In this briefing we look at some of the key changes to law and practice that we anticipate taking place in 2023 which will affect the real estate sector, focussing on real estate development, real estate investment, real estate M&A, real estate occupiers, the senior living sector and the private rental sector.
Scanning the Real Estate horizon: look before you leap!
Overseas entities regime
1 February 2023
Overseas entities that own UK property must register at Companies House before this date in order to avoid penalties and restrictions pursuant to the Economic Crime (Transparency and Enforcement) Act 2022. Our briefing contains more information.
Building Safety Levy consultation closes
7 February 2023
The Government has launched a second consultation into the design of the Levy, which closes on 7th February 2023. Our briefing is here.
Regulation of land transactions by charities
Expected Spring 2023
Sections 17 to 23 of the Charities Act 2022 are expected to come into force. These will:
- amend the current rules on charities disposing of land, to clarify when the statutory restrictions apply;
- remove the automatic statutory requirement to advertise a proposed disposition; and
- expand the category of advisers who can provide a charity with advice on disposals of charity land to include fellows of the National Association of Estate Agents and fellows of the Central Association of Agricultural Valuers.
The Levelling-Up and Regeneration Bill
Expected Spring 2023
This Bill was first introduced into Parliament in Spring 2022 and it is thought that it will achieve Royal Assent by Spring 2023. See more information below.
Ground rent reforms
1 April 2023
Regulations can be laid from this date so that regulated leases of retirement homes will come within the ambit of the Leasehold Reform (Ground Rent) Act 2022, meaning that landlords of leases of retirement properties will be prohibited from charging ground rents of more than a peppercorn. Properties in this sector benefitted from a transitional period until this date, whereas regulated leases of other properties have been subject to the new regime since 30 June 2022. Please see our briefing.
MEES regime to catch existing leases of commercial property
1 April 2023
Under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015/962 (the "MEES Regulations"), landlords will be prohibited from continuing to let sub-standard non-domestic private rented property without a legitimate reason as permitted by the MEES Regulations. A "sub-standard" property is one whose EPC rating from a valid EPC is F or G. Any such reason must have been registered on the PRS Exemptions Register. It does not matter when the lease was entered into. Please see more information below.
Business rates revaluation
1 April 2023
The next valuation of business properties of business rates will take place from 1 April 2023 and will be based on property values as at 1 April 2021. It is 6 years since a revaluation took place, and this revaluation will take place in accordance with the Government's Review of the business rates system in 2021. Please see more information below.
The Building Safety Levy
Expected September 2023
Clause 57 of the Building Safety Act 2022 is expected to be brought into force. This will implement the Building Safety Levy, also sometimes referred to as the "Gateway 2 Levy". This will be payable by developers of new residential buildings in England that are 18 metres or more in height or at least seven storeys tall (unless excluded) and must be paid during the pre-construction stage.
Biodiversity net gain
Expected November 2023
The Environment Act 2021 amended planning legislation (from a date to be set by law, but expected to be November 2023) to require planning permissions in England to be subject to a new pre-commencement condition requiring a 'biodiversity gain plan' for the permitted development. Read more below.
Most of the Building Safety Act 2022 came into force in April 2022 and, as it is a long and complicated Act, the real estate industry is just starting to get to grips with the detail. Key provisions to note are:
- Section 124 of the Act entitles the First-tier Tribunal to make a “remediation contribution order” against a landlord or developer of an in-scope building (one which contains at least two dwellings, and is either at least 11 metres tall, or with at least five storeys), or any “person associated with” the landlord or developer to contribute towards the costs of fire remediation works.
Section 126 of the Act enables the Secretary of State to make regulations to establish a building industry scheme to secure the safety of people in relation to risks arising from buildings and to improve the standards of buildings. It is thought that the membership of this scheme will be comprised of those developers who have signed the Government's Pledge. Any developers who have not yet signed the Pledge will now feel under great pressure to do so.
Sections 128-129 of the Act hint at the importance of becoming a member of the building industry scheme by granting the Secretary of State wide powers to prohibit people from carrying out development in England and from obtaining building control approvals for developments.
The UK Government has announced that new border controls on imports from the EU scheduled for July 2022 are being postponed, and has said that it plans to introduce a new controls regime "at the end of 2023". In the short term, many construction businesses are likely to welcome this move, as it reduces the risk of disruption to supply chains and will ease cost pressures. But at some point, the UK Government will have to decide on its post-Brexit approach to border controls – so what's the plan? Our briefing is here. More generally, construction businesses may also be interested in our analysis of the UK's post-Brexit tariff regime, which came into force last year; as we explain, whilst tariffs were removed or reduced on a significant number of construction materials imported from non-EU countries, suppliers may have decided not to pass on these savings in order to offset other rising costs.
Biodiversity net gain
The Environment Act 2021 amended planning legislation (from a date to be set by law, but expected to be November 2023) to require planning permissions in England to be subject to a new pre-commencement condition requiring a 'biodiversity gain plan' for the permitted development. That plan must in turn ensure the biodiversity value attributable to a development exceeds the pre-development biodiversity value of the onsite habitat by 10% (although this could be delivered via off-site works; or potentially through the purchase of 'biodiversity credits' from a yet to be detailed government scheme, both of which are less preferred than on-site gains). The idea that new projects should not only not harm biodiversity, but in fact positively contribute to it, could present a significant change of mindset of policy makers. Any major projects targeting planning permission in a year or more from now need to take this into account; nationally significant infrastructure projects are expected to be subject to a biodiversity net gain requirement from 2025.
Although biodiversity net gain is not yet a mandatory requirement, there is evidence that some local authorities are already beginning to implement biodiversity net gain via local plans. There may therefore need to be tweaks if national guidance, published later, contradicts local practice.
Levelling Up and Regeneration Bill
Gove's flagship scheme to mitigate the gap between deprivation and wealth in the UK, the Levelling-up and Regeneration Bill, was intended to lead to regeneration via planning reform. It was welcomed by much of the real estate industry, and Gove's recent return to the Department for Levelling-up, Housing and Communities was seen by some as an indication of Government support for his agenda. The report stage of the Bill took place on 23 November 2022 and the next stage will be its third reading in the House of Commons. However, the current economic climate has led to fears that the likelihood of meaningful reform and Government investment is low.
The new register of overseas entities went live at Companies House on 1 August 2022 and requires overseas entities that hold UK real estate to register their beneficial ownership at Companies House. Failure to comply can result in fines and criminal liability. For further details, see our briefing.
Restrictions are now being put on relevant Land Registry titles. Although the restriction on existing titles will only become effective on 1 February 2023, most overseas entities holding UK real estate will now require an overseas entity ID ("OE ID"), issued by Companies House, before they can sell, charge or grant leases with a term of more than 7 years over their UK property. A well-advised buyer, chargee or tenant will usually want to know their OE ID before completion because of the likelihood that their application to register their transaction at the Land Registry has not been completed before the restriction becomes effective.
All overseas entities currently wishing to buy or take a lease of more than a 7-year term over UK real estate will need to provide the Land Registry with their OE ID, which is valid at the date of the relevant transaction, before the Land Registry will complete its registration.
In September's Mini-Budget the then Chancellor, Kwasi Kwarteng, announced the introduction of a package of measures, including planning liberalisation and generous tax reliefs, to create new investment zones. (More details of what was announced are set out in a previous briefing.) When, last month, the new Chancellor, Jeremy Hunt, announced that many of the measures contained in the Mini-Budget were being reversed, the fate of investment zones was not entirely clear. Following the Autumn Statement, we now have some more clarity, with the Government confirming that they will go ahead but will be refocussed. The intention is that the programme will be used to catalyse a limited number of the highest potential knowledge-intensive growth clusters, including through leveraging local research strengths. The existing expressions of interest are not therefore going to be taken forward, instead the first clusters are to be announced in the coming months.
Real estate in the Metaverse
The metaverse is largely still just an idea but the biggest tech companies are already investing heavily in it. Real estate investors are starting to follow suit, for fear of missing out if the metaverse takes off (given that location is key to value, just as in the real world). Virtual real estate is central to the construction of the metaverse; parcels of "land", with (currently) finite availability (e.g. 90,601 in Decentraland) from which to market services, launch virtual products, host events and provide experiences to users. Buying virtual real estate (a digital receipt for a dedicated block of software, which will disappear if the platform closes) clearly presents different risks from buying bricks and mortar. In these early days, buyers are mainly using virtual land to draw attention to their brands, but investors hope that, as the metaverse develops, the opportunities to deal in and profit from these assets will increase, to re-sell, transform or rent them. In this briefing we take a look at some of the boundaries that the metaverse is likely to test from a trade marks perspective and set out key issues for brand owners to consider as they venture into the metaverse.
The Minimum Energy Efficiency Regulations 2015 ("MEES") are intended to reduce harmful emissions from the built environment, with a view to achieving net zero by 2050. The MEES regime refers to the rating that a property was given in its energy performance certificate ("EPC"). From April 2018, landlords of qualifying commercial properties have been unable to grant a new lease of a property that scores F or G unless an exemption applies and has been registered on the PRS Exemptions Register:
Some properties do not require an EPC and therefore fall outside the regime.
From 1 April 2023, these rules will start to apply to existing leases. This means that landlords must not continue to let a sub-standard property to existing tenants (even where there has been no tenancy renewal, extension or indeed new tenancy) or to new tenants, unless one of the exemptions above apply. The rules are complex but there is some Government guidance to assist.
Landlords and tenants of commercial premises affected by this change (and their respective investors/funders) will be concerned to check the terms of their relevant leases to determine who between them is to pick up the cost of making the necessary improvements. When it comes to altering commercial premises, landlords are increasingly sensitive about the effect of any works on the energy efficiency of their buildings and tenants should expect to provide increasingly detailed information on how their fit out, occupation and use of commercial premises affects energy performance.
A lease granted or continued in breach of these rules is still legally valid but the landlord risks enforcement action including fines and "naming and shaming" by means of the publication of the details of the breach.
On 22 September 2022, the Economic Crime and Corporate Transparency Bill (the "Bill") was introduced to Parliament. The Bill, if passed, will give greater powers to the Registrar of Companies to act as gatekeeper for the integrity of the register by querying filings and requiring further information. The Bill also contains provisions requiring verification of identity for company directors and others, new rules intended to improve the financial information on the register, and various other changes which aim to "prevent organised criminals and kleptocrats from abusing our open economy". Read more details here.
The National Security Act 2021
This Act introduced a new regime into the UK on 4 January 2022 which strengthened the Government's powers to scrutinise transactions on grounds of national security. Sectors which are subject to mandatory notifications include nuclear, communications, data infrastructure, defence, energy and transport. Almost one year into the new regime, what trends have emerged so far? Our briefing is here.
For many occupiers whose rents are linked to either an index such as RPI, or to their trading figures, recent rent reviews may have been interesting. In recessionary times, turnover rents are likely to have fallen, giving some relief to tenants. However, due to high inflation levels, index-linked rents will have risen considerably and are likely to have reached the upper limits of any cap. This is particularly challenging for tenants who have annual adjustments of rent against an index such as RPI, on an upwards only basis. Reduced trading and pressures on other operating costs makes real time adjustments to rent, that do not reduce when inflation eases, a long-term challenge.
Various measures were announced in the Autumn Statement in November 2022 to reduce the burden of business rates which the Government says will provide targeted support worth £13.6 billion over the next 5 years, including:
- freezing the business rate multiplier in 2023-24;
- ensuring that transitional relief relating to next year's revaluations does not come at the expense of those whose property's rateable value decreases; and
- extending and increasing Retail, Hospitality and Leisure Relief.
In addition, the Government has confirmed that the previously announced Improvement Relief (to ensure ratepayers do not see an increase in their rates for 12 months as a result of making qualifying improvements) will be introduced from April 2024 and will be available until 2028, at which point the Government will review the measure.
Judgment is awaited in the appeal on 7 and 8 December 2021 heard by the Supreme Court in Fearn and others v The Board of Trustees of the Tate Gallery  UKSC 56. The issue is whether the Court of Appeal erred in failing to hold that:
(i) private nuisance, understood in light of the requirements of section 6(1) of the Human Rights Act 1998, is capable of providing a remedy against ‘viewing’ from neighbouring land; and/or
(ii) public viewing from the Respondent’s viewing gallery into the Appellant’s flats infringes the Appellants’ rights under article 8(1) of the European Convention on Human Rights to respect for their private lives and their homes.
For investors into the seniors and retirement housing/ care homes sectors, although the current high inflation rates create cost pressures they can also boost value where operators occupy under inflation-linked leases. Market practice in these sectors has been to generally link rents to RPI, with annual reviews that are upwards only and subject to agreed cap and collars. It has been unusual to see caps in excess of 5% and so despite such reviews not achieving a completely inflation proof position in the current market, investors are benefiting from increases in rent to offset their own increased costs.
Health and Social Care Levy
A new health and social care levy was introduced across the UK in April 2022, to help fund reforms to the NHS and care sector. The tax began as an increase of 1.25 percent in both employer and employee National Insurance Contributions from 6 April 2022. The Government then announced that this levy was to be abolished from 6 November 2022. The Autumn Statement confirmed that the implementation of the reforms suggested in the Dilnot Report, particularly the cap on each person's lifetime contributions towards the costs of their own care, would be postponed for another 2 years. However, he announced a decision to allocate for adult social care additional grant funding of £1 billion in 2023 and £1.7 billion in 2024.
Care worker shortages
For operators of care homes and Integrated Retirement Communities, recruitment and retention of staff is a key current issue. In the Autumn statement, the Chancellor provided some comfort when he announced that the Department of Health and Social Care and the NHS will publish an independently-verified plan for the number of doctors, nurses and other professionals we will need in 5, 10 and 15 years’ time, taking full account of the need for better retention and productivity improvements. It is hoped that this will include the care workers needed in the private healthcare and IRC sectors as well.
Government to strengthen enforcement of consumer protection law
The UK Government has announced that it is accelerating the introduction of legislation that will significantly strengthen the powers of the Competition and Markets Authority (CMA) to enforce UK consumer law. Indeed, some reports suggest that the Government is aiming to have the Digital Markets, Competition and Consumer Bill on the statute book and in force by Autumn 2023 (previously only a draft Bill had been promised). The legislation will give the CMA powers to take decisions on infringements without going to court and to impose fines of up to 10% of annual turnover. The elderly are generally regarded as vulnerable consumers and the senior living sector has been investigated for breaches of consumer law on a number of occasions in the past, for instance over retirement home "exit fees" and most recently over care home administration costs. Our briefing explains why the changes will give the CMA a much stronger hand when looking at potential breaches of consumer protection law in future.
Renters' Reform Bill
The proposals in this Bill, contained in the fairer private rented sector white paper, are intended to implement many of the proposals for improving the private rental sector ("PRS") for renters contained in the Government's 2017 white paper "Fixing our broken housing market". This includes the introduction of minimum standards for housing in the PRS, and the abolition of both the section 21 method of obtaining vacant possession and the assured shorthold tenancy. Read more about this in our briefing. The Government has confirmed recently that it intends to introduce the Bill in this session of Parliament.
In September's Mini-Budget, the Government increased the nil rate threshold for residential property (and the 3% rate for corporate purchasers or purchasers of second houses) from £125,000 to £250,000 and increased the nil-rate threshold paid by first-time buyers from £300,000 to £425,000. In addition, the maximum purchase price for which First Time Buyers’ Relief can be claimed was increased from £500,000 to £625,000. As we reported in November, in the Autumn Statement the Chancellor has said that these will now be temporary, remaining in place until 31 March 2025.
Real estate businesses handling personal data should note that we can expect to see changes to the UK's data privacy laws, although it is currently unclear what those changes will be. A draft Data Protection and Digital Information Bill (DPDI Bill) was published in July but put on hold in September (upon the appointment of the previous prime minister, Liz Truss). At the Conservative party conference, the Secretary of State for Digital, Culture, Media and Sport, Michelle Donelan, appeared to reveal a plan (but with no firm details) to replace the current data protection regime with a "truly bespoke, British system of data protection", promised to be "co-design[ed] with business". Referring to the General Data Protection Regulation (GDPR) as a "regulatory minefield", her rhetoric hinted at more far-reaching reform than a few tweaks to the DPDI Bill (which retains the foundations of GDPR). There will be a further public consultation on the DPDI Bill.