards for all buildings. See our Building Safety pages for more information and for updates as guidance and secondary legislation is published throughout the year.
Biodiversity net gain
It is expected that from November 2023, planning permissions for most new developments in England will be subject to a condition that the developer delivers a biodiversity net gain of at least 10%. The enhancements for wildlife must be sustained for at least 30 years after the development has been completed.
This means additional due diligence and planning for developers with careful evaluation of the costs in consultation with the planning authorities to assess project viability and pricing. It is anticipated that purchasing off-site credits may be an option where a developer is unable to manage biodiversity requirements within a particular scheme, but it is likely to take some time before the market in such credits is established and planning authorities may be keen to promote on-site provision in the interests of creating more attractive living conditions for residents.
Environmental Outcome Reports
We can anticipate consultation and further details to emerge during 2023 on the framework for a new outcomes-focused system to replace environmental impact assessments which are carried out as part of the planning application process for new developments. Although, with much of the detail still unclear, it is likely to be some years before the Environmental Outcome Reports regime (put forward in the Levelling-up and Regeneration Bill) is fully in force.
We may see the start of pilot schemes for the Infrastructure Levy (IL), the intended successor for the trouble-ridden Community Infrastructure Levy, the framework for which is also set out in the Levelling-up and Regeneration Bill. The IL will focus on land value capture (being based on gross development value rather than floor space) and it is envisaged that it will become mandatory in England (excluding Greater London). For more, see our Insight.
Transparency of information relating to the control of land
Greater publicity over who holds options to purchase land, the benefit of conditional contracts to purchase and other rights relating to land together with the details of those agreements and how they are funded is a possibility under the provisions of the Levelling-up and Regeneration Bill.
The proposals would see this information, which is currently confidential and often highly commercially sensitive, disclosed to the Land Registry. Stakeholders have been pushing for the ability to redact potentially prejudicial information and we will need to see how the detail of the regime emerges as the Bill progresses and regulations implementing its provisions are published.
Housebuilding and leasehold reform
Under pressure from its backbenchers, the government's housebuilding target of 300,000 new houses a year has been watered down, now being only a "starting point with new flexibilities to reflect local circumstances".
New Homes Quality Code
All residential developers were expected to have registered for the New Homes Quality Code by 31 December 2022. This scheme and its enforcement mechanism, the New Homes Ombudsman were set up under the Building Safety Act 2022 to provide a forum for owners of new build homes to seek redress against developers and builders. This year will see the beginning of the more consumer-friendly regime.
Rates of build-out
Concerns have been raised over rates of developer build-out and the Levelling-up and Regeneration Bill, currently progressing through Parliament and expected to be passed this year, will give councils new powers to impose sanctions including to block planning proposals by developers who have "failed to deliver". The detail is awaited.
Competition and Markets Authority investigation
We may see a CMA market study of the housebuilding industry following a formal request by the Secretary of State for Levelling Up, Housing and Communities. An update from the CMA is expected early in 2023.
The abolition of ground rents for new long-leases last June was, for many, the first step of many key reforms needed for long-leaseholds; the final implementation of the (non-retrospective) ground rent regime comes into effect on 1 April 2023 when the transition period that applies to retirement properties ends.
The government is currently reviewing the results of its consultation on recommendations that would broaden access to enfranchisement (the right for long-leaseholders to buy the freehold of their building or to extend their lease) and the right for long-leaseholders to manage their own building. The proposals aim to simplify the current system and would allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or claim a right to manage.
The Law Commission report from 2020 provides a path forwards for this and other key modernisations, including a ban on leasehold houses and the reinvigoration of commonhold, although whether there will be any Parliamentary time for them in 2023 remains to be seen. (See our Insight.)
Residential private rented sector
The publication in June 2022 of the government's white paper "A Fairer Private Rented Sector" and associated documents, introduced the long awaited "New Deal" offering "quality affordability and fairness" for the 4.4 million households who rent from private landlords.
As part of this we are likely to see the Renter's Reform agenda pushed forward this year, potentially seeing an end to "no-fault" evictions, more efficient dispute resolutions, the creation of a new digital property portal, the Decent Homes Standard being extended to the private rented sector and greater protection for tenants through a new Ombudsman scheme. (See our Insight.)
Bonfire of retained EU law on 31 December?
When the UK left the EU, legislation and case law which had come from the EU did not disappear – that would have caused chaos – so at the end of the "Transition Period" on 31 December 2020, it was frozen on our statute books and in the UK legal system as "retained EU law".
As currently drafted, the Retained EU Law (Revocation and Reform) Bill 2022-2023 would revoke (the government term is "sunset") much of this retained EU law on 31 December 2023, other than any legislation that has been specifically "saved" or which has been otherwise "reformed" or allowed to remained on the statute book by an express act of a government minister (in some cases until the end of 2026).
In an attempt to avoid unintended consequences of the automatic sunset, government departments will be tasked with reviewing each piece of retained EU law by the end of the year. The government's original estimate that there were 2,400 laws to be reviewed in this way is reported to be an underestimate, following research by the National Archives which put the number at around 3,800. Either way, understanding each law (and being certain none have been missed) before the end of 2023 cut-off is an ambitious task.
If the Bill passes as currently drafted, from 31 December retained EU law would be no more and instead we would have "assimilated law", comprising that retained EU law actively preserved by a minister during 2023 (whether permanently or pending further review).
Seeking to avoid ambiguities, anomalies and holes in the statute book, significant powers are given to ministers and devolved authorities to "restate" retained EU law up to 31 December 2023 and assimilated law up to 23 June 2026. These restatement powers include the ability to revoke and replace rules by the use of secondary legislation, with the risk that Parliamentary scrutiny is lacking: the only real check on ministerial powers being a proviso that there must be no overall increase in the regulatory burden.
With retained EU law often woven into the way we live, work, study, travel and eat, the impact of this law could be significant for UK business. Particular examples of real estate-related retained EU law that will be up for ministerial consideration under this legislation (if it is passed in its current form) include the Building Regulations 2010 and the Construction (Design and Management) Regulations 2015. In addition, much of the UK's current environmental protection regime is secured through retained EU law and concern has been raised that many of the safeguards built up in recent years could be lost.
In reality, given the far-reaching consequences and criticisms of the inadequate impact assessments to date, the 31 December 2023 deadline may well be extended.
Nuisance and privacy
Extension of the law?
And finally, have the Central London Tate gallery's neighbours, whose residences feature floor-to-ceiling windows, created a "self induced incentive to gaze" as the High Court ruled (supported although on somewhat different lines by the Court of Appeal)?
The Supreme Court heard the case of alleged nuisance last year but the decision in Fearn and others v The Board of Trustees of the Tate Gallery as to whether the law is to be extended is still awaited.
To discuss any of the issues covered in this Insight, please get in touch with your usual Osborne Clarke contact, or one of the experts listed below.