Real Estate Quarterly Winter 2017

Real Estate Quarterly Winter 2017 Hogan Lovells Real Estate Quarterly Winter 2017 3 Contents Countdown to BREXIT 4 Smart Solutions for Smart Cities 6 Mending Fences: How to Minimise Boundary Disputes 8 Flexible Terms in Flexible Space: is London’s Office Market Changing for Good? 14 Q&A 16 Government Issues Draft Tenant Fees Bill Banning Residential Letting Fees 18 Case Round-Up 20 Budget 2017 – Homes Under the Hammond 25 Budget Shock for Property Industry: Non-UK Resident Landlords to be Taxed on UK Property Gains 27 Contacts 29 4 Hogan Lovells Countdown to BREXIT As we approach the end of the year and with Brexit headlines still at the fore, I have been musing over some of the issues that we will want to keep track of as the clock ticks down to 31 March 2019. We have already seen the effect of the 2016 Brexit vote on the market and that volatility is only likely to continue until the uncertainty surrounding the terms of the Brexit deal become more certain. In the meantime, rumours of conditional “Brexit Clauses” are resurfacing, although what conditionality might be sought in such clauses is questionable, as the likelihood of Brexit not happening looks pretty slim. One of the key elements of the Brexit negotiations that concerns investors in city offices in particular is the position that will be reached on free movement of people and the ability for financial institutions based in London to do business around Europe, otherwise referred to as “passporting”. The European Banking Agency has announced that it will relocate from London to Paris. A number of other banks have announced that they will move staff to locations in other parts of the EU. The overall number of jobs affected isn’t yet known, with some predicting up to 100,000 jobs moving out of London. It is not just the financial services sector that is affected. Many businesses around the country, particularly in the hospitality sector, rely on overseas workers, many from the EU, in order to keep their businesses running. In the Chancellor’s Autumn Statement he downgraded his growth predictions for the UK economy and commentators will be keeping a close eye on performance against those predictions. We have now had the first increase in interest rates for more than 10 years and although base rate is still low at 0.5%, there are signals that further rate rises may be in store. The age of cheap debt looks like it is coming to an end. One of the reasons for the rate rise was the increase in the rate of inflation. The Government’s target is 2% but in September the Consumer Prices Index, which is a key measure of inflation, rose to 3%. If the rate of inflation continues to rise, further base rate rises may be needed to keep it in check. Some sectors have been benefiting from the reduction in the value of the pound triggered by the Brexit vote, with the hospitality industry in particular benefitting from increased tourism. It has also been good news for those that export goods, as it has made them more competitive. For international real estate investors it has made the UK better value and the UK continues to attract international investment. Indications are that exchange rates will stay low, certainly for the first half of 2018, but we shall see… My list of things to watch concludes with another announcement from the Chancellor’s Autumn Statement: the withdrawal of Capital Gains Tax relief on the disposal of all UK property, whether it is commercial or residential, by non UK residents. This changes a tax policy which has stood for more than 50 years and was designed to encourage overseas investment into UK real estate. Further details can be found on page 27 of this newsletter and rest assured that we will keep you in touch with the detail. It seems likely though that the changes will prompt a number of sales and restructurings before the deadline in 2019. Season’s Greetings and my very best wishes to you all for a prosperous 2018. Jackie Newstead Global Head of Real Estate, London T +44 20 7296 5262 [email protected] 6 Hogan Lovells Smart Solutions for Smart Cities Smart cities will fundamentally change the way we live in, move around and use the space within our urban environment. But is the law ready for the changes ahead? Sarah Brown and Charles Jemmett take a look at some of the issues that smart cities pose for the real estate industry. On a macro level, new real estate trends will emerge, radically affecting building design, planning and occupiers’ requirements. Demand for traditional office space will reduce as remote and flexible working become more prevalent and shared workspaces become the new norm. Artificial intelligence will also change the requirements for space in many sectors. New types of retail floorspace will be required as more sales are concluded online, with retail becoming more about the experience and the interaction between brands and customers. In addition, there will be a shift to more click and collect points. At the same time the need for dedicated parking infrastructure is likely to decline in prime urban locations. With greater use of driverless cars and car sharing reducing both the requirement for parking in urban centres and out of town shopping centres, this will free up space that can be put to alternative uses. On a micro level, the traditional transaction process associated with the property industry will also see changes – from the way participants make commercial decisions, to the nature of the deals and how they are executed. Smart cities will put a wealth of information into the hands of buyers, tenants and investors. Property “consumers” will be able to compare realtime information on a wide range of variables affecting property assets – for example, energy efficiency, connectivity and traffic noise. Banks will no longer be the only source of funds, with fast availability of internet peer-to-peer lending speeding up the time taken to put a deal together. Blockchain Utilisation Blockchain or distributed ledger technology raises a number of opportunities in this field, from mortgage valuations, to rental and service charge payment systems. Smart contracts will replace the traditional approach to conveyancing – the main incentives being that the technology will expedite the process, reduce fraud and offer total transparency. Blockchain is an idea that is gaining traction in the public sector as well as with start-ups, with the Land Registry recently announcing its intention to test a so-called “Digital Street” to enable ownership to be transferred almost instantly using blockchain technology. Unmanned Drones It seems more likely that an integrated logistics service that is ‘robotically fulfilled’ will become a reality in the near future. Driverless cars and vans as well as unmanned aerial vehicles (“UAVs”) will become commonplace; the underlying technology is close to being capable of widespread deployment and, once manufacturers can prove sufficient reliability, regulators are likely to accommodate the use of such drones and UAVs in urban areas. Within the EU, regulations generally focus on remotely piloted aviation systems – those controlled by a human pilot from a distant location. But what of the unmanned drones that are being tested. The increased use of UAVs raises interesting legal questions in relation to the right to air. This issue has never really been tested and in the absence of hundreds or thousands of UAVs flying across urban areas, arguably it has never needed to be. Crane overhang agreements are one of the few examples of the issue having been tested. The few elements of case law indicate that flying a UAV above a third party’s property at a height so as not to interfere with that party’s ordinary use of the land is unlikely to constitute a trespass. How will the law in this area adapt? Will we see rights of way at 200 metres above the ground? How will this work in practice, which party will grant the right of way, what consideration will be payable, will different logistics companies ‘bid’ for preferred aerial routes? Liability and Driverless Vehicles When driverless cars, lorries and vans are the norm, who will be liable for accidents resulting in death, personal injury or property damage? The government Real Estate Quarterly Winter 2017 intends to make the UK a “world leader” in this area and the Automated and Electric Vehicles Bill 2017 seeks to clarify the law in this complicated area. The starting point of the Bill is for insurers to be primarily liable where the driverless vehicle is insured – on the basis that the owner has not made any unauthorised alterations to the vehicle or failed to update its software (other limitations are apparent). The government intends to keep a list of all automated vehicles in the UK – only those included on it will be “automated vehicles” and subject to the Bill. Assuming the provisions are enacted, the Bill is a welcome clarification of the position on liability and allows anyone who suffers injury or damage as a result of driverless vehicles to achieve quick redress, rather than potentially having to take action against manufacturers. Insurers would still be free to pursue action against manufacturers where they see fit to do so but this will not involve the claimant. However, questions remain – for example, the extent to which owners are able to make alterations to their vehicles and how software update provisions will work in practice. The laws around smart cities are developing, although predictably at a slower rate than the multitude of technologies that are driving the changes. In certain areas, such as driverless cars, the UK is trying to be more proactive in driving the necessary legal changes. The law has evolved and adapted to meet the needs of urban dwellers and we expect that as our cities become smarter the courts and government will tackle these issues head on to ensure that the legal solutions are as smart as the smart cities of the 21st Century. Sarah Brown Senior Associate, London T +44 20 7296 5495 [email protected] Charles Jemmett Associate, Birmingham T +44 20 7296 5158 [email protected] 8 Hogan Lovells Mathew Ditchburn introduces a new protocol for use in boundary disputes. The reasons for having a boundary dispute protocol Why have a boundary dispute protocol? Well, here are a few reasons which will be familiar to anyone who has litigated a boundary dispute. First, boundary disputes are often ruinously expensive if fought in court, and usually eclipse the value of the land in dispute. As Ward LJ observed in Thompson v Collins1 “…that is the insidious nature of a boundary dispute. The lesson is never learnt that those who fight for their principles frequently end up paying for them”. The boundary dispute protocol should help “to avoid what is almost always the wholly disproportionate cost and stress of having to litigate a boundary dispute [and] the blood, toil and sweat which has been devoted to this litigation”, to quote Briggs LJ in Parmar v Upton2 . Secondly, boundary disputes are usually prime candidates for early compromise: this is something which the structured approach set out in the protocol (including alternative dispute resolution) encourages. As Norris J said in Bradley v Heslin3 , advocating the use of negotiation, expert determination or mediation, “those embroiled in [boundary disputes] need saving from themselves”. Thirdly, boundary disputes usually entail a mix of familiar themes, such as the status of an Ordnance Survey plan attached to a conveyance “for the purposes of identification”, the inferences that may properly be drawn from physical features of the land existing and known at the date of the conveyance, or the ownership of a boundary structure. While the proper interpretation of such factors is meat and drink to some lawyers and surveyors, they are often baffling to the parties, who may rely instead on preconceived but erroneous notions. Again, the use of a protocol, supervised by properly qualified professionals, should identify and resolve the errors at an early stage, before the dispute has become heated. Fourthly, the most intractable boundary disputes usually involve people, rather than corporations, each defending their piece of turf, with increasing acrimony. Litigation almost always worsens the situation. As Mummery LJ said in Pennock v Hodgson4 : “In many boundary disputes both sides ultimately lose something that might have been secured in a compromise… The unfortunate consequences of a case like this are that, in the absence of any compromise, someone wins, someone loses, it always costs a lot of money and usually generates a lot of ill-feeling that does not end with the litigation. None of those things are good for neighbours.” In Ellett-Brown v Tallishire Ltd5 , Lloyd LJ added: “once good relations have broken down, bitter enmity so often sets in. Anyone who has ever tried a typical boundary dispute, with all the expense of spirit which such disputes invariably entail, not to mention the expenditure of time and money, will recognise at once what I mean.” To put it bluntly, at the end of your dispute, the neighbour who you have just worsted, or by whom you have just been worsted, is still on the other side of the fence. 1 [2009] EWCA Civ 525; [2009] PLSCS 124 2 [2015] EWCA Civ 795; [2015] PLSCS 231 3 [2014] EWHC 3267 (Ch); [2014] PLSCS 278 Mending Fences: How to Minimise Boundary Disputes 4 [2010] EWCA Civ 873; [2010] PLSCS 223 5 (29 March 1990, unreported) Real Estate Quarterly Winter 2017 9 Fifthly, the use of the protocol should result in disputes being healed and resolved permanently by enforceable and precise agreements as to the boundary. As Megarry J said in Neilson v Poole6 : “a boundary agreement is, in its nature, an act of peace, quieting strife and averting litigation, and so is to be favoured in the law”. Sixthly, we are not alone in wishing to promote the use of ADR in boundary disputes. In 2012, the Property Boundaries (Resolution of Disputes) Bill was published, proposing a mandatory independent expert determination system for the resolution of boundary disputes, based on the Party Wall etc. Act 1996. The Bill was introduced in the House of Lords in 2015, but the general election halted its progress. It was reintroduced in July 2017, this time including provision for the RICS to issue a code specifying best practice in the preparation of plans and documents under the Bill. While welcoming any attempt to lessen the flow of ruinous litigation over small pieces of land, we have serious reservations about the aim and structure of the Bill. Two things in particular are striking. First, boundary disputes are not usually just matters of measurement and consideration of features – matters well within the practical experience of surveyors – but often involve detailed interpretation of plans and conveyances, and the application of legal presumptions – matters more suited to the skillset of a lawyer. 6 (1969) 20 P&CR 909 Secondly, we doubt whether it is right to force parties to forgo their legal rights and submit disputes to independent expert determination: consensual methods of ADR (also including supervised negotiation, arbitration and mediation) seems the better route. Comparisons with the Party Wall etc. Act 1996 are not altogether helpful: first and foremost, that is an act enabling building owners to carry out works affecting their neighbour’s land. The dispute resolution procedure it provides is a qualification of that right and a quid pro quo designed to protect the affected neighbour. The elements of the boundary disputes protocol And so to the documents. In the usual way, we (the authors) have produced a protocol, which seeks to guide the parties’ behaviour to a successful outcome, as well as a guidance note. In addition to this, David Powell FRICS of PSL Chartered Surveyors has kindly produced a supplementary guidance note on what to expect from surveyors in boundary disputes. The protocol The stated aim of the protocol is to provide a process “which seeks to ensure that neighbours exchange sufficient information in a timely manner to minimise the scope for disputes between them; and to enable any such disputes to be readily resolved, keeping costs to a “minimum”. Hogan Lovells Once the parties in dispute have subscribed to the protocol, they must then take the steps set out in a prescribed timetable. These include: (1) the exchange of all relevant title information in each party’s possession; (2) the identification of the first conveyance by which their properties passed into separate ownership; (3) agreement as to the steps to be taken to find that conveyance if they do not have it; and (4) in the event that an adverse possession claim is made, whether to proceed to investigate the paper title position, the adverse possession claim/boundary agreement, or both. If the claim cannot be settled at this stage, the protocol requires the parties to decide whether they can reach an acceptable resolution by direct negotiation or with the assistance of a mediator, before incurring the cost of legal and surveying advice, bearing in mind the value of the land at stake, even if that means accepting something less than they would ideally like. In preparation for such a negotiation or mediation, the parties should ascertain (preferably by asking the advisers that they will retain if the dispute cannot be settled) what costs they will incur if the matter cannot be settled. Assuming they wish to proceed to the next stage (having by now identified the first conveyance), each party must consider what evidence (e.g. old photographs/ aerial photographs) they will be able to adduce about the physical features which existed on the ground at the date when the first conveyance occurred (and any other relevant issues of fact), and then exchange that evidence. If the first conveyance provides accurate plans, but the parties still cannot settle the dispute, it is likely that expert surveying evidence will be needed. In some cases, other types of expert evidence will also be needed, for example, to assist in the interpretation of aerial photographs. Real Estate Quarterly Winter 2017 11 The protocol goes on to make the point that, in most cases where boundaries between private gardens are disputed, it will not be proportionate for the parties to have an expert each. In these cases, an expert should be jointly appointed, and should be asked to produce a short report within a further four weeks. This should: a) include an accurate, computerised plan of the physical features existing on the ground at the date of inspection; b) plot onto that plan the line shown on the first conveyance plan, or, if there is more than one possible interpretation, the various possible boundary lines; c) explain why the various possible boundary lines arise – i.e. what interpretation of the first conveyance and/or the other evidence leads to that line being chosen; and d) produce any photographs which the expert considers will assist. In other cases, it may be proportionate for the parties to instruct an expert each. Short reports should be exchanged within four weeks after instructions are provided to single experts. The experts should, within two weeks of the exchange of reports, have a discussion in order to identify to what extent they are able to agree, and agree a short summary of their discussion which should be provided to both parties. Where either party alleges that it is in adverse possession of the disputed land, the protocol requires that each party should provide to the other party all relevant documentary evidence and information about who the witnesses of fact will be and what they will say. Relevant documentary evidence might include photographs, aerial photographs, and invoices for works done on the boundary. In some cases here too, expert evidence may be necessary – for example, if there is a difference of interpretation of plans, or there are aerial photographs. The same process for appointment, inspection, discussion and conclusion apply here in the same way. The protocol deals in detail with the process for achieving a final resolution of the dispute. In essence, the parties must meet again within two weeks of the date on which the last of the steps set out above is taken, in order to see whether they are able to agree the boundary. If possible, that meeting should take place at the location of the disputed boundary with the expert (or experts if more than one was instructed). Any discussions should be on the basis that they are “without prejudice” and so cannot be relied on in subsequent legal proceedings, if a binding agreement is not reached. If they cannot reach an agreement in principle, the parties should consider whether some form of alternative dispute resolution procedure would be more suitable than litigation and, if so, endeavour to agree which form to adopt. The options for resolving disputes without litigation include arbitration by a suitably qualified and experienced lawyer or surveyor agreed on by the parties or appointed in default of agreement from the Property Panel of the Chartered Institute of Arbitrators by the president of that institute; expert determination by an independent third party (for example, a barrister, solicitor or surveyor experienced in the relevant field); or mediation. If the parties cannot reach agreement after complying with the protocol, then the final step will be for the dispute to be referred to the appropriate tribunal for determination; either the court or (by way of a Land Registry application) the First-tier Tribunal (Property Chamber) (Land Registration). The protocol cautions that the parties should be aware of the substantial costs consequences of taking such action and that the risk of paying costs may be greater if they have failed to take steps equivalent to those set out in the protocol, particularly alternative dispute resolution. The protocol rightly takes some care in outlining the importance of formalising any agreement that is reached, including how to document the agreement, and how to mark the line of the agreed boundary. It advises that in all cases a written document setting out what has been agreed will be required. 12 Hogan Lovells The parties should annex an agreed plan to a written agreement and record that in order to settle a dispute as to the location of the boundary, the parties have agreed that it should run along the line shown, for example, coloured red on the plan annexed. It will often be wise to have the agreement drawn up by a lawyer. Each party should then apply to the Land Registry to note the agreement against their titles. The guidance note This is a short but helpful document which amplifies the reasons for the approach taken by the protocol. It explains first why Land Registry title plans are usually unhelpful in depicting the exact location of the boundary. It goes on to emphasise the importance of locating the first conveyance: “The start point, and in many cases the end point, for determining the location of the boundary is the interpretation of this first conveyance, in light of the words used and the physical features present on the ground at the time.” The guidance note goes on to explore the position concerning historic boundary agreements and adverse possession claims, before ending with advice concerning the importance of ensuring that any agreement settling the dispute is clear and enforceable. Supplementary guidance note This note is designed to help those involved in boundary disputes understand the role of their surveyor and what they can be expected to do. It also gives surveyors an indication of what has been found in practice to be a sensible approach. It draws on the considerable experience of David Powell as a well-known expert surveyor on such matters, and stresses the importance of such practical measures as rigorous inspection, measurement, recording and analysis. It goes on to set out a series of tips for surveyors meeting their clients and opposite numbers, with a view to a rapid and painless end to the dispute. Damage limitation We think that this latest protocol will help to eliminate or minimise the damaging friction that is inherent in boundary disputes, and steer the parties towards a successful compromise without resort to ruinously expensive proceedings – or at least to proceedings in which the issues for debate have been confined. The Property Litigation Association agrees with us, and has been kind enough to add its input and considerable support to this protocol. The protocol, guidance note and supplementary guidance note can be accessed free of charge on the Property Protocols website (http://www.propertyprotocols.co.uk). The authors of the Boundary Dispute Protocol are: Guy Fetherstonhaugh QC, Stephanie Tozer and Jonathan Karas QC all of Falcon Chambers and Mathew Ditchburn and Nicholas Cheffings, both of Hogan Lovells International LLP. Mathew Ditchburn Partner, London T +44 20 7296 2294 [email protected] Flexible Terms in Flexible Space: is London’s Office Market Changing for Good? 14 Hogan Lovells The London office market is not what it was 10 years ago. A combination of ‘place-making’, changes to employee working patterns and the development of efficient and robust IT infrastructure has enabled London’s work force to become a much more mobile community which has prompted a change in attitudes to leasing. Graham Cutts reports. Businesses, particularly small to medium enterprises (“SMEs”), are changing the way they manage their exposure to the property they occupy. SMEs think in much shorter timelines, which at its most extreme is on a quarterly rolling basis and at the other end, over a two year cycle (invariably tied to the EU negotiation timeline). As such, the growth in the “non-traditional” leasing sector that is suited to this type of occupier has been meteoric over recent years, leading commentators to suggest that by 2030, 30% of all office space in the capital will be let under “non-traditional” or “flexible” leases. Larger corporates that have the resources to commit to property long-term (both space requirement and financial exposure) remain suited to a traditional “investment grade” lease. This proportion of London’s leasing market remains relatively undisturbed. However, change is underway and influences from the non-traditional market are beginning to break into the mainstream. A relaxation around the use of space and generally a more realistic business platform, will move that end of the market into a new (and some would say “non-traditional”) space altogether. With the shortage of brand new supply in the capital, landlords (and larger corporates that no longer require full occupancy) are maximising the use of second hand space. This is true of both established landlords and new players to the market who have capitalised on the growth of SMEs in the financial-tech, TMT and creative sectors by presenting opportunities to maximise the use of space in a more flexible and customer focused way. Principally, flexible leases are shorter (both length of term and the document itself). They narrow the occupier’s financial exposure relative to the low cost of equipping the premises and allow SMEs to occupy the space immediately to avoid protracted fit outs and delays. This appeals to SME start-ups and companies in their infancy. All inclusive rent, service charge and insurance deals are common as are proportionate commitments to other occupational costs. More immediate termination rights are offered in lieu of the more traditional insured damage regime (a mechanism that would otherwise tangle the occupier in needless process at a time it needed to remain quick-footed in a moving business environment). Legally, the non-traditional lease shares many similarities with the investment grade model. Given the minimal fit out and connectivity to mechanical plant and equipment already in place, landlords maintain relatively tight grips on the occupier’s ability to alter. Similarly with commonly required investor, group or “hub” sharing provisions landlords maintain control by taking the leases (and the space sharing provisions within them) outside of the protection of the Landlord and Tenant Act 1954. And the occupier’s ability to offload the space is suitably narrowed to avoid occupiers creating layers of interests that could impact landlords’ liquidity. Contrast that with lighter touch tenant break options (frequency and conditionality) and you can see how these arrangements favour both parties. Economically, the rise in non-traditional leasing has had a negative effect on both rental value and demand for space in the institutional sector where landlords have voids to fill. In a growing flexible sector, SMEs have more choice and current estimates suggest there are around 150 flexible workspace centres in London and the wider feeling is that the rapid rise in the non-traditional leasing sector will have a truly transformative effect on the London market in years to come. An earlier version of this article appeared in the Autumn 2017 EG London Investor Guide. Graham Cutts Senior Associate, London T +44 20 7296 2941 [email protected] Q&A 16 Hogan Lovells In this edition Claudia Oliver looks at the proposed beneficial ownership register whilst Jane Dockeray confirms the reduced SDLT filing window from 2019. Q: Earlier this year I read about a beneficial ownership register. What is happening to that? A: You will recall that the government announced the creation of a register of beneficial ownership of overseas companies holding property in England and Wales in May 2016. There have been no formal announcements by the government at this stage, but it does appear that the government is continuing to have informal discussions with various stakeholder groups, (the formal call for evidence from interested parties having ended in May of this year). It is currently envisaged that the target date for bringing the register into effect will be sometime in 2019. Until a timeline for the register is confirmed, overseas companies should consider how they wish to structure their beneficial ownership when purchasing UK property. In particular it should be noted that as part of the discussion around the introduction of the register of beneficial ownership, it has been suggested that the register of beneficial ownership may be retrospective in effect and apply to companies that already hold property in England and Wales. Q: I hear that the government is reducing the SDLT filing window. Is that correct? A: The government has confirmed that the reduction in the SDLT filing and payment window from 30 days to 14 days will apply to land transactions with an effective date on and after 1 March 2019. The government also announced that it is planning improvements to the SDLT return that aim to make compliance with the new time limits easier. Until the Finance Bill 2018-2019 is published, the details of those improvements will not be known. This reduction is a measure that the government has been planning for some time. Originally announced in the Autumn Statement 2015, the government consulted on various proposed changes in September last year7 , but the introductory blurb suggested that the government had already decided to make this reduction and now they have set the date. The process of preparing the forms to report complex commercial transactions is complicated and can be extremely time-consuming. In time-pressured transactions, it is often not possible during the course of the transaction to engage with the approval of the significant amount of information which needs to be included on the returns. It is not unusual for transactions to be completed where required information about a property (for example, details of leases/subleases) is simply not known and has to be ascertained following completion. The decision to reduce the filing and payment window to 14 days might exacerbate the number of returns submitted with incomplete information. Whilst some firms file returns electronically, many paper returns are submitted with “errors”. 7 See our blog on the consultation posted on 23 September 2016 Real Estate Quarterly Winter 2017 Claudia Oliver Associate, London T +44 20 7296 2494 [email protected] Jane Dockeray PSL Counsel, London T +44 20 7296 5126 [email protected] Until the Finance Bill 2018-2019 is published, we cannot assess how the proposed “improvements” to the SDLT return will address these concerns. If the government has taken the opportunity to substantially simplify the forms and the amount of information required, then the pain of the reduced filing and payment window will be substantially lessened. 18 Hogan Lovells Government issues draft Tenant Fees Bill banning residential letting fees A year ago in the Autumn 2016 Budget, the government targeted upfront residential letting fees with a promise to ban fees as soon as possible. On 1 November 2017, the government took the next step towards realising that promise by publishing the results of its consultation on the topic, together with a draft Tenant Fees Bill. Julia Heyn reports. The Draft Bill The draft legislation bans landlords and agents in England from charging residential tenants and licensees fees or other charges on top of the rent as a condition of the grant, renewal or continuance of a tenancy. The ban covers letting agents’ fees as well as fees charged by landlords and any required payments to third parties (for example credit checks). There are a handful of exceptions: a refundable security deposit (capped at six weeks’ rent, which is an increase from the one months’ rent originally proposed), a refundable holding deposit (capped at one weeks’ rent) and tenant default fees. The ban will apply only in relation to tenancy agreements and licences entered into after any legislation comes into force. It does not apply to long residential leases or social housing tenancies. It does not bite on assignments of tenancy agreements. In reality, assignments of Assured Shorthold Tenancies are rare as ASTs are often short term and personal. The draft Bill includes anti-avoidance measures by preventing a rent at a higher initial sum which subsequently drops during the first year of the tenancy. It does not prevent an increase in rent spread over the term of the tenancy. However, the devil is in the detail, and the final legislation will need to be unpicked to fully understand what the anti-avoidance measures prohibit. Where agents seek to pass fees onto landlords, there is nothing that prevents a landlord from reflecting such fees in a higher rent spread evenly across the term. Whether they do so is likely to depend on supply and demand of similar properties in the area and therefore the extent to which tenants can shop around for rental properties. Enforcement of the ban will be carried out by local authorities (Trading Standards). An initial breach would result in a civil penalty of up to £5,000. Subsequent breaches within five years would be a criminal offence but with a civil penalty of up to £30,000 as an alternative to prosecution. The Consultation Response As could have been expected, the response highlighted differing opinions between agents, landlords and tenants, with many agents and landlords indicating an opposition to a ban (but with some acknowledging that fees are currently not at a level that is justifiable, therefore agreeing that intervention is necessary). The highlights of the consultation findings are as follows: – A common response was that a ban would result simply in fees being passed onto landlords who in turn would increase their rents. Tenants made the point, however, that higher rents would be preferable to the current upfront fees as costs would be more affordable (by being spread out) and transparent. The government believes that tenants will still see a net saving due to the evidence of excessive fees. – There was disparity between the average fees charged, with the response from agents averaging £238 per tenant, whilst the response from tenants averaging £327. That in itself highlights the difficulty that tenants have in assessing the true cost of entering into a tenancy. – Landlords and agents felt that they should be permitted to charge for additional services such as reference checks and inventory checks, commenting that the fees are purely for cost-recovery, not profit. The government agrees that tenants should be able to choose such additional services but that agents and landlords should not be able to require a tenant to pay them. Reference checks should not be exempted from the ban as it is the landlord who contracts for those services and so it is the landlord who is better placed to negotiate and pay those fees. Real Estate Quarterly Winter 2017 – Agents and landlords were concerned that they could be unfairly penalised if a tenant withdraws from a property despite reference checks having been made. In response and as referred to above, a capped refundable holdings deposit (to take a property off the market) is exempt from the ban under the draft Bill. – There was broad support for the capping of tenancy deposits but differing opinions as to the level, ranging from three weeks’ rent to two months’ rent, with the government proposing six weeks in the draft Bill. – The final part of the consultation touched on wider regulation and the responses indicated a general appetite for wider regulation of letting agents. The government indicates that it will consult further on legislation to require letting agents to register with an appropriate organisation and comply with an industry code of conduct. In his written statement to parliament, Sajid Javid (Secretary of State for Communities and Local Government) highlighted the government’s aim to create “a more transparent and competitive private rented market with a higher quality of service” by sharpening and increasing letting agents’ incentives to compete for landlords’ business. The ban will also do away with the risk of unfair practices in the form of double charging. The draft Bill has only recently been introduced in parliament and it will not come into force for some time. However, the message from the government is clear and consistent: it is a case of when not if we see the end of letting fees. Julia Heyn Senior Associate and Senior Professional Support Lawyer, London T +44 20 7296 5354 [email protected] Hogan Lovells Case round-up Lien Tran summarises recent case law. NRAM Plc v Evans [2017] EWCA Civ 1013 Accidentally discharged mortgage can be re-registered at HM Land Registry but priority lost The Court of Appeal ruled that the accidental discharge of a mortgage by a bank did not constitute a mistake which the Land Registry ought to rectify. The bank was able to reinstate its charge at the Land Registry, but only by way of an update to the register. The charge could not be put back in the same position of priority, as before the accidental discharge. The defendants, Mr and Mrs Evans (E), took out a loan from Northern Rock (as NRAM was previously known) in 2004, which was secured by a mortgage over their property. A year later, E took out a further loan from NRAM to repay the first loan. A new loan agreement was created which was secured by the existing mortgage. Over the course of the next 10 years, E treated the second loan as being secured under the original mortgage. However, in 2014, they wrote to NRAM to request a discharge of the mortgage on the basis that the first loan had been repaid. In their letter, they did not make any reference to the second loan or the fact that it was secured by the same mortgage. NRAM discharged the mortgage as it failed to realise that the further loan was still secured by the original mortgage. NRAM applied to court to rescind the discharge on the grounds of mistake and alter the register as if the charge had never been removed. The Court of Appeal considered the distinction between an alteration of the register to correct a mistake or for the purposes of bringing the register up to date. The court noted that there is no mistake where the registrar registers a transfer that is voidable but has not been avoided at the date of registration. In this instance, the bank had discharged the mortgage due to their mistaken belief, but there had been no mistake by the Land Registry. The disposition was therefore voidable and remained valid until NRAM rescinded it. The court concluded that the register remained correct until that point, and therefore could not be characterised as a mistake. Once NRAM rescinded the voidable disposition, the court held that the Land Registry could alter the register to bring it up to date. However, the court had no power to re-register the mortgage with the same Real Estate Quarterly Winter 2017 21 priority as before the discharge. Had the discharge been a void disposition (for example, as a result of fraud), then it would have amounted to a mistake which should be rectified and the court would have had the power to change the priority of interests. West End Commercial Ltd v London Trocadero (2015) LLP [2017] EWHC 2175 (Ch) Injunction discontinued for Trocadero retailer London Trocadero (LT) is the freehold owner of the well-known Trocadero shopping centre. LT granted a licence to occupy to the claimant (WECL) in respect of a retail unit in the Trocadero. Under the terms of the licence, LT could give 30 days’ notice at any time to terminate the licence. The notice provisions stated that notices “shall be in writing and shall be sufficiently served if delivered by hand or sent by recorded delivery to the other party at its registered office or last known address”. LT terminated the licence within a week after it was granted. The termination notice was served by email and by hand and recorded delivery to the premises. WECL claimed that LT’s agent had given assurances during the negotiations that LT would not serve notice to terminate, as long as WECL paid the licence fee and did not breach any other terms of the licence. The licence did not include any provisions relating to the assurances allegedly given by LT’s agent. However, WECL contended that: (a) a proprietary estoppel had arisen because it had relied on the agent’s representations, and (b) the termination notice had not been validly served at its registered office. WECL obtained an interim injunction to prevent LT from terminating the licence. LT contended that WECL was only a licensee and had no proprietary interest in the property. The High Court ruled that the injunction should be discontinued. The court found that WECL had not suffered detriment by entering into the licence, as it did not previously have any right to occupy the premises. There was no existing legal relationship between the parties and WECL did not have any property interest in the retail unit, so its proprietary estoppel argument failed. LT had lawfully terminated the licence in accordance with terms that both parties had agreed. In any event, WECL could be adequately compensated in damages for loss of profits if the termination turned out to be unlawful, so an injunction would not be appropriate. As for the validity of service of the notice, WECL dropped this argument in the final injunction hearing. The court agreed, commenting that the notice provisions were permissive and did not describe exhaustively the methods of service. In any event, the wording permitted service at WECL’s last known address, so service at the premises would suffice. Farakh Rashid v Mohammed Rashid [2017] UKUT 332 (TCC) Fraudulent registered proprietor cannot claim further adverse possession title Mohammed Rashid (M) was the owner of a property in Birmingham and had been the registered proprietor since 1982. However, the defendant’s father, who had initially found the property for M, transferred the property into his own name in 1989 by forging M’s signature. The following year, the father gifted the property to his son, the defendant (F), who remained the registered proprietor ever since. Under Schedule 4 to the Land Registration Act 2002, a mistake on the Land Register can be rectified if it was made as a result of fraud or lack of proper care, unless exceptional circumstances apply. At the First tier Tribunal, the judge held that F had colluded in the fraud and M should be restored as the registered proprietor. F argued that he was in adverse possession of the land, which amounted to exceptional circumstances that justified not altering the register. The judge rejected this on the basis that a registered proprietor cannot be in adverse possession of his own land. On appeal to the Upper Tribunal (UT), F contended that his unlawful behaviour (by fraudulently becoming registered proprietor) meant that he could be deemed to be in adverse possession. As he had already obtained adverse possession, there would be no point in rectification. M countered that F should not be allowed to benefit from his own illegality, particularly where he had committed serious fraud. The UT found that adverse possession is not ruled out by unlawful behaviour. However, the registered proprietor of land cannot be a trespasser, regardless of whether the title was transferred to him fraudulently or otherwise. From a common sense perspective, F could 22 Hogan Lovells not have another title through adverse possession. The UT also commented that it would have also found in favour of M on the second point regarding illegality, as F should not benefit from his fraudulent act. Cheerupmate2 Ltd v Calce [2017] UKUT 377 (TCC) (15 September 2017) Invalid notice prevents landlords from forfeiting long lease The landlord (L) attempted to forfeit a lease of a long residential leasehold property held by the defendant tenant (T) for arrears of ground rent. After L acquired the reversion of the lease in 2015, it served a notice notifying T of the change in landlord and demanding ground rent in the sum of £11 for the period 2010 to 2015. A tenant with a long residential lease is only liable to pay rent if notice is served in the prescribed form required by sections 166 and 167 of the Commonhold and Leasehold Reform Act 2002 (CLRA 2002). When T failed to pay, L forfeited the lease by peaceable re-entry. At the First tier Tribunal, the judge held that L’s purported forfeiture was ineffective. On appeal to the Upper Tribunal, L’s notice was found to be invalid as it was not in the form prescribed by the CLRA 2002. Although technical defects in notices should not invalidate them if their meaning remains clear, the wording used in L’s notice was not sufficiently clear for T to understand the position. In addition, the lease specified that L was only permitted to forfeit the lease for non-payment of rent after the tenant had been in arrears for two years. Under section 167 CLRA 2002, landlords are only allowed to forfeit a lease where the arrears have been outstanding for over three years or exceed £350. The time starts running from the due date specified in the section 166 notice rather than the due date in the lease, so L’s right to forfeit had not yet arisen. Lea v Ward [2017] EWHC 2231 (Ch) Right of way includes only the track in use at time of grant Lea (L) owned a property in Shropshire which had the benefit of a right of way over a strip of land which belonged to Ward (W). L’s right of way was claimed “over the track or way… between the said point D and the point marked F on the said plan”. However, the plan was unclear and left the width of the right of way ambiguous. W decided to redevelop his property into six residential units and applied for planning permission. The plans attached to the planning permission showed that the development would include the strip of land and did not mention the right of way. When W commenced development works on his land, he erected temporary fencing and undertook building works which L argued amounted to a substantial interference of the right of way. The court had to decide the extent of the right of way that had been granted and if there had been a substantial interference by W. The judge first considered the wording of the deed of grant, which granted the right of way “over the track or way”. The natural meaning of the words suggested that the track or way was “something recognisable and having been beaten by use”, which would only include the physical extent of the track used in 1979. The court held that the right of way only applied to the track that was in use at the time of grant, rather than the whole strip of land. The court also found that L could not exercise his right of way as conveniently as before, which meant that the fencing amounted to an actionable interference. However, only a nominal amount of damages was awarded because the practical impact was minimal. As for the building works, the route of the right of way had been altered. Although an alternative route had been provided, the court agreed that there was a substantial interference with L’s original right of way. If W failed to provide L with an alternative but equally convenient route, then an injunction would be granted. Signature of St Albans (Property) Guernsey Ltd v Wragg [2017] EWHC 2352 (Ch) Developer continues to be bound by restrictive covenants The claimant (S) was a developer who owned three properties in St Albans. During the late 19th century, the properties had been part of a larger estate which was owned by one person. When the owner of the estate died, the land was sold as separate parcels, each intended to be high-class residences. As a result, the land belonging to S was burdened by restrictive covenants that had been created by two conveyances, Real Estate Quarterly Winter 2017 23 which intended to preserve the residential character and high quality of the neighbourhood. S obtained planning permission to demolish the existing buildings on its land and build a residential care home. If S implemented its proposed scheme, the development would constitute a breach of the restrictive covenants. The defendants (W) were residents of neighbouring properties, who argued that the restrictive covenants continued to affect the land and were enforceable against S. However, S applied to the court for a declaration that the restrictive covenants did not affect the property and were not enforceable against it. S argued that there had been breaches of the vendor covenants, which prevented W from enforcing the purchaser covenants. In addition, the persons entitled to the benefit of the purchaser covenants had made such changes in the character of the neighbourhood that the covenants did not have any practical effect. The High Court rejected both of these arguments. S was unable to prove that W had breached the covenants and, in any case, there had not been any application for an injunction at the time of the alleged breaches. Although the neighbourhood had changed in number of residential properties, the character had not changed to a lower quality. The restrictive covenants continued to affect the land and could be enforceable by an injunction. Sparks v Biden [2017] EWHC 1994 (Ch) Court implies term into overage provisions in option agreement S owned a portion of land which he wanted to develop into residential property. However, S did not have any experience in carrying out such developments and decided to enter into an agreement with B, who was an experienced developer. The parties entered into an option agreement which granted B an option to purchase the land from S. The option agreement stated that B should use all reasonable endeavours to obtain planning permission during a three year period. Once the planning permission was granted, B would have one month to exercise the option. B was then obliged to proceed with construction as soon as practicable. Upon the sale of each new property, S was entitled to overage of approximately a third of the sale price of that property to ensure that the S received at least £700,000 in total. B obtained planning permission, exercised the option and built eight houses on the land. Rather than selling the houses, B occupied one property himself and let the remainder under assured shorthold tenancies. B argued that there was no obligation to sell the newly constructed properties under the option agreement. As none of them had been sold, the overage payments were not due. S argued that B’s interpretation fundamentally undermined the underlying purpose of the overage agreement. He contended that there should be an implied term which required B to sell the properties as soon as reasonably practicable. The court held that there should be an implied term in the option agreement requiring B to market and sell the houses within a reasonable time of the grant of planning permission and exercise of the option. The key factor which persuaded the judge was the option agreement’s structure. B was under an obligation to use reasonable endeavours to obtain planning permission during the option period and construct the development as soon as practicable after purchasing the land. It was clear that these obligations were designed to trigger a further obligation to pay overage upon sale of the new properties. The obligations had a view to realisation of the value of the development and S’ entitlement to overage. The judge stated that the clause was obvious and necessary as a matter of business efficacy. Lien Tran Associate, London T +44 20 7296 5502 [email protected] Budget 2017 – homes under the Hammond 25 It was no surprise that in Budget 2017 Mr. Hammond focused on house building and the post Brexit economy. Hard cash, planning reform and government intervention are the Chancellor’s proposed solutions to the housing crisis. Kathryn Hampton gives a quick summary of the key announcements and their implications: Hard Cash – £44bn in capital funding, loans and guarantees for housing over the next five years. This is being pledged to enable the delivery of 300,000 new homes a year by the mid-2020s. – £8bn of new financial guarantees to support private house building and the build to rent sector. – £2.7bn to the Housing Infrastructure Fund. It is hoped that this will ensure that the infrastructure needed to facilitate higher density development will be delivered. – £1.1bn for strategic sites, including new settlements and urban regeneration schemes. – £630m to unlock the construction of 40,000 homes on small sites. – £400m for estate regeneration. – New money for the Home Builders Fund for SME house builders. – £34m to develop construction skills. Planning Reform – A reaffirmed focus on urban areas (rather than greenbelt). The government wants to see high quality, high density homes in city centres and around transport hubs. With new national planning policy due in Spring 2018, we can expect to see this included. – Councils in highly populated areas will be encouraged to grant planning permission for more homes for local, first time buyers and affordable renters. 26 Hogan Lovells – A community infrastructure levy (CIL) consultation will be launched which will look into speeding up the process of setting and revising CIL. It will also consider allowing some councils to introduce an additional Mayoral type CIL for mayor infrastructure and allowing different CIL rates to reflect land value uplift. – A consultation on the barriers to offering longer tenancies in the private rented sector will be launched. The government will look at how it can encourage landlords to offer longer tenancies to tenants who want more security. Government Intervention – An “urgent” review into land-banking, looking at the gap between planning permissions and housing starts. An interim report will be required before the Spring Statement 2018. The Chancellor has been clear that if the review finds that land is being withheld for “commercial, rather than technical, reasons” the government will intervene. Details of the invention are yet to be released, but Mr. Hammond mentioned using compulsory purchase powers as necessary. – Local Authorities are being given the power to charge a 100% council tax premium on empty properties. We await details as to how “empty” will be defined. It will be important for the government to consider how this will affect holiday homes and the private rented sector. What this means Whilst the additional funding will be welcomed by the industry, the race is now on to qualify for it. The sums seem large at first glance, but with the amount of focus on this market and the number of new homes needed, developers will need to get in early to secure their piece of the pie. The impact of the planning reforms mentioned will depend heavily upon how they are integrated into the national planning policy changes expected in the Spring. The Chancellor said that the Communities Secretary will set out more detail shortly. We are very interested to see the CIL consultation and will be commenting on that in due course. Again, it will be very important for developers to provide their views on this too. One of the most notable announcements is the review into land-banking which the Chancellor says will be conducted as a priority. This shows that the government is taking this issue very seriously. It is therefore crucial that the industry responds so that the government can understand the true constraints affecting development sites around the country, even where planning permission has been granted. If this opportunity is missed, there is a major risk that onerous measures will be introduced to force developers to build out the whole scheme within a certain period, or lose their planning permission – or even the development site – altogether. An earlier version of this article appeared as a newsflash on Budget day. If you would like to be included on the mailing list for future newsflashes, please contact one of the editors. Kathryn Hampton Senior PSL, London T +44 20 7296 5435 [email protected] Real Estate Quarterly Winter 2017 27 Budget shock for property industry: non-UK resident landlords to be taxed on UK property gains Quietly, almost without any fanfare, a tax policy of more than 50 years designed to encourage overseas investment into UK real estate was reversed in the small print of the Budget. The announcement has provoked a storm across the property industry. Elliot Weston explains the hidden detail. UK tax will apply to the disposal by non-UK residents of all UK property (commercial and residential) from April 2019. There will also be a UK tax charge where a non-UK resident realises a gain on disposal of a 25% interest in an entity which derives directly or indirectly 75% or more of its gross asset value from UK property. Generally only gains accruing from April 2019 will be within the charge to tax and historic gains will be excluded. For residential property already within the scope of the Non-Resident CGT regime, gains from April 2015 will continue to be within the charge to tax. Overseas pension funds registered in the UK will be exempt from capital gains tax on disposal of UK property investments or interests in UK property rich entities. Also companies owned as to at least 80% by qualifying institutional investors such as pension funds, life assurance companies and investment trusts will be able to benefit from the substantial shareholdings exemption when disposing of 25% shareholdings in property rich companies. Despite the historic nature of this change in UK tax policy, the writing has been on the wall for some time. It follows the pattern of a gradual widening of the UK tax net for overseas investors in UK property over the last few years. The UK is practically the only developed country in the world not to charge tax to non-residents on the disposal of commercial property located in its jurisdiction. Most double tax treaties allocate taxing rights on immoveable property to the State in which the property is located. You could characterise this Budget announcement as bringing UK tax policy on commercial property gains into line with that in other countries. It has been a feature of the UK property market for several years that overseas investors, particularly from China and the Middle East, have dominated the acquisition of high value commercial UK property. Much of this investment is held through offshore structures, such as non-UK resident companies and unit trusts. We may see a flurry of sales and restructurings in 2018, but many investors are long term holders of UK property. In the future, investors will look at onshore structures for holding UK property. The proposed reduction in UK corporation tax to 17% from April 2020 will mean that a UK holding company may be a simple and relatively attractive option. Alternatively there are tax exempt vehicles like openended property funds (PAIFs) or listed property companies (REITs). One likely impact of the change is that investors will look closely at converting existing joint venture vehicles and funds into UK REITs. The government has made its policy intentions clear, but there is a consultation on the shape of the legislation which is open for comment until 16 February 2018. This article was first published as a Keeping it Real Estate blog. You can find the blog at www.ukrealestatelawblog.com We are hosting a Spring 2018 seminar on the implications of the new measures. If you would like to be included on the invitation list, please contact one of the editors. Elliot Weston Partner, London T +44 20 7296 2658 [email protected] 29 Contacts This newsletter is written in general terms and its application in specific circumstances will depend on the particular facts. If you would like to receive this newsletter by email please pass on your email address to one of the editors listed below. If you would like to follow up any of the issues, please speak to one of the contacts listed below, or to any real estate partner at our London office on +44 20 7296 2000, or to any real estate partner in our worldwide office network as listed at the back of this newsletter: Daniel Norris UK Head of Real Estate [email protected] Jane Dockeray Editor and PSL Counsel [email protected] Julia Heyn Editor and Senior Associate [email protected] For topical commentary on key issues in today’s rapidly evolving real estate market, visit our Keeping it Real Estate blog: www.ukrealestatelawblog.com or follow us on twitter at @HLRealEstate 30 Hogan Lovells Notes www.hoganlovells.com “Hogan Lovells” or the “firm” is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses. The word “partner” is used to describe a partner or member of Hogan Lovells International LLP, Hogan Lovells US LLP or any of their affiliated entities or any employee or consultant with equivalent standing. Certain individuals, who are designated as partners, but who are not members of Hogan Lovells International LLP, do not hold qualifications equivalent to members. For more information about Hogan Lovells, the partners and their qualifications, see www. hoganlovells.com. Where case studies are included, results achieved do not guarantee similar outcomes for other clients. Attorney advertising. Images of people may feature current or former lawyers and employees at Hogan Lovells or models not connected with the firm. © Hogan Lovells 2017. 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