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Real estate focus

A round-up of some key legal developments in England and Wales for the real estate sector.

Publication March 2019


Introduction

A round-up of some key legal developments in England and Wales for the real estate sector.

In this edition we take a look at a new SDLT surcharge; successful rates mitigation strategies; calculating compensation under the Electronic Communications Code; and conflicting covenants in multi-let buildings.

SDLT surcharge for non-UK residential purchasers

A government consultation on the introduction of a Stamp Duty Land Tax (SDLT) surcharge on purchases of residential property by non-UK residents was published in February 2019.

The proposal is that the surcharge should:

  •  apply to freehold and leasehold purchases of residential property in England and Northern Ireland …
  • … by non-UK resident individuals and non-natural persons including companies, trusts and partnerships; and
  • be at a rate of 1 per cent on top of existing SDLT rates, including the rates applicable to the rental element of leasehold property and the rates for those purchasing additional dwellings.

The residence test proposed for individuals is to treat individuals as non-UK resident if they spent fewer than 183 days in the UK in the 12 months ending with the effective date of the transaction. However they would be eligible for a refund if they subsequently spend 183 or more in the UK in the 12 months following the effective date.

Insofar as companies are concerned, in broad terms a company will be resident in the UK for the purposes of the surcharge if:

  • they are incorporated in the UK; or
  • at the time they acquire residential property, their central management and control is exercised in the UK.

If the company is not UK resident under this test, it will be treated as a non-UK resident purchaser and will be liable to the surcharge.

Special rules are proposed for UK resident companies with non-UK resident participators. For example, a UK resident company will be liable to the surcharge if, at the point it acquires residential property, it is a close company under the direct or indirect control of one or more non-UK resident persons.

Mixed use transactions involving residential and non-residential property are treated as non-residential and therefore not within the scope of the surcharge. Purchases of six or more separate dwellings are also treated as non-residential transactions and not within scope.

The surcharge was first announced in the 2018 Budget so the consultation comes as no surprise. However the proposal that it should extend to non-natural persons - with possible implications for investment in the private rented sector – was less widely anticipated.

The consultation closes on May 6, 2019.

Landlords: a sigh of (rates) relief

Non-domestic rates (NDR) are very much in the headlines, not least as they are such an onerous liability and seen in many quarters as a potential killer blow for struggling businesses, particularly retail. Good news for landlords, then, that the courts have again (see our August 2018 Focus) come down firmly on their side in two test cases about NDR mitigation schemes.

In Rossendale Borough Council v Hurstwood Properties (A) Ltd and others and Wigan Council v Property Alliance Group Limited [2019] EWCA Civ 364 the claimant local authorities challenged two schemes designed to avoid the payment of NDR on unoccupied properties. Under the schemes, the freeholder/ head leaseholder granted leases to special purpose vehicle companies (SPVs) without assets or liabilities. Some SPVs were then placed in voluntary liquidation entitling them, as the “owners” of the properties in question responsible for paying NDR, to rely on an exemption available in the case of unoccupied properties owned by a company “which is being wound up voluntarily”. In other cases the SPVs were allowed to be struck off the register of companies as dormant companies and dissolved, so that the leases vested as bona vacantia in the Crown.

The local authorities’ case was that the SPVs should be disregarded, leaving the freeholders/ head leaseholders liable for the payment of NDR.

Their first argument was that the SPVs should be disregarded under the doctrine of “piercing the corporate veil” as they were set up for the sole purpose of avoiding liability for NDR. The Court of Appeal held that it could not extend that doctrine to apply in this situation. The Court of Appeal also rejected a second argument that the SPV leases should be disregarded, applying the principle established in W.T. Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, because they were devoid of any commercial purpose and were granted solely to escape liability for NDR.

Apparently over 50 cases have been waiting in the wings for the outcome of these cases, with the NDR claimed in relation to them amounting to about £10 million. The result is therefore a considerable financial blow for local authorities: is an appeal to the Supreme Court on the cards?

Calculating payments under the Electronic Communications Code

The current Electronic Communications Code came into force in December 2017 and governs the relationship between landowners/occupiers on the one hand and most mainstream electronic communications network and infrastructure providers (or operators) on the other.

The Code encourages the installation and upgrading of digital infrastructure through commercial negotiation and voluntary agreements, but with the imposition of agreements by a tribunal if all else fails.

If Code rights are conferred by voluntary agreement, the parties are free to negotiate the consideration to be paid without constraint. However, if the agreement is imposed by a tribunal, the calculation of consideration and compensation is governed by the Code. These provisions have proved to be ambiguous in practice and, we understand, are a root cause of delays in finalising Code agreements.

EE Limited and Hutchison 3G UK Ltd v The Mayor and Purchasers of the London Borough of Islington [2019] UK UT53 (LC) is the Upper Tribunal’s first decision on the meaning and effect of the consideration and compensation provisions in the Code.

Insofar as consideration is concerned, in general terms the Code provides that this should be based on market value but on the assumption (amongst others) that the transaction does not relate to the provision or use of an electronic communications network. This is known as the “no-scheme” or “no-network” assumption. It has been generally assumed that this would lead to a lower consideration than that achievable under the old Code, but how much lower?

The site in this case was the flat roof of a block flats in Islington. Interestingly, negotiations between the landlord and operator for the siting of communications apparatus on the roof had started before the new Code came into force and a payment of £21,000 a year was agreed in principle, although that agreement was never completed.

Taking the characteristics of the site into account, the Tribunal concluded that the value of the Code rights, on the no-network assumption, was £50 with additional consideration payable by way of service charge bringing the total to £1000 per annum. (In the event, the operator had offered £2551.77 per annum and was prepared to stick to this so that is the figure that appeared in the agreement).

As to compensation, other than a payment for the temporary use of land at ground level for installation and reasonable expenses, none was payable: to the extent that the value of the site provider’s land was diminished as a result of the Code rights granted, this was reflected in the consideration payable. However, a claim for compensation was not “once and for all” and if circumstances occurred at a later date resulting in additional loss not anticipated when consideration was assessed, the landowner could in principle make an additional claim.

The case brings long overdue clarity that will be welcomed by operators but it remains to be seen how landowners and landlords will react now that financial incentives have all but disappeared.

Covenant versus covenant: landlords take care

It is common for leases in multi-tenanted buildings to contain an absolute prohibition on structural alterations by lessees. It is also common - particularly in a residential context - for the landlord to covenant in such leases with each lessee that every lease in the building will contain covenants of a similar nature and that, in the event of a breach, the landlord will at the request (and the cost) of a lessee enforce any of those covenants against other lessees.

Julia Duval v 11-13 Randolph Crescent Limited [2018] EWCA Civ 2298 considered the interaction between those two covenants. Can a landlord consent to structural alterations (or other actions) that are prohibited by the lease without repercussion under the covenant to enforce?

The Court of Appeal held that the landlord could not: if the landlord grants a licence to a lessee to do something which would otherwise be a breach of the lease, it commits a breach of the covenant to enforce given to other lessees by putting it out of its power to enforce. This was the case regardless of whether a request to enforce had in fact been made.

It must be all too easy for the landlord of a lease containing such a set of covenants to be minded to agree to a prohibited alteration or other action without considering all the consequences - not only in the form of other irate tenants but also of liability to them for breach of covenant.

Given the prevalence of residential leases in this form, it may come as no surprise that permission to appeal to the Supreme Court has just been granted.


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