I INTRODUCTION TO THE LEGAL FRAMEWORK
i Ownership of real estate
The two main types of ownership of real estate in England and Wales are freehold and leasehold. Freehold is in effect absolute ownership for an indeterminate period, whereas leasehold is a right to possession and use of land for a limited period; the lessor retains its interest and grants the leasehold interest to the lessee for the term of the lease. Ownership of land also includes ownership of any buildings or other structures attached to the land and, as a general rule, includes the subsoil beneath and the airspace above the land.
Generally speaking, freehold interests are more attractive to investors because they are not subject to termination and there are fewer restrictions on the owner, whereas a lessee is constrained by the terms of a lease. That said, long leasehold interests are often held for investment purposes. In central London in particular, properties may be owned by the Crown Estate, trusts, charities or other entities that may choose not to dispose of their freehold interests as a matter of policy, and will instead grant long leases. It is also common for leaseholds to be used when structuring joint ventures, and other arrangements and structures where owners wish to retain an element of control by imposing positive covenants.
A leasehold property held on an investment basis should be distinguished from an occupational lease, which is typically granted for between five and 20 years subject to a market rent, and therefore has a negligible capital value. An investment leasehold interest will most likely be granted for a term of between 99 and 250 years, at a premium. There are generally fewer onerous obligations on the lessee of a leasehold property held on an investment basis. The income generated from most investment properties is in the form of rent paid under occupational leases.
A relatively new form of land ownership called commonhold was introduced in England and Wales by the Commonhold and Leasehold Reform Act 2002. Commonhold comprises a freehold unit within a larger development and membership of the company that manages the common parts. As such, commonhold is suitable for residential flats as well as commercial developments such as shopping centres; however, its use has not been adopted by the property industry and it remains a rarity.
ii System of registration
Most freehold and long leasehold titles are registered at the Land Registry; however, a number of unregistered titles remain, and these will generally only become registered once there has been a dealing with the land that triggers a requirement for ‘first registration’. Trigger events include sales, mortgages and leases granted for more than seven years. Until a trigger event occurs, titles will usually remain unregistered. Registration fees are payable, calculated by reference to the type of transaction and the price paid.
Registration at the Land Registry provides a state guarantee of title. Compensation is payable if loss is suffered as a result of a mistake on the register. Therefore, there is no separate US-style title insurance regime. The registered title has a unique title number and identifies the extent of the land on a plan. The register also provides details of the property, including any rights that benefit it, and identifies the owner and any rights or matters adversely affecting the property, including financial charges. More recently, it also includes the purchase price at which the owner acquired the property and the date of purchase, if done so through an asset as opposed to a share purchase. If the property is leasehold, brief details of the lease are included. Various short leases and rights of occupation are not, however, required to be registered in their own right. These and some other non-registrable interests will bind a purchaser, and should be uncovered by the purchaser’s due diligence process. Accordingly, the information on the register cannot be treated as being totally comprehensive. Documents and other information held by the Land Registry are widely available to the public, although it may be possible to protect certain commercially confidential provisions for a limited period.
iii Choice of law
Dealings with real estate in England and Wales will be covered by the law of England and Wales. Although a contract may include an express choice of governing law, which in general the courts will uphold, English law will still apply in relation to the transactional formalities that involve English and Welsh real estate.
Real estate law in England and Wales is different from real estate law in Scotland, Northern Ireland, the Channel Islands and the Isle of Man, and thus specialist advice will be required where these jurisdictions are involved. Due to tax planning structures, property ownership vehicles are often incorporated in the Channel Islands.
II OVERVIEW OF REAL ESTATE ACTIVITY
Brexit needs to be considered in the light of continuing international economic and political uncertainty. Overseas investors will continue to look for safe havens for their capital and UK real estate offers attractive assets providing a competitive return. While Brexit has undoubtedly added to the uncertainty, it has also brought investment opportunities. Of particular significance to overseas investors is the weakness of sterling. The pound plunged to a 30-year low following the vote and exchange rates remain very favourable to overseas buyers. In addition, a number of trophy assets became available as real estate funds sought liquidity to meet the initial rush of redemptions. Other factors that have contributed to London and the UK continuing to be a global property hotspot include the political stability afforded by a new prime minister and government, historically low interest rates, falling unemployment and other better-than-expected economic news. Although transaction levels are at their lowest since 2013, demand from overseas investors remains high, accounting for nearly half of investment volumes. North American funds have been particularly active, while some far eastern investors have realised profits. London is a unique city with a truly global appeal and, although there has been speculation that investors and occupiers will look to cheaper European alternatives, it is difficult to see a true competitor in terms of what the UK and its capital have to offer.
Despite the undoubted importance of London, investors have continued to look to the regions for value and opportunities. The south-east has been particularly healthy, while key regional cities, such as Birmingham and Manchester, have also enjoyed strong demand, helped by the decentralisation of both businesses and government departments. Although take up in the London office market is down, there is no sense that 2017 will be a repeat of 2008. As international businesses consider their strategies and future requirements, the real estate market and wider UK economy received a welcome boost when Apple committed to new London headquarters at Battersea Power Station, Google confirmed a major UK investment plan and McDonald’s decided to move its non-US tax base from Luxembourg to the UK. Demand is expected to remain strong for high-quality premises offering flexibility and meeting the technology requirements of the modern business occupier. On the investment front, China Life and Brookfield’s joint venture purchase of the Aldgate Tower is an indicator of continued confidence in the London office market.
There has been a significant increase in interest from overseas investors in alternative real estate assets. The most popular target has been the private rented sector (PRS). The ongoing UK housing crisis means that demand remains strong for PRS and other residential schemes, helped by a number of government measures introduced to encourage housebuilding and improve affordability. The hotel sector is another important alternative asset class where, helped by the favourable exchange rate, demand for rooms from both overseas visitors and the domestic market has grown. Other alternative assets that are attracting interest include student accommodation, care homes, serviced apartments, retirement villages, logistics, data centres and infrastructure.
The outlook for the retail sector remains mixed. While high-profile casualties on the high street continue, the luxury central London market has benefited from the enhanced spending power of overseas visitors. Concerns about domestic spending power and the continued rise of online shopping mean that the wider high street remains over supplied. Demand for large high-specification sheds at key transport hubs remains strong to meet the growing needs of e-commerce. Uncertainty in the industrial sector surrounding the UK’s future trade deals has been offset, to some extent, by the opportunities afforded to exporters by the low value of sterling.
Prime central London residential properties have continued to struggle as high prices, oversupply and punitive rates of SDLT have deterred overseas investors, whose seemingly insatiable appetite for London apartments and houses has diminished. Domestic ‘buy-to-let’ investors have also been hit by additional SDLT and a reduction in mortgage interest relief. Despite the economic uncertainty, the wider UK market has held up well, and most areas have risen above pre-financial crisis highs. It will be interesting to see if the latest government measures to encourage housebuilding are sufficient to overcome the reticence of cautious housebuilders concerned about committing to new developments in an uncertain economy. Either way, demand will continue to outstrip supply for the foreseeable future and the acute shortage of housing stock will maintain upwards pressure on values.
The longer-term trend of banks moving away from real estate has been offset by the emergence of new lenders, including insurance companies, pension funds, sovereign wealth funds and private equity funds. Non-bank lending is now firmly established and this trend is expected to continue. In particular, the market share of insurance companies has increased significantly as funds look for long-term returns to meet liability-matching requirements. Although confidence about debt has been hit by market uncertainty, low margins and new regulatory requirements, there remains a significant amount of equity available for investment and the picture here is more positive.
III FOREIGN INVESTMENT
Overseas investors are able to own, sell and lease real estate in England and Wales without any legal restrictions. A legal opinion may be required to confirm that an overseas investor has legal power to enter into a transaction involving property in England and Wales, to deal with the property and to execute the relevant documents.
IV STRUCTURING THE INVESTMENT
A number of alternative structures are available for direct or indirect investment in real estate in England and Wales. The decision how best to structure an investment is likely to be dictated by tax considerations, and it is important to ensure that appropriate tax advice is sought, taking into account both UK tax legislation and that of the investor’s own jurisdiction. There are, however, a number of advantages and disadvantages to each structure, which may also prove critical depending on the investor’s particular objectives.
i Corporate entity
A company can hold assets in its own name and create floating charges. There is potential for flexibility in terms of share structure, and there can be the advantage of limited liability. More generally, corporate entities are widely recognised, and can promote a strong and legitimate identity. Nonetheless, there is a lack of confidentiality in comparison with other investment structures and the added administrative burden of complying with the relevant regulatory framework. There is also a lack of tax transparency, and it may be expedient to base the company offshore.
ii General partnership
Whereas property co-ownership is not in itself sufficient, the active, joint management of property may constitute a partnership; it is a matter of substance rather than form. The main advantage is tax transparency, while the main disadvantage is the unlimited liability of the partners.
iii Limited partnership
In a limited partnership, investors will be limited partners who are only liable to the extent of their investment. This limited liability is particularly advantageous when coupled with the tax transparency that, to an extent, is offered by a limited partnership. However, a limited partnership must comply with the Limited Partnerships Act 1907, and a limited partner should not become involved in the management of the partnership. This may prove to be unduly restrictive for investors looking to actively manage their real estate investments.
iv Limited liability partnership (LLP)
LLPs are governed by the Limited Liability Partnerships Act 2000 and combine limited liability for members with the tax transparency of a partnership. LLPs are not subject to the same restrictions as limited partnerships, and partners are able to actively manage the business of the LLP. Furthermore, an LLP is a body corporate (having a legal entity separate from that of its members), so there are no issues as to the legitimacy of floating charges. If the LLP is a collective investment scheme, it must be operated by an authorised person in accordance with the Financial Services and Markets Act 2000 (FSMA).
v Property unit trust
A property unit trust is an open-ended fund that allows pooled investment and is tax-efficient. A unit trust is governed by a trust deed, and as such may be an unfamiliar structure to certain overseas investors. One drawback may be the need for authorisation under the FSMA. Offshore unit trusts are popular, and can provide further tax advantages as a result of their offshore status; Jersey property unit trusts in particular have been used extensively in recent years. However, there may still be local regulatory supervision, and the fact that the trust must be managed outside the UK may be undesirable for certain investors.
vi Property authorised investment fund (PAIF)
PAIFs are open-ended investment schemes that invest in property and are authorised under the FSMA. The PAIF regime allows gross dividends to be paid, and was introduced to make property attractive to tax-exempt investors. A number of conditions apply for entry into the PAIF regime, including the need to carry on a property investment business and the genuine diversity of ownership condition. PAIFs benefit from SDLT seeding relief.
vii Offshore vehicle
Offshore vehicles can take advantage of lighter regulatory and tax regimes. As well as Jersey, popular offshore locations include Luxembourg, Guernsey, the Isle of Man, the British Virgin Islands and the Cayman Islands.
viii Listed property company
Investing in a listed property company offers a popular means of investing in UK real estate. Listed property companies can benefit from a high profile and augmented credibility as well as greater liquidity. The drawbacks include stringent regulatory and filing obligations, and a general lack of confidentiality. In addition, listing may be costly and places extra pressure on the company management to perform. The investor also has limited control over the underlying real estate assets.
ix Real estate investment trust (REIT)
The REIT is a relatively new form of property-specific investment vehicle in the UK based on an investment structure first developed in the United States. REITs are tax-efficient, as they are exempt from tax on income and capital gains; distributions of profits are treated as property income in the hands of the shareholders. To gain REIT status, a company must comply with a number of conditions, including a requirement to be listed on the official list of the London Stock Exchange or traded on a recognised stock exchange, and proof of property rental business characteristics.
x Property joint venture
Joint ventures allow parties to share risk, and therefore provide a particularly attractive investment structure while the availability of debt remains constricted and investors are keen to mitigate risk exposure. A property joint venture can be structured in whatever form the parties choose, and in many cases may involve more than two parties. Of course, as well as sharing risk, parties share gains and management, so joint venture provisions need to be considered carefully.
V REAL ESTATE OWNERSHIP
The planning administration in England and Wales primarily consists of local planning authorities (LPAs) and the Secretary of State for Communities and Local Government. The Mayor of London is also able to exercise specific planning powers at a London-wide level, including the power to decide strategically important planning applications himself. Planning administration is governed by various statutes, the most important of which is the Town and Country Planning Act 1990. In general, planning permission is required for development, including material changes of use, although certain restricted types of development are automatically granted planning permission under the Town and Country Planning (General Permitted Development) Order 2015. There are particular planning requirements for conservation areas and listed buildings, as determined by the Planning (Listed Buildings and Conservation Areas) Act 1990. Third parties have a right to make representations about any planning application, which in turn must be considered by the relevant LPA. Applicants are able to appeal LPA planning decisions to the Secretary of State, in which case the Secretary of State will decide the application afresh and on its merits. Third parties have no such right of appeal but they (and applicants) can appeal decisions of the Secretary of State on the grounds of legal error. LPAs have enforcement powers to deal with development which is carried out without or in breach of planning permission. The Planning Act 2008 provides a streamlined decision-making process for nationally significant infrastructure projects, which are projects within the five general fields of energy, transport, water, wastewater and waste, as well as certain commercial and residential projects. A development consent order granted under the Planning Act 2008 provides a single consent for such projects, thereby removing the need for developers to seek planning permission and other related consents separately.
The environmental issue of particular significance to investors is the contaminated land regime, which is set out in Part IIA of the Environmental Protection Act 1990, as amended by the Environment Act 1995. Contaminated land is land that is causing, or may cause, significant harm to the environment or human health, and the regime also applies to water pollution. There is an obligation on local authorities to inspect their land to identify areas of contamination. Where land is deemed to be contaminated and is not being remediated voluntarily, the local authority or the Environment Agency (in England) or Natural Resources Wales (in Wales) is obliged to serve a remediation notice on the relevant persons requiring the clean-up, investigation and monitoring of the contamination. It is a criminal offence to fail to comply with a remediation notice. In general, those who cause or knowingly permit land to become contaminated are responsible in the first instance; however, if no such person can be found, the current owners and occupiers of the site may be liable for remediation costs. While the regulators in the United Kingdom do not take enforcement action as readily as in other jurisdictions, remediation costs can be substantial, and it is often necessary to obtain specialist advice when dealing with land that is or may be contaminated.
The starting point is that a supply of land will be exempt from VAT. However, the seller or lessor can exercise the option to tax, which will make any sale or letting of the property a supply subject to VAT. The standard rate of VAT is currently 20 per cent. The lessor or seller can then recover the VAT charged on supplies of goods and services made to him or her in connection with the property concerned. In addition, supplies of land are generally subject to VAT if the sale involves a new commercial building completed within the past three years, or an incomplete industrial or commercial building.
SDLT is a transactional tax payable by the buyer on the acquisition of a chargeable interest, and applies to any chargeable consideration payable by the buyer on a relevant transaction. The rate depends on the value of the transaction, and the highest rate for non-residential transactions is currently 5 per cent in respect of that part of consideration which exceeds £250,000. Residential properties are subject to rates ranging from 2 per cent up to 12 per cent for higher-value properties where the consideration exceeds £1.5 million, and there is an additional 3 per cent charge on second homes and buy-to-let properties. Where the buyer of a residential property costing more than £500,000 is a corporate vehicle, the rate of SDLT is 15 per cent and an additional annual charge may also apply. SDLT is also payable by the lessee on the rental element of a lease on grant, and is charged at 1 per cent of the net present value of the rent payable for the term of the lease. Limited types of transactions are normally exempt from SDLT, including mortgages and personal licences to use or occupy land. There are also a number of reliefs that may apply, including group relief, sale and leaseback relief, acquisition relief, reconstruction relief and charity relief. It is important to consider how best to structure a transaction for SDLT purposes, although the introduction of various anti-avoidance provisions has made it increasingly difficult to implement tax-saving schemes.
The occupier of a business property is responsible for the payment of business rates, which fund local government expenditure and are calculated by reference to the rateable value of the property. Rateable values are assessed every five years, and the next revaluation will take place in 2017. This may result in a significant uplift, particularly for those businesses in property hot spots such as central London. Following a significant reduction in the relief available, business rates are generally payable on empty properties, and this has become a significant issue for owners in sectors with high vacancy rates.
iv Finance and security
Lenders will generally require security over real estate, the best form of which is a charge by way of legal mortgage. It is necessary to register a mortgage over land at the Land Registry and, if the company giving the security is registered at Companies House, the security must also be registered at Companies House within 21 days of creation. A new regime for the registration of charges created by companies came into force in 2013. The mortgage will typically impose restrictions on the ability of the borrower to deal with the property and obligations on the borrower to preserve the value of the security. Security is also commonly taken over the rental income derived from occupational leases.
VI LEASES OF BUSINESS PREMISES
In general, the lessor and lessee are free to agree the terms of a commercial lease. The law does not prescribe a particular form or contents of a lease and, subject to the lessee’s security of tenure referred to below, there are relatively few statutory provisions affecting the lessor and lessee relationship under a commercial lease. The Code for Leasing of Business Premises seeks to encourage fairer and more flexible terms for lessees but, despite industry endorsement, remains voluntary. Traditionally, the industry has not enjoyed a reputation for being customer-driven, and leases have tended to be lengthy, complex and onerous for lessees. That is, however, changing as owners seek to meet the needs of their occupiers. The position for commercial leases should be contrasted with that for residential leases, where statute plays a significant role.
Leases can be granted for a wide range of terms. Leasehold interests held for investment purposes are normally held on long leases for a term of between 99 and 250 years. Historically, occupational leases were granted for a term of 20 or 25 years; however, shorter terms of 15 years, 10 years or less have become more common recently. A lessee of an occupational lease may also require a right to determine the lease before the end of the term. For example, the lessee of a 10-year lease may have a contractual right to determine or break the lease at the end of the fifth year of the term.
ii Rent increases
The property industry has traditionally required five-yearly-upwards-only rent reviews to the open market rental value of the property. This guarantees a minimum return of no less than the original rent for the remainder of the term of the lease, even if market rents have fallen. Although there has been some pressure on the property industry to offer leases on more flexible terms, it is still very rare to see rent review provisions that allow for the rent to go up or down in line with the market. An alternative form of rent review is indexation, for example in line with the retail price index or the consumer price index, but this, too, is often on an upwards-only basis. Fixed uplifts in the rent are another possibility, and changes to the rent can also be restricted by agreed caps and collars. An element of the rent, particularly in large retail developments, may also be calculated by reference to turnover. VAT may be charged on the rent if the lessor has exercised the option to tax.
iii Lessee’s right to sell and change of control
There are likely to be restrictions on the lessee’s ability to sell, charge, underlet or share occupation of the property without the lessor’s consent. In a typical occupational lease, consent must not be unreasonably withheld. In considering applications for consent, the lessor will be keen to ensure that a lessee of good covenant strength is responsible for paying the rent. Provisions restricting a change of control of the lessee itself are, however, rare.
iv Lessee liability and security for payment of rent and performance of covenants
The Landlord and Tenant (Covenants) Act 1995 (LT(C)A) introduced a regime whereby lessees of new leases (granted on or after 1 January 1996) are released from liability on an assignment of the lease. The lessee’s guarantor is also released at this point. This is in contrast to the previous regime, whereby the lessee and its guarantor remained liable for the duration of the term of the lease under the doctrine of privity of contract, even after an assignment of the lease. The doctrine continues to apply to old leases (granted before 1 January 1996). The LT(C)A also introduced authorised guarantee agreements (AGAs), which provide the lessor with a guarantee from the outgoing lessee for the incoming assignee’s obligations under a new lease. The AGA is for the duration of the assignee’s term only, so that when the lease is assigned again, the original lessee is released from all liability. The decision in K/S Victoria Street v. House of Fraser (Stores Management) Ltd and others2 confirmed that, although an existing lessee’s guarantor cannot guarantee the liability of an incoming assignee, it can guarantee the outgoing lessee’s obligations under an AGA given by that lessee in respect of the assignee. A lessor will also consider other security, including a rent deposit or bank guarantee.
v Repair and insurance
A lessee of business premises will usually be expected to be responsible for all liabilities in respect of the property, including maintenance and repair costs. Where a property is multi-let, those costs are recovered through a service charge. The lessor generally insures the property, but recovers the cost of the premiums from the lessee. As a result, leases of business premises are often known as full repairing and insuring (FRI) leases. An FRI lease is important for the UK real estate investment market, as it allows the lessor to receive a clear income stream without incurring any expense itself in relation to the property.
vi Collateral warranties
For investors in a property that has been recently constructed, collateral warranties provide investors, funders and other third parties with a contractual link that can be used to enforce the performance of the duties of the professional and construction teams. Third parties can also be given equivalent rights under the Contracts (Rights of Third Parties) Act 1999.
If the lessee fails to pay the rent or is in breach of any of its other obligations, generally the lessor is entitled to bring the lease to an end by forfeiture; however, the lessee is given the opportunity to remedy the breach and can apply to the court for relief. The lessor’s right to forfeit also normally applies if the lessee of an occupational lease becomes insolvent.
viii Security of tenure
The Landlord and Tenant Act 1954 (LTA) provides security of tenure to lessees of commercial properties in England and Wales. If the property is occupied for business purposes, the lessee has the right to remain in occupation at the end of the term of the lease and is entitled to apply for the grant of a new lease on substantially the same terms; however, the lessor may be able to resist the grant of a new lease based on one of the grounds prescribed by the LTA. The most common ground relied on in practice is that the lessor plans to redevelop the property. This ground is not always easy to establish and, if the lessor is successful, the lessee may be entitled to compensation. Security of tenure can be a valuable statutory right for lessees, and can have a significant impact on a lessor’s plans for dealing with its property, including future development plans. It is possible for the lessor and lessee to agree to contract out of the security of tenure provisions of the LTA. To contract out, a notice must be served on the lessee explaining that security of tenure is to be excluded, and the lessee must make a declaration acknowledging this before the lease can be completed. Contracting out tends to be more common in relation to short-term leases. A recent reform ensures that lessees operating a business from home do not acquire security of tenure.
ix Mixed-use developments
Mixed-use developments are generally permitted in England and Wales, and have become a facet of urban renewal. There are specific issues relating to mixed-use developments, including increased levels of statutory protection for residential lessees. Residential lessees’ rights include collective enfranchisement and individual lease extension rights, as well as the right of first refusal and protection in relation to service charges and the management of the property.
VII DEVELOPMENTS IN PRACTICE
i Vote to leave the European Union (Brexit)
The purely legal implications of Brexit are much less significant than the effect on market conditions. Land law in England and Wales is almost entirely unaffected by membership of the EU. Brexit will not have any direct legal implications for the way in which overseas investors own, sell and lease real estate in England and Wales. The position in relation to environmental law is very different and EU legislation plays a significant role in environmental law and policy. This extends to the environmental aspects of the planning process. State aid and procurement are also governed by EU regulations and Brexit will have significant and direct implications for all these areas.
The government has announced that a Great Repeal Act will enshrine all existing EU law into British law. New legislation will then be introduced to make any necessary changes. The process of modifying existing EU law seems likely to continue for a number of years and gives the UK the opportunity to choose those aspects that work while discarding those that do not.
ii Assignment to guarantor
Following the Court of Appeal’s decision in K/S Victoria Street, there has been doubt over whether the lessee of a lease can assign its interest to its guarantor. Lord Neuberger had suggested that such an assignment was void under the LT(C)A, ‘even where both tenant and guarantor wanted it’.
In EMI Group Limited v. O&H Q1 Limited,3 the court confirmed that a purported assignment of a lease to the lessee’s guarantor was void and of no effect. This meant that the lease remained vested in the original lessee and the claimant assignee remained liable as guarantor of the original lessee. The purpose of the LT(C)A is to ensure that a guarantor cannot reassume or renew its liabilities by taking an assignment of the lease, even if there were good commercial reasons for this to happen. Care must be taken to identify any instances where a guarantor has taken an assignment of a lease and the unravelling of the legal and practical consequences of such an assignment on the various interested parties could prove to be complicated.
iii Rights to light
The Supreme Court’s decision in Coventry and others v. Lawrence and another4 suggested that a more flexible approach would be taken in determining whether damages, and not an injunction, were the appropriate remedy where there had been an unlawful interference with a property right. Accordingly, there was significant interest in Ottercroft Limited v. Scandia Care Limited and another5 where the Court of Appeal was asked to confirm whether an injunction was the appropriate remedy for what was, in many respects, a relatively minor interference with an adjoining owner’s right to light. Although the Court of Appeal upheld the award of an injunction, the case can be confined to its facts and should not be seen as a move back from the more flexible approach advocated by the Supreme Court. The determining factor was the poor and unneighbourly behaviour of the defendants. The defendants had behaved badly throughout and had shown little regard for the claimant’s rights. In particular, the defendants had carried out the works in breach of an undertaking not to carry out any works that would interfere with the claimant’s right to light. The decision emphasises the significance of a developer’s conduct when dealing with affected owners.
iv Lessor’s redevelopment
The lessee of an upmarket art gallery in Mayfair has been awarded a 20 per cent reduction in rent because of disturbance caused by the lessor’s redevelopment work. In Timothy Taylor Ltd v. Mayfair House Corporation and another,6 the lease reserved rights for the lessor to carry out works to the building, notwithstanding any effect on the lessee’s use and enjoyment of its premises. The lessor proceeded to carry out extensive works to create new flats on the upper floors of the building. The lessee claimed that the lessor had failed to take all reasonable steps to minimise disturbance to its customers and staff. The court found in favour of the lessee, the reservation of rights to carry out works should be construed as requiring the lessor to take all reasonable steps to minimise disturbance. The lessor had failed to engage with the lessee regarding the programme of works and had not paid any attention to the lessee’s concerns and requirements. In addition, the redevelopment works were entirely for the lessor’s benefit and there was no benefit for the lessee. The lessor was in breach of its covenant for quiet enjoyment and in derogation from grant.
v Relief from forfeiture
In the recent case of Pineport Ltd v. Grangeglen Ltd,7 the court considered whether a lessee of a long lease of commercial premises was entitled to relief from forfeiture for non-payment of service charge. One of the issues was whether the 14-month delay in seeking relief prevented the court from exercising its discretion in favour of the lessee. Although the delay was significantly longer than the six-month period generally adopted by the courts as a guide, the court accepted the tenant’s explanation for the late application. In addition, the lease had a capital value that was significantly higher than the amount of the arrears. If the lease was forfeited, the lessor would enjoy a disproportionate windfall. The lessor would not suffer any prejudice from the grant of relief because the lessee had shown that it was able to discharge the arrears and the lessor had not taken any steps to market or re-let the property. The case confirms that the primary purpose of forfeiture is to secure performance of the lessee’s covenants and not to provide the lessor with a windfall. However, lessors will be concerned about the inherent uncertainty in allowing a lessee a significant amount of time in which to make an application for relief.
vi Break clauses
The courts have again confirmed that any condition to the exercise of a lessee’s break clause must be complied with strictly. In Riverside Park Ltd v. NHS Property Services Ltd,8 the lessee’s right to terminate its lease was conditional on the lessee yielding up the premises with vacant possession on the break date. The lessor claimed that vacant possession had not been given because the lessee had not removed internal partitioning installed by it. The High Court held that, on the facts, the partitions were chattels and not fixtures. The partitioning had been intended to benefit only the lessee and did not provide a lasting improvement to the lessor’s property. The continued presence of the partitioning following the break date substantially prevented or interfered with the lessor’s right to possession. Accordingly, the lessee had not given vacant possession and the break clause had not been complied with. The decision also serves as a reminder of the importance of identifying whether an item is a chattel or a fixture forming part of the property and whether the lessee is required or entitled to remove it.
vii Energy efficiency
Minimum energy efficiency standards (MEES) are due to be implemented in April 2018 in relation to new lettings, and in relation to all existing lettings by April 2023. Once implemented, a lessor will not be able to let a property unless it meets the required energy efficiency rating. The minimum energy efficiency rating will be an ‘E’ and the rating for a building is set out on its energy performance certificate (EPC). A lessor may be required to carry out cost-effective energy efficiency works to improve the EPC rating of a substandard property. There are limited exemptions to the requirement for such works to be carried out, and MEES will not apply to very short leases (six months or less) or very long leases (99 years or more).
In addition, the Heat Network (Metering and Billing) (Amendment) Regulations 2015 may have an affect on lessors of multi-let buildings that have a communal heating or cooling system. If the Regulations apply, lessors may be required to carry out improvements to the system, including the provision of meters, and must issue bills to individual tenants based on their actual energy use.
viii Real estate practice
Most contracts for the sale of land are drafted by reference to the Standard Commercial Property Conditions (SCPCs), which aim to strike a reasonable balance between the interests of the seller and the buyer. The new edition of the SCPCs (third edition) is due to be published and will form the basis of the vast majority of commercial property contracts. Most of the changes reflect changes in law and practice since the previous edition, published in 2004.
The City of London Law Society Land Law Committee has published an update of its certificate of title. The certificate can be used on a range of different real estate transactions, but is most commonly addressed to the lender on real estate financings.
Indications suggest that the introduction in 2014 of the Model Commercial Lease (MCL) has been a success. The MCL is a new suite of commercial leases and related documents that aims to offer a fair and reasonable starting point for both parties.
Any changes to property law and practice that seek to make the process of buying and selling UK property easier and more efficient will help make investment attractive to overseas investors and are to be welcomed.
VIII OUTLOOK AND CONCLUSIONS
It is difficult to see beyond Brexit as the dominant political, economic and legal issue in the coming months and years. The government has indicated that, legal challenges permitting, it will trigger Article 50 of the Lisbon Treaty by the end of March 2017 and the UK is expected to leave the EU by 2019. Although the impact of Brexit is not yet fully clear, the initial uncertainty seems destined to remain for some time as this novel and multifaceted process develops. The evolution of the UK’s relationships with Europe and the rest of the world will undoubtedly affect the UK real estate market. Key issues include the potential relocation of multinational occupiers and the free movement of people. The availability of skilled workers is fundamental if the UK is to remain open and attractive to overseas investors. Any restrictions on immigration will be particularly significant for the financial services sector in the City of London, and also for the construction industry, which has relied heavily on Europe for skilled and non-skilled labour. Although initial indications are that the UK real estate market, and the wider economy, have held up better than many predicted, the process of leaving the EU is unlikely to be smooth and the uncertainty will continue.
Notwithstanding the undoubted significance of Brexit, it remains important to see the effect of the UK leaving the EU in a global context. The outcome of the US election, continuing concerns about China and other developing economies, global debt levels, oil prices, interest rate increases, inflation and instability in the Middle East are all global issues that help achieve some perspective on Brexit. The bigger picture gives a greater sense of optimism about the continuing attraction of UK real estate for overseas investors looking for a relatively safe haven for their capital.
Away from Brexit, the Law Commission is considering the reform of the Land Registration system to reflect changes in law and practice since the Land Registration Act 2002. The government’s plans for the privatisation of the Land Registry have, once again, been put on hold, much to the relief of most practitioners. The Law Commission is also consulting on future projects for reform. Topics towards the top of a real estate lawyer’s wish list include issues with the LT(C)A and the LTA, various aspects of the statutory regime for residential leases, such as the right of first refusal, and electronic conveyancing.
Following the recommendation of the Airports Commission, the government has finally confirmed its support for the construction of a new north-west runway at Heathrow. However, Parliament will vote on the decision in 2017 and the threat of legal challenge remains. Investment in the UK’s infrastructure is essential to ensure that the UK remains a country in which to do business and where people from around the world want to live. Other key projects include Crossrail 2 and the extension of HS2. In the Autumn Statement, the government confirmed significant investment in transport infrastructure, including funding for a new expressway linking Oxford and Cambridge and an East-West Rail line.
To remain competitive, the UK must work hard to meet the requirements of overseas investors to continue to attract global investment capital. Key areas include the need for flexible planning laws and the preservation of London’s status as an international centre of legal excellence. However, of most concern is the need to offer an investor-friendly tax regime. Recent increases in the rates of SDLT mean that UK property taxes are among the highest in the developed world and, particularly in the residential sector, this has started to impact on investment volumes.
The events of 2016 have confirmed that it is impossible to predict what will happen in 2017. Although there will undoubtedly be risks, there will also be opportunities. Perhaps more than ever, the UK must be aware of its significance in the global context and ensure that UK real estate remains attractive to investors from around the globe. In the words of the new prime minister, Britain must show that it is ‘open for business like never before’.