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5 Trends to Watch: 2024 UK Real Estate

1. Renewed Government focus on improving transparency of land ownership

On 21 February 2024, the Government closed a consultation around how to improve the transparency of land ownership when trusts are involved in the structure.

Views are being sought on options around widening access to trust information held on the UK’s Register of Overseas Entities (ROE) which came into force in August 2022 through the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA 2022), as well as how ownership of land involving trusts can become more transparent generally.

The proposal builds upon existing registers that contain information about companies and trusts including the:

  • Register of People with Significant Control over companies (PSC) which requires the identification of people who own or control a UK company;
  • ROE which requires overseas entities that own land or property in the UK to declare their registered beneficial owners and/or managing officers; and
  • Trust Registration Service (TRS) which is a register of the beneficial ownership of trusts and requires all UK trusts (and some non-UK trusts) to register with HMRC.

Unlike the existing registers above, which keep trust information out of public view, the Government has proposed three options in its consultation to enhance the transparency of trusts information held on the ROE: (1) making trust information publicly available by default (protected information excepted); (2) partial public availability of trusts information by default and (3) no change from the current system. The new Economic Crime and Corporate Transparency Act 2023 (ECCTA 2023) will also enable the Government to make applications for non-public trust information held on the ROE irrespective of the outcome of this consultation. At the time of writing there is no set date as to when the provisions under ECCTA 2023 will come into effect, but Companies House has indicated changes could be implemented as early as 4 March 2024.

In terms of domestic trusts, the consultation considers various options as to how the transparency of land held by trusts not associated with ROE entities could be improved, including what trusts information should be gathered, who should have access, under what circumstances and information that should be withheld.

This consultation is further evidence of the continued push by the Government to focus on who really owns and controls land and property in the UK with the ultimate view of tackling illicit finance and corruption and supporting a housing market that better delivers for the public.

Overseas entities also need to be aware of new rules to be introduced under ECCTA 2023 requiring more information about the person(s) for whom UK land is being held by overseas entities acting as nominees, the provision of retrospective beneficial ownership information and the disclosure of information of all trustees in the ownership chain.

It is also worth reminding overseas entities registered on the ROE of the requirement to file annual updates with Companies House one year after the initial date of registration (the due date) and every year after that. The update must be filed no later than 14 days after the due date and must confirm whether there are any changes to the information held or that the information held on the ROE is still correct. Failure to comply constitutes a criminal offence under ECTEA 2022 and entities may face prosecution or financial penalties. In addition, an overseas entity’s ID will become invalid (triggering an inability to buy, sell, transfer, lease or charge property or land in the UK) until the point the update is filed.

2. New biodiversity net gain requirements introduced for developments

As of 12 February 2024, new planning applications for major new developments in England will be required to deliver at least a 10% biodiversity net-gain requirement pursuant to the provisions of the Environment Act 2021 and the passing of the Environment Act 2021 (Commencement No 8 and Transitional Provisions) Regulations 2024 (SI 2024/4).

The requirements will also apply to ‘small sites’ from 2 April 2024 and nationally significant infrastructure projects from late November 2025. ‘Small sites’ include residential developments with less than 10 dwellings on a site less than one hectare or 0.5 hectares where the number of dwellings is not known. For commercial developments, this includes where the floor space to be created will be less than 1,000 square metres or where the site area is less than one hectare.

For the purposes of these requirements, biodiversity is measured in standardised biodiversity units. Developers must use the statutory biodiversity metric tool to accurately measure how many units are needed to achieve the 10% biodiversity net-gain requirement. The 10% net-gain must be against the baseline biodiversity of the development, and this cannot be reduced by anything done prior to planning or pursuant to a planning permission (for example, the clearing of vegetation).

A 10% biodiversity net-gain can be achieved on-site (within the redline boundary of a site) or off-site either on the developer’s own land in another location or through purchasing off-site biodiversity units on the market from a land manager. It is not clear how this will work in practice particularly if local planning authorities insist that any off-site improvements must be within the local planning authorities’ borough, especially in dense urban boroughs. In addition, some local planning authorities may require (as part of their local plan) a higher percentage uplift than the 10% statutory minimum. Applications to register a biodiversity gain site and record allocation of off-site gains to a development, can now be made.

If it is not possible to produce the necessary 10% net gain on-site or off-site or via a mixture of the two, statutory credits may be purchased from the Government. Prices are based on the cost to create, maintain, and monitor different habitat types and will be reviewed every six months. The revenue will be used to invest in habitat creation in England. As this approach must be a last resort, credits are priced accordingly to disincentivise use (price per credit currently starts at around £42,000 for common habitats and up to £650,000 for rare habitats).

A biodiversity net gain plan should demonstrate that at least a 10% net gain can be maintained for a minimum period of 30 years at the development if off-site gains or significant on-site gains are being made.

In summary, developers putting in new planning applications will now have to carefully plan for and factor in these mandatory requirements in terms of the cost and timeframe for all impacted developments.

3. Further progress and challenges with the Renters (Reform) Bill

The Renters (Reform) Bill (the Bill) was introduced to Parliament on 17 May 2023 with the aim of delivering on the Government’s commitment to “bring in a better deal for renters”, including abolishing ‘no fault’ evictions and reforming landlord possession grounds. The objective of the Bill is to change the law around rented homes and ensure private renters have access to a secure and decent home. By way of an overview the measures include:

  • section 21 ‘no-fault’ evictions, after a fixed term tenancy ends if there is a written contract or during a ‘periodic’ tenancy, are to be abolished and replaced with increased statutory rights of possession for a landlord as a result of a strengthened section 8 procedure. The Bill proposes that court possession proceedings will be digitalised to make it simpler and easier for landlords to use, with certain cases being prioritised (specifically anti-social behaviour). Currently, the courts have a huge backlog and presumably it was concerns over how the courts would cope with an increased workload that led to the Government announcing on 23 October 2023 that there would be an indefinite delay to the ban on ‘no-fault’ evictions due to the need to tackle and reform the efficiency of the court system first. The Government also stated it will not commence the abolition until “stronger possession grounds” are in place.
  • to redress the loss of section 21, landlords’ grounds for possession under section 8, subject to evidence, have been overhauled to include new notice periods to be given and new grounds that the landlord can regain possession under, including: if they or their family want to live in the property (as prescriptively defined in the Bill); if the tenant or anyone living in or visiting the property is proven to be guilty of anti-social behaviour; if the tenant is repeatedly late in paying rent; or if the landlord wishes to sell the property or to demolish or substantially redevelop. It is notable that many of the proposed new grounds are only discretionary rather than mandatory in that the court may or may not order possession.
  • ASTs (assured shorthold tenancies) to be abolished and replaced by an entirely flexible (for the tenant) periodic tenancy arrangement (i.e. open-ended) which can only be terminated by either the tenant serving two months’ notice to terminate or, by the landlord being able to evidence a valid ground for possession and obtaining a court order for possession.
  • rent escalator/review provisions will be banned with rent increases being limited to once a year via the section 13 process which is currently used when a fixed term has ended and gives the tenant a right to apply to the First Tier Tribunal to challenge a proposed increase. The concern with this approach is that it will likely lead to more challenges overloading an already struggling tribunal and county court system.
  • tenants will have a right to request consent to keep a pet, and landlords will have to act reasonably in considering any such request.
  • landlords to provide tenants with a written statement including terms of the tenancy prior to the commencement of the tenancy.
  • a new, digital ‘Property Portal’ supported by the new ‘Private Rented Sector Database’ is being set up (which all landlords must join), to provide tenants with details of all private landlords, the properties they own and their track record as landlords.
  • a new ‘landlord redress scheme’ and Ombudsman is to be introduced and set up to resolve disputes between landlord and tenants. The theory is this will free up the court system and streamline the overall process by allowing tenants to take effective action to enforce their rights and escalate issues to their local council or the Private Rented Sector Ombudsman but we need to see further details to really understand whether this will be the case in practice.
  • introduction of financial penalties and criminal offences for landlord non-compliance.

Albeit not referenced in the Bill (but mentioned in the Government’s 2022 White Paper, ‘A Fairer Private Rented Sector’), the Government has also stated it will bring forward legislation to apply the Decent Homes Standard to the private rented sector and make blanket bans on tenants receiving benefits or families with children, illegal.

In terms of the student housing market, the Government distinguishes between purpose-built student accommodation (PBSA) and private housing rented to students. The Bill specifically provides an exemption for PBSA (on the basis such tenancies are not "assured") and PBSA providers will be allowed to issue fixed-term tenancies provided they are governed by an approved code of conduct. As it currently stands private housing rented to students will not be exempt. The Government has acknowledged that the abolition of section 21 ‘no-fault’ evictions is not conducive to the cyclical nature of the short-term student letting business model as landlords will be unable to guarantee possession at the end / start of each academic year. The Government is therefore proposing a ground for possession to address this and although this will give landlords some level of comfort around minimising voids there are still concerns over the potential consequences of a split between the approach to the PBSA and PRS student housing market particularly at a time where demand for student housing is significantly outstripping supply.

We expect further debate and amendments to the Bill this year (at the time of writing it has had its second reading and we await a date for the Bill’s third reading in the House of Commons). Albeit timings are unclear, particularly in light of the Government’s apparent recognition that the abolition of ‘no-fault’ evictions cannot be implemented until new court reforms are in place, provisions could come into law as early as October 2024 presumably with the ability built in to enable further regulation down the line along the lines of Wales’s new renting reforms.

4. Continued commitment to reform the existing residential leasehold system

Another Bill currently making its way through Parliament is the Leasehold and Freehold Reform Bill (the LFR Bill) which while not going as far as abolishing leasehold completely (especially leasehold houses as promised), aims to deliver on the Government’s commitment to leasehold reform and making it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold.

By way of an overview, the proposed measures of the LFR Bill include:

  • increase the standard lease extension term to 990 years for both houses and flats (increased from 50 years for houses and 90 years for flats) with ground rent reduced to a peppercorn upon payment of a premium.
  • removal of the requirement for a new leaseholder to have owned their house or flat for two years before they can extend their lease or buy their freehold.
  • removal of the concept of ‘marriage value’ from the calculation of the premium when leases are extended.
  • introduces a compulsory standard valuation methodology for statutory lease extensions where the valuation assumes the freeholder is a ‘willing seller’.
  • increase the 25% ‘non-residential’ limit preventing leaseholders in mixed-use buildings, from buying their freehold or taking over management to allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or take over its management.
  • a number of other provisions around the maximum time and fee for the provision of information to a leaseholder from the freeholder; transparency over leaseholders’ service charges by requiring service charge invoices to be provided in standardised forms; extending the existing service charge statutory regulation to fixed service charges; replacement of buildings insurance commissions for managing agents, landlords and freeholders with transparent administration fees and access to “redress” schemes for leaseholders to challenge poor practice.

Another element of the LFR Bill is the Government’s proposal to cap ground rents in existing residential long leases1. A consultation on this closed 17 January 2024 and subject to the outcome the Government have said they will aim to introduce reforms through the LFR Bill. A variety of options for capping existing ground rents were put forward, including capping at a peppercorn. The concern is the proposals which would seek to retrospectively alter a commercially entered into agreement without compensation, will adversely impact investors (often pension funds) with ground rent portfolios generating a significant income stream. Not only this but it may act as a disincentive to investment into the UK residential market generally at a time when investment is much needed.

A House of Commons Public Bill Committee is in the process of scrutinising the LFR Bill and it is due to have its third reading in the House of Commons on 27 February.

5. Is climate risk, investment risk? Key industry focus on sustainability and green leases

On 29 January 2024, the Better Buildings Partnership (BBP) published its updated green lease toolkit (the Toolkit).

Green leases aim to promote environmentally (and socially) responsible building management practices on the part of both the occupier and the owner.

The purpose of the Toolkit is to drive market transformation through owner-occupier collaboration and shared responsibility; improve professional understanding through knowledge sharing and develop common approaches across the real estate industry. The BBP believes that by facilitating open dialogue around sustainability and responsible leasing and by creating guidance to drive an institutionally acceptable standard, this will help transform the environmental and social impact of buildings.

The Toolkit includes background information for stakeholders on green leasing generally; draft green lease clauses including an overview explanation of what each clause is trying to achieve and accompanying drafting notes. For some draft clauses there are also light, medium, and dark green options allowing owners and occupiers to adapt to their circumstances (nature of the asset; occupation; use) and ambitions accordingly. Some key features of the updated Toolkit include enhanced data-sharing obligations around energy, water, and waste; the expansion of service charge provisions to include green service items and the inclusion of social impact clauses with the aim of creating positive social impact (for example, working with local businesses).

Although the Toolkit has been developed with a multi-let office asset in mind, the draft clauses can be adapted to suit different asset types and the BBP intends to issue more sector-specific guidance in the future as common practice develops.

The BBP acknowledge that costs can often act as a barrier to the agreement of green clauses. The Toolkit makes the following recommendations in this respect – first, tenants should contribute to the costs of any works which result in a cost saving for the tenant and secondly, the parties should consider how the landlord would recover the cost of any works carried out to the premises not recoverable through a service charge. Beyond this, the Toolkit is purposefully non-prescriptive on the topic of cost-recovery, and this will always be one for commercial agreement between the parties.

The issue of the updated Toolkit demonstrates that climate and investment risk are converging risks for stakeholders and there is the continued and growing demand for sustainability across the real estate market for owners, occupiers, investors, and lenders alike.

About GT's UK Real Estate Practice: Our fully integrated team of more than 50 multidisciplinary real estate lawyers offer experience in a broad spectrum of core real estate and related practices, including funds and private equity, investment, development, construction, finance, corporate and capital markets, tax and litigation in the dynamic global real estate hub of London. Our team members have decades of experience working on some of the most high-profile and complex deals in the London and wider UK market, representing global investors and fund managers as well as hedge funds, pension funds, REITs and a wide range of developers, occupiers and debt providers.

1 The Leasehold Reform (Ground Rent) Act 2022 restricted ground rent to a peppercorn under all newly granted long residential leases.