Commercial real estate in the UK (England and Wales): overview

A Q&A guide to corporate real estate law in the UK (England and Wales).

The Q&A gives a high level overview of the corporate real estate market; real estate investment structures, including REITs; title; tenure; sale of real estate; liability; due diligence; warranties; real estate tax, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; and planning law.

To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.

This Q&A is part of the global guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-guide.

Contents

The corporate real estate market

1. What have been the main trends in the real estate market in your jurisdiction over the last 12 months? What have been the most significant deals?

The most notable features of the commercial real estate market are the slowdown that has occurred so far in 2016 compared to the previous year, and the impact that the UK's referendum on leaving the EU has had on the property market in the short term and how it will continue to impact going forward.

There was no let-up in transactional activity during the last quarter of 2015, with almost GB£18 billion of completed deals. This culminated in a record breaking year, with over GB£70 billion of transactions, well over the roughly GB£63 billion transacted in 2014, which had itself held the previous record.

However, it now looks increasingly clear that 2015 marked the top of the current cycle. The volume of transactions dropped off significantly from the first quarter of 2016 onwards, with about GB£25 billion of transactions during the first half of the year compared to almost GB£39 billion in the first half of 2015.

In the earlier part of 2016, there seemed to be some consensus among many market commentators that, although uncertainty regarding the UK's referendum on EU membership was causing a number of investors to wait until after the vote, there was an expectation that there would be a sharp increase in activity after the referendum in the second half of the year, assuming that the referendum result would be for the UK to remain in the EU.

The referendum Brexit result seemed to catch the industry by surprise and killed off hopes of an increase in activity (at least in the short term), with commentators agreed that market sentiment has generally deteriorated with the undoubted creation of short-to-medium term volatility.

The immediate aftermath of the vote saw reports of a number of transactions being put on hold or becoming abortive, and the very notable news that several UK funds (including Standard Life, Aviva and Aberdeen) were forced to suspend trading due to the high number of redemptions being sought by retail investors. Many assets held by those funds have been rushed to the market in an attempt to raise funds. Early indications are that a number of sales have occurred in very short timescales, with agents reporting that sale prices are weaker than they would have been before the referendum result. Certainly, the most recent IPD data suggests that capital values have fallen since the Brexit vote.

Overseas investors remain the largest net investors into commercial property, although there were signs that they were scaling back investment during the first half of 2016, with investment by such investors down about 40% year-on-year compared to the first half of 2015. This may have been due to uncertainty regarding the referendum, coupled with a global economic slowdown and a perception that the UK was further along in the cycle than other parts of the world.

However, one other notable impact of the referendum result has been the fall in the value of sterling, which will mean that UK property is now cheaper for foreign capital than it was previously. Market commentators are speculating (and indeed report that there is evidence emerging) that a number of overseas investors are seeking to capitalise following the referendum by looking at UK opportunities afresh, due to the better value created by the volatile markets and fall in sterling. This may help to ensure that their main targets for investment, prime offices and retail (particularly in central London), should quickly recover.

Despite the referendum result, many are optimistic about the underlying fundamentals of the UK economy and commercial property market. Most commentators seem to agree that the UK (whether in or out of the EU) is likely to maintain its safe haven status, and that political instability will be short lived. That, allied with the sheer weight of global capital and an increasingly desperate global search for yield, will help to limit any market correction and ensure that the UK retains favour with overseas investors.

On the occupier side, rental values had been enjoying growth prior to the referendum but there may be an impact on occupier demand going forward as businesses react to the Brexit result. Some occupiers are likely to defer decisions, whereas others may act by rolling out contingency plans. However, there remains a shortage of modern stock in many areas, so many commentators are expecting slower growth rather than a rental decline to be the most likely scenario.

The most significant deals during the 12 month period from October 2015 to September 2016 include the following:

  • London and Regional Properties purchasing Lone Star's Atlas hotel portfolio for GB£575 million.

  • Mapletree Investments acquiring Green Park, Reading from Oxford Properties Europe for GB£563 million.

  • The purchase of 123 Buckingham Palace Road, London SW1, by GAW Capital from DivcoWest for GB£498.5 million.

  • Mapletree Investments' purchase of an Ardent UK student portfolio from International Mutual Fund for GB£417 million.

  • Oxford Properties Europe's acquisition of 110 Southwark Street, London SE1 from Time Inc for GB£415 million.

  • The sale of Merry Hill, Dudley by QIC Real Estate to Intu Properties for GB£410 million.

  • The purchase of 334-338 Oxford Street, London W1 by Ramsbury Estates from British Land for GB£400 million.

  • ENPAM's acquisition of Principal Place London EC2 from Brookfield Property Partners for GB£382 million.

  • AustralianSuper's purchase of Kings Cross Central London N1 from London and Continental for GB£371 million.

  • Lend Lease and London and Continental's sale of The International Quarter office building in London E20 to Deutche Asset and Wealth for GB£370 million.

  • M&G Secured PIF's acquisition of a David Lloyd Leisure portfolio for GB£350 million.

  • The purchase of Aldgate Tower London EC1 by China Life Insurance and Brookfield Office Property from Aldgate Developments Ltd for GB£346 million.

 

Real estate investment

2. What structures do investors typically use for real estate investment in your jurisdiction and what are the main advantages and disadvantages of each (for example, flexibility and tax transparency)?

A range of investment structures is used to acquire and hold commercial real estate investments, particularly where there are co-investors. The optimum structure in any particular case will depend on a number of factors, including:

  • Tax.

  • Funding.

  • Management.

  • The introduction of new investors.

  • Exit routes.

Common investment structures include:

  • Limited liability companies.

  • Property unit trusts.

  • Partnerships (with limited liability).

  • Trusts of land.

  • Contractual joint ventures.

It has been possible to establish real estate investment trusts (REITs) in the UK since 2007. As a result of relatively restrictive conversion and regulatory requirements when compared to some other jurisdictions, apart from the initial conversion to REIT status of a number of the larger stock exchange-quoted corporations, the UK REIT market has not grown at the rate originally anticipated. However, reforms to address some of the market concerns were introduced in 2012 and since then REITs have been more widely considered as potential vehicles for joint ventures between sophisticated investors.

 
3. What are the main sources of finance and types of investors for real estate investment in your jurisdiction? Does your government encourage overseas investment into real estate in your jurisdiction, for example through real estate investment legislation?

As real estate remains an important component of a balanced, long term investment portfolio, institutional investors (such as pension funds and insurance companies, both domestic and overseas) remain active in the market and tend to be longer term investors.

Private investors include listed property companies, sovereign wealth funds and private equity funds and investment vehicles backed by high net-worth individuals. Investors will usually be financed from equity or debt or both.

The UK has attracted large amounts of overseas investment into real estate. Generally, overseas investors are attracted by a mix of factors including the UK's political and economic stability, its transparency and lack of corruption, the well- established legal and planning system and tax environment and prospects for capital and rental growth, rather than any particular investment legislation as such.

 

Restrictions on foreign ownership or occupation

4. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

There are no restrictions on foreign ownership or occupation of real estate.

 

Title to real estate

5. What constitutes real estate in your jurisdiction? Is land and any buildings on it (owned by the same entity) registered together in the same title, or do they have separate titles set out in different registers?

Real estate includes land and any buildings or other structures on or over it. It also includes the subsoil below and the airspace above the land to a height necessary for the ordinary use and enjoyment of the land.

Where title to the land is registered all component parts are registered together under the same title at the Land Registry.

 
6. How is title to real estate evidenced? What is the name of the public register of title and the authorities responsible for managing it? Is electronic access and electronic conveyancing available?

When land has been registered, title is evidenced by registration in a public register of title which is maintained by the Land Registry (www.landregistry.gov.uk). The Land Registry exists to:

  • Provide a reliable record of information about ownership of and interests affecting land by maintaining the public register of title.

  • Provide owners with a title that is underpinned by the state.

  • Simplify the transfer of interests in land.

Land registration was first introduced towards the end of the 19th century and over 80% of the land area in England and Wales has now been registered. Much of the unregistered land is in rural areas and most urban land is registered. Ownership of land which has not yet been registered is evidenced by possession of the title deeds.

Full electronic conveyancing is not yet available, but steps are being taken to facilitate this in the future. At present, it is possible electronically to discharge a charge from the register, to lodge a standard form electronic charge which requires an electronic signature by the borrower and to make other minor applications to change the register. While not yet possible to complete the majority of land transactions electronically, it is possible to deliver applications electronically to the Land Registry through their secure website known as the Portal. Most types of dealing transaction that are sent to the Land Registry by post are available to send and receive electronically through the Portal's electronic Document Registration System (e-DRS). There are some exceptions to this, including first registrations and documents exceeding a certain size. There is a 50% fee reduction for use of e-DRS on most applications.

Official copies of the title register and related plans (showing the extent of the registered land) can be accessed through the Portal's Information Services, through which certain searches can also be carried out online.

 
7. What are the main information and documents registered in the public register of title? Can confidential information or documents be protected from disclosure in the public register of title?

Each real estate interest is allocated a separate register and a unique title number. The register consists of three parts:

  • Property register. This contains a description of the registered interest (by reference to a plan, based on the Ordnance Survey map), states whether the interest is freehold or leasehold and details any rights enjoyed over other land. If the interest is leasehold, brief details of the lease are also provided.

  • Proprietorship register. This contains the name and address of the owner and details of any limitations on the owner's power to deal with the land.

  • Charges register. This records charges and other encumbrances affecting the registered interest.

The register of title is a public document and anyone can inspect and make copies of it or any document referred to on it.

However, the Land Registry has discretion to restrict public access to certain information contained in registered documents in limited circumstances, where disclosure of that information could be prejudicial to one of more of the parties.

Certain information (such as the price paid for land) must be shown on the register of title but other commercial information (such as the rent payable under a lease) can be excluded.

 

State guarantee of title

8. Is there a state guarantee of title? Is the authority that manages the public register liable to pay compensation for any errors it makes in relation to title registration? Is title insurance available and is it commonly used?

There is a state guarantee of title for land which has been registered at the Land Registry. The register is conclusive evidence of the legal title.

In certain prescribed circumstances (for example, if a registration error has been made or a forged transfer document has been registered) the Registrar may rectify the register. A statutory compensation scheme is in place which entitles anyone suffering a loss as a result of the rectification to an indemnity from the Registrar (unless the loss resulted from the claimant's own fraud or lack of proper care).

Title insurance is available, although the existence of the state guarantee limits the need for insurance. Insurance is commonly available against loss arising from the enforcement of uncertain or historic third party rights (such as restrictive covenants limiting the use of the land).

 
9. How can real estate be held (that is, what types of tenure and other main ownership rights exist over land)?

There are only two estates which can be held in real estate:

  • A freehold estate (effectively absolute ownership).

  • A leasehold estate.

Commonhold is an alternative form of freehold land ownership which was introduced in 2004 as a means of providing for freehold ownership of an individual unit within a larger freehold development (such as an apartment within an apartment block or a unit within an industrial estate). However, commonhold has not been embraced by the real estate industry and commonhold titles are rarely encountered.

 

Sale of real estate

Preliminary agreements

10. What types of preliminary agreements are typically used in the sale of real estate? Are they legally binding?

Commercial negotiations commence once an interested party has been identified. At this stage, the seller may negotiate with more than one potential buyer. For larger lot sizes, sales by competitive tender are becoming increasingly common.

Following selection of a preferred bidder, until a formal sale contract is agreed and signed, neither party is legally bound and so there is flexibility to conduct negotiations without the concern that binding legal commitments may arise unintentionally. Normally the buyer and seller (or their agents) agree heads of terms, recording the principal commercial terms for the transaction, before referring the matter to lawyers to negotiate the formal contract. Although heads of terms evidence serious intent they do not legally compel the parties to conclude the deal on the terms agreed or even at all. Provisions relating to confidentiality and costs may however be binding on the parties.

Once heads of terms have been agreed, there are occasions where an exclusivity agreement may be signed which gives the buyer an agreed period to exchange contracts, during which the seller will not market the property or discuss terms with any third party.

 

Sale contract

11. Briefly outline the typical main provisions of a corporate real estate sale contract and main real estate provisions of a typical share purchase agreement.

A contract for the sale of land must meet all the following requirements:

  • Be in writing.

  • Contain all the terms which the parties have agreed (either on the face of the contract itself or in another document which is identified in the contract).

  • Be signed by both parties.

The contract must set out all the agreed terms and not just the main terms. If it does not, it is not enforceable. Notarisation is not required.

In a share transaction the real estate will indirectly transfer to the buyer as one of the assets of the business when the target's shares are acquired. There will not usually be any need for a direct transfer of the real estate. However, as the buyer will take on all the target company's existing liabilities and commitments (and those of any subsidiaries) it is important to establish what they may be. It is likely that the seller will provide certain warranties about both the target company itself and the real estate that the company holds, and that the buyer may obtain certain indemnities from the seller. The extent of the provisions will vary greatly, depending on the nature of the transaction and other factors such as the extent of due diligence undertaken.

 

Due diligence

12. What real estate due diligence is typically carried out before an acquisition and what key areas does it cover? Which documents are typically reviewed? Which specialist advisers are usually involved and which reports do they typically produce?

For a typical acquisition a prudent buyer would:

  • Investigate the seller's title to the property. All documents of title are usually reviewed.

  • Undertake the standard searches of the public registers and raise enquiries of public authorities and utility providers.

  • Commission a "desk-top" environmental survey (and possibly a more extensive survey depending on the results). In some circumstances an environmental consultant may be instructed to deal with specific issues.

  • Commission a survey of the building and its services. A surveyor will usually undertake a condition survey of the land and buildings and produce a report for the buyer.

  • Obtain a valuation. A formal valuer may be appointed by the buyer to produce a valuation report.

  • In the case of an investment property, analyse the rental streams and the financial standing of the tenants.

  • In the case of a property with development potential, carry out an audit of potential development constraints (such as the existence of rights of light and other third party rights which would inhibit development).

 

Sellers' warranties

13. What real estate warranties are typically given by a seller to a buyer in the sale of corporate real estate and what areas do they cover? What are the main limitations on warranties, for example are they typically qualified by disclosure?

The standard market practice is that the seller does not give any warranties on the sale of real estate, other than some limited statutory warranties in relation to:

  • The seller's capacity to sell.

  • The absence of non-disclosed charges and encumbrances.

  • In the case of a leasehold sale, the validity of the lease and that the buyer must satisfy itself by conducting a due diligence exercise.

However:

  • On a sale by way of a disposal of the corporate vehicle which owns the real estate, the seller may be required to give some warranties (although warranties relating to the real estate may be limited if the buyer has carried out its own due diligence).

  • In some cases the buyer may buy on the basis of a certificate of title given by the lawyer acting for the seller. In such a case:

    • the buyer is relying on the statements in the certificate;

    • the seller will warrant that the information it provided for the purposes of the certificate is correct.

In a share sale disclosures made in what is referred to as the disclosure letter will limit the extent of the seller's exposure under the warranties. On larger transactions, it is not uncommon for the real estate warranties to be ringfenced.

 

Liability

14. Does a seller have any statutory or other liability to the buyer in a disposal of real estate?

Generally a seller of real estate is not under an obligation of disclosure to the buyer and the responsibility is with the buyer to undertake its own due diligence. The main exception to this general rule is that a seller must disclose any defects in the title which are not apparent from a visual inspection of the property.

 
15. Briefly outline the environmental legislation and potential liability for a buyer in a purchase of real estate. Is it common to carry out environmental surveys and searches and to obtain environmental insurance? How is environmental liability typically dealt with in the sale contract?

The Environmental Protection Act 1990 establishes a risk-based regime for the identification and clean-up of land where contamination poses an unacceptable risk to human health or the environment. The overall objective of the contaminated land regime is to ensure that contaminated land is cleaned up, in the first instance by those responsible for the contamination. However, if the original polluter cannot be found, liability passes to the current owner or occupier of the site, regardless of whether it was aware of the contamination. Therefore a buyer of real estate can become liable for remediation and for this reason a well advised buyer will carry out various investigations regarding contamination prior to contracting to buy the land.

Even if the original polluter can be found, liability can still be imposed on a buyer that has accepted responsibility contractually (sale agreements will therefore often assign responsibility for any existing contamination between the seller and buyer), or where the buyer is deemed to have knowingly permitted the continued presence of the contamination (the buyer may have acquired knowledge through information disclosed by the seller or through its own environmental investigations pre- or post-acquisition).

Preliminary enquiries are raised of the seller and a search of the records held by the relevant local authority is performed. Additionally a buyer will commission an environmental report from an independent consultant. The level of survey will be determined by the known or likely environmental risks and the future use of the land. Basic environmental reports involve a desk top review of publicly available material, whereas more detailed reports include soil, gas and groundwater sampling and a risk assessment. The buyer will also usually commission a specialist flood risk report.

Environmental insurance is rarely obtained as adequate cover at a suitable price is not readily available. Sale contracts do not generally contain provisions dealing with environmental liability but bespoke provisions will be individually negotiated where this is required by the transaction.

The Control of Asbestos Regulations 2012 impose a duty on those with responsibility for the maintenance or repair of non-domestic premises to identify whether any asbestos is present, and to manage any asbestos that is either identified or is likely to be present.

 
16. Can an owner or occupier inherit liability for other matters relating to the real estate even if they occurred before it bought or occupied it? Can a seller or occupier retain any other liability relating to the real estate after it has disposed of it?

There are circumstances where a new owner can inherit historic liability:

  • Continuing breach. This occurs where the breach which gave rise to the original liability is continuing, such as an ongoing breach of a restrictive covenant or continuing failure to repair in the case of a leasehold property.

  • Breach of statutory requirements. The new owner will continue to be liable for a breach of statutory requirements, such as a breach of planning law.

  • Clean-up liability is imposed on persons who cause or knowingly permit contamination. This liability arises under the contaminated land regime (see Question 15).

Circumstances where a seller of real estate retains liability for past events include:

  • Liability in contract. Generally, a seller remains liable for breaches of obligations committed by it during its ownership.

  • Leasehold. A tenant under a lease granted before 1 January 1996 (or on or after 1 January 1996 under an agreement entered into before 1 January 1996) generally remains liable under the covenants in the lease (and obtains an indemnity from the buyer on the sale of the lease). A tenant under a lease granted on or after 1 January 1996 is automatically released on an assignment of the lease but, if the lease provides, the tenant can be required to guarantee the performance of the buyer, under what is known as an Authorised Guarantee Agreement (AGA).

  • Liability for any contamination that the seller has caused or knowingly permitted. Under the contaminated land regime (see Question 15), the seller retains this liability unless this responsibility has been assumed by the buyer under the sale agreement. In some cases, a seller may agree to retain responsibility and indemnify the buyer for any existing contamination.

 

Completion arrangements

17. What are the typical arrangements and main documents required for completion of the sale? When does title transfer and what are the formal legal requirements to execute the sale documents, transfer the real estate and register the change of title? Is notarisation required?

The parties to a sale contract are legally bound once they have formally entered into the contract. A sale contract can be made subject to conditions (for example, subject to obtaining the consent of the landlord in the case of the sale of a leasehold interest). If the conditions are not satisfied (or waived) the contract is usually terminable. The contract does not have to be executed as a deed.

Normally a deposit is payable by the buyer (of between 5% and 10% of the purchase price) which is held by the seller's lawyer as a stakeholder. If the buyer fails to complete the contract, the seller can retain the deposit.

The transfer from the seller to the buyer is completed on the date specified in the sale contract for completion by a separate instrument, called a transfer, which the buyer then submits to the Land Registry for registration. The transfer must be executed as a deed and, if of registered land, comply with Land Registry requirements in terms of form and layout.

As between seller and buyer, title passes on completion of the transfer but the buyer does not become the legal owner of the interest transferred until it becomes registered as the proprietor of that interest at the Land Registry. A buyer (and any mortgagee) can secure priority between the date of completion of the transfer and the date of submission of the application for registration at the Land Registry by undertaking a priority search before completion. So long as the application for registration of the transfer (or charge) is received by the Land Registry within the priority period conferred by the result of that search (currently 30 business days) the application will have priority over any other application received by the Land Registry within that priority period. Notarisation is not required.

 

Real estate tax

18. Is stamp duty/transfer tax (or equivalent) payable on the sale or purchase and who pays? Who pays, what are the rates and are there any exemptions? Does it apply to the transfer of shares in a company holding real estate and at what rate?

Stamp duty land tax (SDLT) is payable by the buyer of commercial real estate. The rate payable is a percentage of the purchase price and varies depending on the consideration (including VAT) paid for the property. The current rates for non-residential or mixed transactions with an effective date on or after 17 March 2016 (which were introduced in the 2016 Budget) are:

  • Up to GB£150,000: 0%.

  • Between GB£150,001 and GB£250,000: 2%.

  • More than GB£250,000: 5%.

The new SDLT rates operate on a slice system, under which that part of the entire consideration falling within a particular band is taxed at the rate applicable to that band (rather than the previous slab system, under which SDLT was levied at a single rate on all the chargeable consideration). Different rates apply for transactions involving residential premises.

Various reliefs and exemptions are available, such as for charities, intra-group transfers, corporate reconstructions, and land in areas covered by compulsory purchase orders.

Where commercial real estate is acquired by a corporate vehicle and the real estate includes individual residential units of a value in excess of GB£500,000, SDLT may be payable on the consideration attributable to each residential unit at the rate of 15%. However there are a number of exemptions available, including for property developers and traders.

SDLT does not apply to purchases of shares in companies holding real estate. The rate of duty on the transfer of shares in a UK incorporated company is 0.5%.

In relation to land in Scotland, SDLT has been replaced with the Land and Buildings Transaction Tax (LBTT). In Wales, it has been announced that SDLT will be replaced with a new tax on land transactions in April 2018.

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios? What is the general approach of the tax authorities in your jurisdiction to such schemes?

Commercial real estate (both individual properties and portfolios) are often held in corporate structures, in which case the corporate vehicles are acquired rather than the real estate interests themselves. The rate of duty on the transfer of shares in a UK incorporated company is 0.5%.

Where the real estate interest is sold and purchased directly, VAT is not payable where the sale is treated as a transfer as a going concern (TOGC).

In the case of commercial property held as an investment (but not as trading stock) by a non-UK entity, any capital gains made on a disposal are generally not subject to UK tax.

 
20. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate? Who pays? What are the rates? Are there any exemptions?

The default position is that the sale or purchase of real estate in the UK is not subject to VAT. However, an owner of commercial property can opt to tax the property so as to treat any supplies it makes in relation to the property subject to VAT at the standard rate (currently 20%). If the option is made, any sale is subject to VAT. In practice, most owners of commercial property in the UK opt to tax.

On the sale of a commercial property which is let to tenants, the sale can be treated as being outside the scope of VAT as a transfer of a letting business as a going concern (TOGC) provided that the buyer:

  • Continues the letting business.

  • Also opts to tax the property.

  • Notifies the UK tax authorities of the option to tax.

 
21. Are municipal taxes paid on the occupation of business premises? Are there any exemptions?

Business rates are payable by occupiers of commercial buildings, broadly based on their notional rental value at the coming into force of the relevant rating list (currently 1 April 2010) multiplied by a percentage, which varies from to year but is currently around 50%. Empty premises are subject to business rates at the same level as occupied rates, subject to various exemptions such as relief from rates during the first three or six months of vacancy (depending on the nature of the premises). Some mitigation schemes are available to obtain a further three/six month period of relief after a period of rateable occupation of at least six weeks, but these need to be carefully operated to avoid challenge.

 

Climate change issues

22. Are there targets to reduce greenhouse gas emissions from buildings in your jurisdiction? Is there legislation requiring buildings to meet certain minimum energy efficiency criteria?

Under the Climate Change Act 2008, the UK has imposed a legally binding target to reduce carbon dioxide emissions by 80% by 2050. The UK government has identified improving the energy efficiency of existing and new buildings as one of the principal means of meeting this target.

The CRC Energy Efficiency Scheme (CRC) is a mandatory carbon emissions purchasing scheme which applies to private businesses and the public sector. There are complex rules for determining which organisations are required to participate in the CRC but essentially participation is based on the participant's energy consumption in the designated qualifying year. Participants are required to measure and report on their energy consumption and buy allowances from the Environment Agency for the amount of carbon dioxide emissions associated with their electricity and heating fuel consumption. The scheme can mean that landlords bear responsibility for and have to buy allowances to cover energy consumed by their tenants and, under some existing leases, it may not be possible for landlords to recover these costs. In the 2016 Budget, the government announced that a simplified energy consumption reporting framework will be introduced by April 2019. The CRC is expected to be abolished by the end of 2018/2019.

An Energy Performance Certificate (EPC) providing information about the energy efficiency of a building prepared by an accredited assessor is required whenever a building is constructed, altered, sold, or let. From April 2018, there will be restrictions on new leases of the least energy efficient commercial properties until certain energy efficiency measures have been performed. These restrictions apply to new lettings of properties which require an EPC where the EPC has an F or G rating (currently the lowest ratings). By 1 April 2023 these restrictions will extend to all lettings of commercial premises, that is, both new and existing lettings.

There are corresponding requirements for private rented properties. Where a private rented property's EPC has an F or G rating, the landlord cannot:

  • Grant a new tenancy or renew an existing tenancy from 1 April 2018.

  • Continue to let a sub-standard domestic property from 1 April 2020.

  • Continue to let a sub-standard non-domestic property from 1 April 2023.

The Green Deal is a financing framework set up under the Energy Act 2011, to allow certain energy improvement measures to be funded by a charge on the property's electricity bill, thereby avoiding the upfront cost of such measures. In July 2015 the government ceased financing to the scheme, effectively ending availability for new customers.

The Energy Savings Opportunity Scheme (ESOS) requires larger companies and non-public sector organisations to carry out mandatory energy efficiency audits covering energy used in buildings, transport and activities such as industrial processes. The scheme applies across the UK and requires compliance once every four years.

The Minimum Energy Efficiency Standards (MEES) Regulations 2015 came into force from 1 April 2016. Among other measures introduced, it gives a tenant of a domestic private rented property the right to carry out alterations to improve energy efficiency. These Regulations do not impose further obligations on landlords, but a landlord cannot unreasonably withhold consent to a tenant's request to carry out such alterations.

The Heat Network (Metering and Billing) Regulations 2014 are also concerned with energy use in buildings. They require heat suppliers, including landlords of multi-let buildings, who supply heating, cooling or hot water to a final customer via a communal heating system (or a district heat network) to notify details to the National Measuring and Regulation Office of each of their systems or networks by the first date of operation. These Regulations also require heat suppliers to notify details of the location of each system, the number of meters installed and final customers supplied, details of the content of bills and further technical information. This information must be updated every four years. Where meters are already installed, there is also a duty to provide bills based on actual consumption, provided it is technically feasible and economically justified to do so. There are further obligations to perform viability assessments regarding the installation of individual heat meters by 31 December 2016. Provided it is cost effective and technically feasible to do so they must also, by this deadline, install individual meters to measure the consumption of heating, cooling and hot water by each final customer. Where individual meters are not viable, heat cost allocators should be installed with hot water meters. The European Commission is midway through reviewing the operation and effectiveness of the current Energy Performance of Buildings Directive 2010. Its consultation closed on 30 October 2015 and its review is required to be concluded by 1 January 2017. The Commission is expected to announce implementing legislation following the review.

 
23. Are provisions relating to the energy efficiency of buildings commonly included in contracts for the sale of real estate or in leases (for example, green leases)?

The government has introduced various measures to reduce carbon emissions from buildings, and some of these have led to the inclusion of energy related provisions in sale contracts and leases (see Question 22). Where both parties to a sale are participants in the CRC, provisions are sometimes included in contracts to deal with the allocation of allowances or money set aside for the purchase of allowances. Residential properties subject to the Green Deal require a contract clause acknowledging that the buyer is aware of the existence of the Green Deal.

In some leases landlords prohibit any alterations which would adversely affect the building's energy efficiency, as such alterations could impact on compliance with the CRC as well as the building's EPC rating. The latter is becoming increasingly important, with the approach of the 2018 deadline to restrict lettings of properties with F or G rated EPCs (see Question 22). Alternatively, there may be provisions in a lease to determine who pays the costs of energy efficiency improvements.

There has also been a gradual move towards lease provisions to address and improve a building's sustainability and environmental performance, for example by reducing water and energy consumption and improving recycling. Such provisions are gaining acceptance where they call for a collaborative approach between landlord and tenant. However, sustainability clauses that impose onerous, enforceable obligations, with sanctions for non-compliance, remain unpopular with tenants. No industry standard "green lease" has emerged but The Better Buildings Partnership's "Green Lease Toolkit" provides model green lease clauses and best practice recommendations. Such clauses are sometimes included in a memorandum of understanding, rather than in the lease itself.

 

Real estate finance

Secured lending involving real estate

24. Briefly outline the typical security package required by lenders in relation to real estate lending. How are the most common forms of security interest relating to real estate created and perfected (that is, made valid and enforceable)?

The security package for a facility secured on real estate will usually consist of:

  • A charge by way of legal mortgage over the real estate asset.

  • A charge over rents receivable.

  • A charge over all bank accounts into which all rents must be paid.

  • A charge (or security assignment) over all relevant contracts including leases, agreements for lease, insurance policies and construction contracts.

All the security will usually be contained in a composite charging document known as a debenture. In the case of real estate financing structured through a special purpose corporate vehicle, the security package usually includes a charge over the shares in the vehicle and over any shareholder loans made to that vehicle.

The security package is perfected as follows:

  • For companies and limited liability partnerships incorporated in the UK, particulars of the security must be delivered to the Registrar of Companies within 21 days of creation.

  • The charge by way of legal mortgage over the real estate must be submitted for registration at the Land Registry within the relevant priority period.

  • Notice of charges over bank accounts must be given to the relevant bank.

  • Notice of security over other contracts must be given to the counterparty to the contract.

 
25. What other real estate related measures do lenders typically take to protect themselves against default by the borrower?

Depending on the commercial circumstances lenders may also seek protection against borrower default in the following ways:

  • Conditions precedent and direct covenants in the facility agreement.

  • Property valuations.

  • Guarantees and bonds.

  • Direct agreements.

  • Cash collateral and letters of credit.

  • Step-in rights.

  • Charge over shares.

  • Floating charge from the parent company.

 
26. Can lenders incur environmental liability? What measures do lenders typically take to manage potential environmental liability?

Lenders can incur environmental liability after they enter into possession of the property following enforcement of their security in much the same way as any other landowner. They will not assume responsibility for past breaches of environmental regulation by the borrower, but will be bound to comply with the law while controlling the premises.

One means to avoid the risk of incurring environmental liability is therefore for lenders to appoint a receiver instead of going into possession. Lenders not in possession are excluded from the categories of persons who may be required to remediate under the contaminated land regime (see Question 15). However there is some doubt as to whether that exclusion offers full protection where the lender's actions could themselves amount to causing or knowingly permitting contamination at the site.

 
27. Briefly outline the main remedies for lenders in relation to the secured real estate if the borrower defaults on the loan. What is the effect of the borrower's insolvency on the lender's remedies?

Where an event of default has occurred under a facility agreement and has not been remedied or waived, the lender will typically be entitled to demand immediate repayment of the loan. If the borrower cannot do so, the lender would ordinarily be entitled to enforce its security.

The most common ways of enforcing security over real estate in England and Wales are either:

  • A lender will commonly have a right under the security documents to appoint a receiver over specific assets (for example, a particular property or shares in a property owning company).

  • A lender will have a right to appoint an administrator in respect of a corporate borrower where the relevant security documents contain a floating charge over the whole, or substantially the whole, of the borrower's property (a qualifying floating charge).

A receiver's role is to realise assets in favour of his appointor, so the appointment enables the secured lender to enforce its security over particular assets (rather than the borrower entity as a whole) and procure the sale of that asset. This is commonly a quicker and less expensive process than administration.

An administrator is a licensed insolvency practitioner (typically a partner in a large accountancy firm) who will be responsible for the management of the borrower. This is often considered to be a more suitable enforcement process for a complex borrower or borrower group, or where the secured lender wishes to carry out a review of the business before deciding whether to dispose of the assets. Administrators are required to pursue statutory objectives (being, in descending order of priority:

  • Rescuing the company as a going concern.

  • Achieving a better result for creditors as a whole than would be likely if the company had gone straight into liquidation.

  • Realising property to make a distribution to one or more secured or preferential creditors).

Frequently, the first objective cannot be achieved and the administrator will carry out his functions to achieve the second (or failing that, third) objective, which will often involve the sale of the borrower's assets.

A secured lender may use its ability to enforce its security as a negotiating tool to try and persuade the borrower to co-operate prior to any enforcement process. A separate option for a lender to realise value outside of an enforcement process is to sell its interest in a non-performing loan to a third party specialising in distressed debt.

If a borrower becomes insolvent prior to the lender taking any enforcement steps (typically, a lender would probably be forewarned of the borrower's deteriorating financial health, due to the reporting requirements or financial covenants in the facility agreement), the borrower company or its directors may seek to appoint an administrator. A lender with a qualifying floating charge will be given notice of such intention. If a company enters administration (or gives notice of an intention to appoint administrators) creditors are restricted from taking enforcement action against the borrower without the consent of the administrator or the leave of the court. Whether the court will grant such leave is determined on the facts in each case, and the court will balance the interests of the secured creditor against those of the company's unsecured creditors. Ordinarily, the court would probably grant such leave, provided it would not have a disproportionate effect on the purpose of the administration.

 
28. Briefly outline key additional issues for lenders in relation to construction and development projects.

Lenders will typically require approval of material development documentation as a condition precedent to draw down of development loan monies. They will obtain information on construction documentation through due diligence and reporting by its own instructed lawyers and/or reliance on borrowers' due diligence reports.

Lenders will expect:

  • Construction contracts and professional appointments to be assignable by way of security.

  • To receive collateral warranties or third party rights from contractors, designers and key sub-contractors (as a matter of market practice, collateral warranties continue to be used in many transactions, rather than third party rights). Collateral warranties will typically include provision for a standstill period when contracts/appointments can otherwise be terminated, to give the lender (or its nominee) an opportunity to step into the borrower's shoes and take over the contract/appointment.

  • The right to step in and take over the contracts/appointments in the event of a borrower event of default under the financing documentation.

  • Construction contracts to be entered into on a fixed price basis with clear allocation of risks.

 

Other real estate financing techniques

29. Are other real estate finance techniques commonly used in your jurisdiction? For example, real estate securitisation and sale and leasebacks.

Acquisitions are financed through a combination of debt and equity. As the availability of debt in the market continues to improve, competition for the financing of good quality assets arises. Good sponsors are able to raise significant debt funding for good quality real estate. As some of the traditional sources of debt finance decline, insurance companies, debt funds, asset managers and other alternative lenders (for example, hedge funds and private equity investors) are increasingly active in the senior debt sector and new funds have been raised to provide mezzanine finance.

Loan-to-value ratios had risen slightly back towards 70% for senior debt, but these are now falling back as a result of Brexit. Significant equity contributions are required for any new financing.

Well-rated listed property companies are still able to borrow on an unsecured basis against their overall balance sheet.

Development finance has become available as competition for investment financings has intensified and banks have looked to development finance to make their returns, although current market uncertainty is likely to see a reduction in the amount of development finance available.

The most common methods of using real estate to raise finance are:

  • Investment facilities secured on the asset value of underlying real estate and using the rental income from tenants to service debt.

  • Development facilities secured on the underlying real estate, construction contracts and, where applicable, pre-let agreements. Funders will also usually require a cost overrun and interest shortfall guarantee to protect against cost overruns against an agreed base case budget.

  • Sale and leaseback transactions where the underlying real estate is sold to a third party and leased back to the seller at a market rent.

Until mid-2007, the securitisation market was an extremely active source of funding for commercial real estate, with large volumes of commercial mortgage backed securities (CMBS) being issued. The financial crisis affected all sectors of the securitisation markets, including CMBS issuances which struggled to recover in the wake of the crisis. Since 2013, activity in the CMBS sector has started to increase, and the first half of 2015 looked promising (although the year ended on a more subdued note). Pricing and market conditions, as well as the regulatory environment, remain challenging for CMBS, with the first public European deal of 2016 not being completed until March. More encouragingly, there has been an increase in the number of unrated CMBS issuances, leading to increased speculation that this could constitute a new asset class (the disadvantages of higher pricing and a narrower investor base being weighed against lower start-up and ongoing costs of compliance with rating and regulatory requirements). Commercial property has occasionally also been used as security for covered bonds, for example Tesco stores, but these structures are effectively quasi-corporate bonds, as they require a single long-term tenant with a significant corporate covenant.

Islamic finance is a developing alternative source of funding in the real estate market for real estate structures which are compliant with Shariah principles.

 

Real estate leases

Negotiation and execution of leases

30. Are contractual lease provisions regulated or freely negotiable? Which legislation applies?

The terms of business leases are freely negotiable. However, the investment market has driven the evolution of what has become known as the "institutionally acceptable lease", which has broadly standardised the allocation of the principal obligations and risks between landlord and tenant. Any significant departure from this form of lease can have an adverse effect on the value of the investment.

The main laws regulating leases of business premises are the:

  • Landlord and Tenant Act 1954, which established a security of tenure regime for tenants of business premises.

  • Landlord and Tenant (Covenants) Act 1995, which applies to all leases granted on or after 1 January 1996 (or after 1 January 1996 under an agreement entered into before that date) (see Question 35).

Various real estate industry groups have, from time to time, attempted to gain voluntary acceptance across the industry of standard leasing practices, such as the 2007 Code for Leasing Business Premises. A number of major industry players have given their endorsement to the Code but adherence to it remains voluntary.

 
31. What are the formal legal requirements to execute a lease? Does the lease have to be executed by certain parties or as a deed? How do the formalities differ for a company, partnership and for individuals?

A lease must be made by deed unless it is a lease to which the following conditions apply:

  • It is for a term of less than three years.

  • It takes effect in possession.

  • It is at the best rent reasonably obtainable without a premium.

A lease fulfilling all these requirements can be made orally or in writing.

All deeds must meet certain formal requirements. The instrument must:

  • Be in writing.

  • Make it clear on its face that the party or parties intend it to be a deed.

  • Be validly executed as a deed.

  • Be delivered as a deed.

A company (broadly, one registered under the Companies Act 2006) can execute deeds in any of the following three ways:

  • Affixing the company's common seal.

  • Signature by two authorised signatories.

  • Signature by a single director in the presence of a witness.

There are different requirements for an overseas company.

Similar rules apply for LLPs, as the execution provisions in the Companies Act generally apply to LLPs with some modifications. Although LLPs can have a common seal (in practice this is rare), LLPs usually execute deeds by two members signing or by one member signing in the presence of a witness. In favour of a purchaser (acting in good faith for valuable consideration) a document is deemed to have been duly executed if it purports to be signed in that way. Every member of a LLP is the agent of the LLP.

In the case of general partnerships (not LLPs), an individual partner does not have authority to sign a deed on behalf of a partnership unless his authority is expressly conferred by deed. Therefore, where a deed is to be executed by a partnership and is intended to bind each partner in favour of a third party, it should be executed as such by each partner or an attorney for each. This is unless one or more partners is given power of attorney to execute deeds on behalf of the partnership. Some partnership deeds expressly confer authority on a partner or partners to do this.

An individual will usually execute a deed by signature in the presence of one witness who then attests the signature. There are other more rarely used methods of execution.

 

Rent payments

32. How are rent levels usually reviewed and are there restrictions on this? Is stamp duty and VAT (or equivalent) payable on rent? Is a rent security deposit required and does it have to be managed in a certain way?

It is standard practice to review rent levels every five years, and adjust rent to the higher of:

  • The rent payable immediately before the review.

  • The open market rent at the date of the review.

This is known as an upwards-only review. The open market rent is determined on the basis of comparable evidence and there is a mechanism for determination by an independent party if the landlord and tenant are unable to agree. In some special situations (for example when the lease has been entered into as part of a larger structured transaction or financing arrangement) the rent can be increased periodically either by reference to an index (such as the inflation rate) or by a fixed percentage. In some leases of retail premises, rent may be determined by reference to turnover.

SDLT is payable by the tenant on the net present value (NPV), meaning all of the rent payable (plus VAT if any) over the whole term of the lease, but applying an annual discount factor of 3.5% to rent due in later years. New rates were announced in the 2016 Budget and, subject to transitional rules, the new rates apply to transactions with effective dates on or after 17 March 2016. The rate payable is a percentage that varies depending on the NPV:

  • Up to GB£150,000: 0%.

  • Between GB£150,001 and GB£5,000,000: 1%.

  • More than GB£5,000,000: 2%.

VAT is payable on rents if the landlord has made an option to tax in respect of VAT in relation to the building which is the subject of the lease. The current VAT rate is 20%.

A rent deposit is not always required by a landlord but is an attractive option, as it is an immediately accessible source of money that can be drawn down on as soon as the tenant is in breach of a relevant covenant in the lease. There is no need to take legal proceedings to recover the debt or secure performance of the obligation. It is particularly important for a landlord to consider additional security if the tenant is of weak financial status, is an overseas company or is a new business.

Different structures are available depending on the circumstances of the parties (such as potential insolvency concerns, ease of operation, relative cost, tax and the ability to transfer the arrangement to successors in title) and there is no requirement to follow any particular format in the commercial environment. Alternative forms of security include bank guarantees, parent company or director guarantees or letters of credit.

 

Length of term and security of occupation

33. Is there a typical length of lease term and are there restrictions on it? Do tenants of business premises have security of occupation or rights to renew the lease at the end of the contractual lease term?

The term of a lease is a matter for negotiation between the landlord and the tenant and depends on a number of factors, including the size, type and age of the premises. Historically, it was normal for commercial leases to be granted for a term of 25 years. However, the length of the term has been reducing over the last two decades and recent market research suggests that the average lease term is now less than ten years. Depending on the bargaining power of the tenant, it might be able to negotiate a right to terminate the term earlier or an option to renew at the end of the term.

A tenant of business premises has security of tenure (that is, a statutory right to be granted a new lease, at market rent, on the expiry of the existing lease). The landlord can only resist the grant of the new lease on a limited number of grounds, the most common of which are that:

  • The tenant has been in persistent default under the existing lease.

  • The landlord intends to redevelop on the expiry of the current lease.

If the landlord successfully resists the grant of a new lease (on grounds other than the tenant's default) the tenant may be entitled to statutory compensation.

The landlord and tenant may agree to exclude the tenant's right to security of tenure before entering into the lease. For an exclusion to be effective, a strict statutory procedure must be followed.

 

Disposal

34. What restrictions typically apply to the disposal of the lease by the tenant? Can tenants usually share their business premises with companies in the same corporate group? What is the effect of a legal reorganisation or transfer/sale of the tenant on the lease and on a guarantee of the lease?

The restrictions on disposal depend on factors such as the type of premises and length of term but typically a tenant can assign the lease with the consent of the landlord (whose consent cannot be withheld unreasonably).

The landlord may be able to require a guarantee or other form of security as a condition of assignment (and in the case of a lease granted on or after 1 January 1996, may be able to require the outgoing tenant to enter into an AGA (see Question 35)).

Usually a tenant can share premises with a group company.

If there is a change of control of the corporate entity that is the tenant this will usually have no effect on the lease. In rare situations, there may be a provision in the lease prohibiting or restricting a change of control.

 
35. Does a landlord or tenant retain any liability under the lease after the lease is assigned?

If the lease was granted before 1 January 1996 (or after such date if one of the exceptions below applies), the original tenant remains liable to the landlord for any breach of the terms of the lease by any subsequent tenant. The original landlord remains liable to the original tenant throughout the lease, even if the original landlord sells his interest (his reversion). Each subsequent owner of the reversion will only be liable while they own the reversion.

If the lease was granted on or after 1 January 1996 (unless granted pursuant to an agreement, option or right of first refusal entered into (or made by court order) before that date) then statute amends the common law concept of privity of contract so that tenants are released from future liability if they sell the lease. Statute sets out rules which a landlord must take into account when asked to consent to the sale of a lease and governing the form of guarantee (the AGA) which it may require from a selling tenant guaranteeing the performance of the buyer. On a sale of its interest a landlord may obtain a release from the landlord covenants in the lease by following a set procedure.

 

Repair and insurance

36. Who is usually responsible for keeping the leased premises in good repair and for insuring the leased premises? Are there provisions for the ownership of lease improvements?

Responsibility for repair depends on whether the lease is of the whole of a building or of part only.

Where the lease is of the whole of the building, it is normal for the tenant to be responsible for the repair of the whole (that is, internal and external). However, for a relatively short lease term, the landlord may retain responsibility for external repairs.

For a lease of part only of a building, it is normal for the tenant to be responsible for the repair of the interior of the premises and for the landlord to be responsible for external repairs and the repair of common areas and services. The landlord recovers a proportion of the cost of repair from each of the tenants through a service charge.

The responsibility for insuring the premises usually follows the responsibility for repair. Therefore, if the tenant is responsible for repair, it normally insures (possibly in the joint names of the tenant and the landlord). If the landlord is responsible for repair, it normally insures and recovers the cost of the premium from the tenant (or tenants in the case of a multi-let building) as part of the service charge.

If a tenant has made improvements to the premises which add to the letting value then it has a statutory right to compensation if various conditions are satisfied and both its tenancy and the improvement qualify under the terms of the legislation. Leases will often seek to limit or prohibit this statutory right.

 

Landlord's remedies and termination

37. What remedies are available to a landlord for a breach of the lease by the tenant? On what grounds can the landlord usually terminate the lease and what restrictions and procedures apply? What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

The two most widely used remedies available to a landlord are damages and forfeiture. Damages may be awarded by a court if the tenant is in breach of the lease and where the losses incurred are quantifiable and money can be a sufficient compensation. Forfeiture allows a landlord to terminate the lease if certain conditions are met.

The right to exercise distress on the goods of the tenant was replaced in April 2014 by a new method of commercial rent arrears recovery (CRAR), which enables a landlord in certain circumstances to recover rent arrears by instructing an enforcement agent to take control of a tenant's goods and sell them. A number of conditions apply and are required to be satisfied.

The normal grounds on which a landlord can terminate a lease are:

  • Non-payment of rent.

  • Breach of an obligation by the tenant.

A lease granted in consideration of a market rent but no premium can also typically be terminated by the landlord on the insolvency of the tenant. The right of the landlord to terminate for breach of obligation by the tenant is regulated by statute. Before terminating, the landlord must serve notice of the breach on the tenant and allow reasonable time for remedy (if the breach is capable of remedy). Only very limited statutory protection is afforded to tenants that become insolvent and none in the case of non-payment of rent.

Certain insolvency procedures can postpone the right of the landlord to forfeit the lease.

The tenant may be able to apply to the court to have the lease reinstated but this remedy is discretionary and the court will take account of all the circumstances, including the conduct of the tenant.

 
38. Can the tenant withhold rent payments in certain circumstances, for example for serious damage to the leased premises? Can the tenant terminate the lease in certain circumstances?

Unless the lease provides otherwise, the tenant has a right of set-off, where if the landlord is in breach of covenant and the tenant has suffered loss, it is possible for the tenant to withhold rent. In practice, the lease will usually exclude this right and expressly prohibit the tenant from exercising any rights of deduction or set-off.

A tenant can only terminate a lease if the lease gives the tenant an express right to do so (commonly called a tenant's break). A tenant's break is often subject to certain conditions, such as all rent having been paid up to the date of termination.

 

Planning and development controls

39. In what circumstances can local or state authorities purchase business premises compulsorily? Is the purchase price market value?

Many state and local authorities and private sector entities (such as utility companies) have or can acquire powers to compulsorily acquire real estate. The exercise of those powers is subject to due process. There are two overriding principles:

  • The exercise of the power must be for the public benefit.

  • The owner of the interest acquired must be paid fair compensation.

The amount of compensation is assessed according to a well-developed set of valuation principles but, broadly speaking, it is the market value of the interest acquired. In addition, compensation may be payable to cover business disruption and relocation costs.

 
40. What authorities regulate planning control and which legislation applies? Is there specific protection for special categories of buildings such as historic buildings?

A number of bodies exercise planning control. The identity of the body will depend on the type of development to be permitted.

The local planning authority is responsible for all planning matters. Generally this will be a district, city or borough council. However, mineral and waste planning are the responsibility of the county council. In some areas, a unified authority is responsible for all types of planning control.

Although a planning application would initially be made to one of these authorities, the Secretary of State may decide to call in a planning application for his own determination in some circumstances. In addition, in Greater London, the Mayor of London has the power to call in applications of potential strategic importance for his own determination. The Mayor may also direct refusal of planning applications which are of potential strategic importance in certain circumstances.

An application for consent for a nationally significant infrastructure project is made directly to the Secretary of State (under the Planning Act 2008).

The main pieces of legislation applying to planning control are the:

  • Town and Country Planning Act 1990.

  • Planning (Listed Buildings and Conservation Areas) Act 1990.

  • Planning and Compulsory Purchase Act 2004.

  • Planning Act 2008.

  • Localism Act 2011.

  • Housing and Planning Act 2016.

 
41. What planning consents are required for building works and the use of a building?

Planning permission is required for operational development (that is building, engineering, mining or other operations in, on, over or under land, including demolition works) or a material change of use of land. Planning permission is not required for works that affect only the inside of a building, except if the works would increase floorspace area. In some cases, operational development or a material change of use or both is permitted by subordinate legislation, which means that an express grant of planning permission is not required.

Listed building consent is required for any alteration to a listed building (including internal alterations).

Conservation area consent is required for the demolition of a building in a conservation area in Wales. Conservation area consent was abolished in England on 1 October 2013. Planning permission is now required for the demolition of a building in a conservation area in England.

 
42. What are the main authorisation and consultation procedures in relation to planning consents?

Initial consents

The relevant local planning authority determines planning applications.

The authority determines applications by reference to its development plan, unless material considerations indicate otherwise. The National Planning Policy Framework (NPPF) gives guidance to local planning authorities on the weight that they should give the NPPF, alongside the development plan, in making a determination.

The Secretary of State determines applications that he calls in for his own determination and applications for consent for nationally significant infrastructure projects (under the Planning Act 2008). Similarly, the Mayor of London determines applications that he calls in for his own determination.

The length of time taken to determine a planning application varies depending on the nature and scale of the development. If the local planning authority does not make a determination within the time periods set out in subordinate legislation, the applicant can appeal. The periods are:

  • Four weeks for non-material amendments to development that has already been permitted.

  • Eight weeks for the majority of applications.

  • 13 weeks for major development.

  • 16 weeks for development which requires an assessment of the development's likely significant effects on the environment.

Third party rights and appeals

Planning applications must be publicised by the local planning authority and third parties have the right to object. The local planning authority must consider objections in determining the application. The weight attached to an objection depends on its relevance to the planning issues raised in the application, rather than purely private interests.

As part of publicising an application, the local planning authority must consult certain statutory agencies (who vary depending on the nature of the development) and the landowner.

The Localism Act 2011 introduced a new statutory requirement for applicants to carry out pre-application consultation on applications for planning permission for wind power projects with more than two turbines or a hub height of over 15 metres.

A planning inquiry will be held if the Secretary of State calls in an application (see above, Initial consents). A planning inquiry may be held where an applicant makes a planning appeal. If the Secretary of State considers it more appropriate, he may require the appeal to be determined by written representations or a public hearing.

The applicant can appeal a planning authority's:

  • Decision to refuse planning permission.

  • Failure to determine the application within specified time periods (see above, Initial consents).

  • Decision to grant permission subject to conditions.

In general, an appeal will be heard and determined by an Inspector appointed by the Secretary of State. An applicant can challenge a decision to refuse an appeal in the High Court.

A third party cannot appeal the merits of the grant of a planning permission but can challenge a decision to grant planning permission by way of judicial review on procedural grounds.

 

Reform

43. Are there proposals to reform real estate law and are they likely to come into force and, if so, when?

The Law Commission, an advisory, non-departmental public body, is responsible for reviewing the existing law of England and Wales and making recommendations for change. The government announced in 2016 that it would bring forward proposals to respond to the Law Commission's recommendations and a draft Law of Property Bill to modernise and simplify the law relating to easements (rights enjoyed by a landowner over the land of another), covenants (promises to do or not do something on a person's own land) and profits à prendre (rights to remove products of natural growth, for example fish).

The Law Commission has also recently consulted on the severity and extent of uncertainties arising from the Landlord and Tenant Act 1995, which relates to liabilities and responsibilities on assignment of new leases, particularly intra-group. The Property Litigation Association has put forward a proposed amendment, which has the backing of the British Property Federation, the British Retail Consortium and the Property Bar Association. This will be discussed with the Department for Communities and Local Government before receiving further consideration by the Law Commission.

Other Law Commission recommendations include the simplification of the law relating to rights of light, the introduction of a new statutory scheme of conservation covenants (which would enable landowners to enter long-lasting, enforceable covenants for conservation purposes) and the abolition of the current law of forfeiture and replacement with a modern statutory scheme for the termination of tenancies on the ground of tenant default. It has also recently consulted on updating the Land Registration Act 2002. It is not currently clear when and if the government will respond to any of these proposals.

HM Treasury have completed a consultation process on proposals to change UK limited partnership legislation. If enacted, a new form of corporate vehicle, currently named a "private fund limited partnership" (PFLP), would be created. Unlike the current position with limited partnerships (where a limited partner faces the potential loss of limited liability for the debts and obligations of the partnership if it takes part in the management of the limited partnership business), it is proposed that a non-exhaustive white list of key activities and decisions could be taken by a limited partner in a PFLP. The proposed legislation would also contain a number of other changes to the current limited partnership law which may improve investor privacy and simplify registration requirements. As limited partnerships are commonly used as part of real estate holding structures by a wide variety of investors and in real estate joint ventures, the changes will be of wide interest. It is not clear when the proposed legislation will be enacted but it is quite likely to be some time in 2017.

The Housing and Planning Act 2016 received royal assent on 12 May 2016 and contains measures to enact some of the previous government's planning reform proposals, with an overall aim of eliminating red tape and streamlining the planning process. Many of the Act's measures will rely on secondary legislation for the detail, and this has not yet been published at the time of writing. The reforms include introducing a planning permission in principle for certain housing-led developments on brownfield sites, a requirement for starter homes in some new developments, and reform to compulsory purchase procedures.

Reform of the Community Infrastructure Levy is also expected in autumn/winter 2016, following a review by an independent panel who reported their recommendations to the government. This levy on development has been implemented by the Mayor of London and by many local planning authorities both outside and inside London. The number of local planning authorities who have implemented the levy continues to increase.

A private member's Bill entitled Property Boundaries (Resolution of Disputes) Bill is due to have its second reading in the House of Lords, on a date to be announced. The Bill sets out a new compulsory statutory procedure to be followed, supported by a Code of Practice, to guide disputing parties and surveyors appointed by them, to settle claims relating to the positioning of boundaries on neighbouring land.

The new, replacement Electronic Communications Code is driven by the need for more extensive 4G coverage, better connectivity and faster electronic communications, especially in hard to reach areas. The Code is now in draft form, and makes major reforms to the rights that communications providers have to access land, and also makes it easier for communications providers to deploy and maintain their infrastructure. The government intends to take this package of reforms forward as part of the Digital Economy Bill at the earliest possible opportunity.

 

Online resources

legislation.gov.uk

W www.legislation.gov.uk

Description. Contains original versions of all legislation since 1988, as well as revised versions of legislation that have been in force since 1991.

Bailii

W www.bailii.org

Description. External website that contains British and Irish case law and legislation, EU case law and Law Commission reports.



Contributor profiles

Iain Carruthers

Herbert Smith Freehills LLP

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Professional qualifications. England and Wales, 1996

Areas of practice. Real estate.

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Herbert Smith Freehills LLP

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Professional qualifications. England and Wales, 1987

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Matthew White

Herbert Smith Freehills LLP

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Professional qualifications. England and Wales, 1997

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Herbert Smith Freehills LLP

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Professional qualifications. England and Wales, 1996

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Professional qualifications. England and Wales, 1997

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Professional qualifications. England and Wales, 1997

Areas of practice. Real estate.


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