In this edition we take a look at coronavirus-related developments; the UK’s largest solar farm; real estate tax issues; and two timely reminders.
The Corporate Insolvency and Governance Bill – further curbs on landlords pursuing rent arrears
On April 23, 2020, the Government announced additional temporary restrictions on commercial landlords pursuing outstanding rent (see our May Focus). It has now published full details.
The initial restriction was imposed by Section 82 of the Coronavirus Act 2020, which came into force on March 20, 2020 (see our April Focus). It created a moratorium on commercial landlords forfeiting a business lease for non-payment of rent. The moratorium, which initially lasted until June 30, 2020 has just been extended to September 30, 2020.
Having seen some landlords turning to other tactics such as statutory demands followed by winding-up petitions to put pressure on their tenants to pay outstanding rent immediately, the Government announced further curbs on landlords pursuing outstanding rent by employing these tactics.
The additional restrictions are included in the Corporate Insolvency and Governance Bill (the Bill), which was published on May 20, 2020.
Significantly, the restrictions go much further than seemed to be indicated by the original April press release, which referred to: “High street shops and other companies under strain [being] protected from aggressive rent collection.” In fact the restrictions in the Bill apply not just to landlords pursuing rent arrears from their tenants but to all creditors pursuing sums owed by corporate debtors. Equally significantly, these restrictions have retrospective effect.
Further detail can be found in our Briefing on this topic. Please note that, since our briefing was published, the Government has announced that the limitation on the use of statutory demands and winding-up petitions in the Bill will be extended until September 30, 2020.
The Government intends to ask Parliament to fast-track the Bill and it is expected to come into force in early July 2020.
Insofar as landlords are concerned, many of whom will themselves be in a difficult financial position, they may well be dismayed at having their actions further restricted and will be concerned about the possible impact on rental payments due on the June quarter day (June 24). Tenants should be mindful of the fact that these restrictions, while allowing them a breathing space, do not release their obligations altogether – the rent will still be payable and with accrued interest.
COVID-19 Code of Practice for commercial landlords and tenants
On June 19, 2020 the Government published a Code of Practice for commercial property relationships during the COVID-19. It has been issued just ahead of the June quarter day.
The Government developed the Code with a working group from the commercial rental sector, including representative bodies such as the British Chamber of Commerce, British Property Federation, the British Retail Consortium, the Commercial Real Estate Finance Council, Revo, the Royal Institution of Chartered Surveyors and UK Hospitality.
The Code, which applies to all commercial leases held by businesses in the UK which have suffered financially during the pandemic, is intended to reinforce and promote good practice amongst landlords and tenants as they deal with the income shocks that have been caused. It is intended to be temporary and also voluntary - it stresses that it does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor. However if not followed, the Government has stated that it will explore options to make it mandatory.
The Code encourages transparency and collaboration. It acknowledges that all landlord and tenant relationships are different and sets out options for new arrangements that could be agreed to by both parties. The Code states that tenants who are in a position to pay rent in full should do so. Tenants who are unable to pay in full should seek agreement with their landlord to pay what they can, taking into account the principles of the Code. This would allow landlords to support those tenants who are in greatest need. Landlords are encouraged to provide support to a tenant where reasonably possible, whilst having regard to their own financial commitments and fiduciary duties.
Landlords and tenants are also encouraged to engage with their lenders and finance providers to seek flexible support in relation to their existing financial arrangements where this is needed. Ahead of the publication of the Code, UK Finance confirmed its members’ support for commercial landlord customers, including making available new and extending existing finance, restructuring facilities, providing capital payment holidays and covenant waivers. However it added that: “Commercial landlords are expected to pass on the benefit of payment holidays to their tenants to ensure that they are supported during this time."
Real estate tax update
VAT: Domestic reverse charge for construction services delayed to March 2021
As reported in our July 2019 Focus, a VAT reverse charge on construction services was initially announced in the Autumn 2017 Budget and a statutory instrument subsequently provided that the reverse charge, which shifts the responsibility for accounting for VAT to the recipient of the supply, would apply to business-to-business supplies of construction services (subject to certain exceptions) with effect from October 1, 2019. In September 2019, the commencement date was deferred to October 1, 2020.
It has been announced that the introduction of the reverse charge will be delayed by a further five months to March 1, 2021 due to the impact of the pandemic on the construction sector.
At the same time, the original legislation has been amended to provide that any business which is an “end user” or “intermediary supplier” and therefore exempt from the reverse charge, will need to inform their sub-contractors of that status in writing. This reflects the recommended advice on the HM Revenue & Customs guidance and is designed to bring certainty for sub-contractors to ensure consistency of treatment.
Stamp Duty Land Tax – three-year time limit extended for refunds in relation to “additional residential property”
When a homeowner buys an additional dwelling which is intended to replace their main residence, but has not yet been able to sell their existing main residence, a 3 per cent SDLT surcharge is levied on the acquisition of the additional residential property. This 3 per cent surcharge is refunded where the homeowner does in fact sell their home within three years of buying the replacement property.
In light of the impact of the pandemic and the restrictions imposed on the ability to market a property for sale, HM Revenue & Customs have updated their guidance on “exceptional circumstances” that allow refunds beyond the three-year time limit. The exceptional circumstances now include the current situation. Once the exceptional circumstances have ended, the taxpayer must sell their original home in order to be able to apply for the refund.
Release of an option to buy land considered an exempt supply for VAT purposes
The First Tier Tribunal (FTT) in Landlinx Estates Ltd v HMRC  UKFTT 220 (TC) has held that the release or surrender of an option to buy land constitutes an exempt supply for VAT purposes.
HMRC has historically treated the grant of an option to buy land as an exempt supply. In a significant and surprising U-turn, however, HMRC argued that neither the grant nor release of such an option in land were in fact covered by the VAT exemption under EU law, instead claiming that they should both be treated as taxable supplies.
The FTT rejected this approach. It disagreed with HMRC’s analysis that the UK VAT exemption, as viewed through the lens of EU law, would only apply to the supply of tangible property, and not to rights which were derivative of that (such as the grant of an option (and seemingly any other such derivative interest)). The FTT emphasised that it would be unreasonable for a purchase to be VAT exempt but not the exercise of an option to purchase given that these could be economically identical.
Although HMRC’s arguments were rejected by the FTT, should these arguments be accepted on appeal, they could have significant implications for the tax treatment of the transfer of legal and equitable rights in land.
For further information please contact Tax Special Counsel Julia Lloyd
A look at development consent: UK’s largest solar farm
On May 28, 2020, the Secretary of State for Business, Energy and Industrial Strategy (the SoS) made a development consent order (DCO) for the construction, operation, maintenance and decommissioning of Cleve Hill Solar Park - a proposed solar photovoltaic (PV) farm of 880,000 solar panels on the North Kent coast (the Project).
Once built, the £450 million Project will be the largest solar farm in the UK with a potential capacity of up to 350 MW. The Project will also include either an energy storage facility with capacity of over 50 MW or an extension to the main solar array. Due to its size, the Project qualifies as a Nationally Significant Infrastructure Project (NSIP) – both the PV array and the energy storage facility are over 50 MW, and consequently a DCO was required under the Planning Act 2008 (PA 2008) as opposed to seeking consent via the traditional route under the Town and Country Planning Act 1990.
For projects of sufficient scale or importance to qualify as NSIPs, there is a long process before developers can even start putting spades to soil. Submission of the DCO application for the Project in November 2018 kicked off an 18-month process involving 11 public hearings and almost 900 relevant representations from local authorities, organisations and individuals. This excludes all the pre-application legwork required just to get to the stage of submitting the DCO application and, of course, all the work that is still to be done to complete the implementation and construction of the Project.
The DCO process
The DCO process involves six stages: (i) pre-application consultation; (ii) acceptance (within 28 days) and (iii) pre-examination of the application; (iv) examination by the Planning Inspectorate (PINS) for six months; (v) PINS' recommendation on the application (within three months of the end of the examination period) and the SoS’s decision (within three months of the recommendation; and (vi) post decision, an application for judicial review can be brought within six weeks.
History has shown that once a DCO application has been made and accepted, a DCO (in one form or another) is the most likely outcome. Within the first 10 years of the PA 2008 regime, over 90 per cent of DCO applications concluded in a DCO being made. These statistics are unsurprising. If the applicant diligently follows the process, undertakes comprehensive pre-application consultation and deals with significant objections (and significant objectors) to the proposed development at this stage and, once accepted, further issues are ironed out or justified through the examination stage, then the odds of a DCO being made at the end are favourable.
For instance following pre-application consultations on the Project, the area of solar panels was reduced by 45.5 per cent prior to submitting the application and several planning issues including, inter alia, biodiversity, compulsory acquisition, heritage matters, landscape effects and flooding were identified at the preliminary meeting and at an early stage in the examination as requiring particular attention. Through multiple hearings, interested party representations and formal requests for information from the applicant, these matters were addressed, minimised or simply accepted as an inherent part of the proposed Project, allowing the SoS to make the DCO.
Further, to date, no made DCOs have been successfully challenged by judicial review (although some have tried). Although the Project faced significant local opposition, it will be interesting to see whether the Cleve Hill DCO will be challenged, given the precedents of success.
Interestingly, as the first solar farm qualifying as an NSIP there are no directly applicable National Policy Statements (NPS) to cover the Project. NPS EN-1 (Energy Infrastructure) expressly excludes renewable energy projects other than wind, biomass or waste; NPS EN-3 (Renewable Energy Infrastructure), excludes solar power and electricity storage; and NPS EN-5 (Electricity Networks Infrastructure) relates to long distance transmission/distribution systems (however it does cover “associated infrastructure” e.g. generation stations). It will therefore be interesting to see, with solar technology improving and costs associated with it dropping, whether the Energy White Paper (which was due to be published in March 2020 by BEIS) will address potential future solar projects that reach NSIP status.
Given the UK’s need for energy security and diversification of its energy sources it would be surprising if large scale solar arrays were not included in the Government’s future proposals for the energy sector.
For further information please contact partner and Head of Planning Sarah Fitzpatrick
- The Tenant Fees Act 2019 bans landlords and agents from requiring tenants of privately rented housing to pay “letting fees” or any other payments save for those specified. The specified payments include rent, a capped tenancy deposit and a capped holding deposit. As from June 1, 2020, the Act extends to tenancy agreements entered into before June 1, 2019, when the Act came into force.
- The Electrical Safety Standards in the Private Rented Sector (England) Regulations came into force on June 1, 2020. They apply to all new specified tenancies from July 1, 2020 and to all existing specified tenancies from April 1, 2021. A “specified tenancy” is, with some exceptions (including leases of over seven years, student halls of residence and a tenancy where the landlord is a private registered provider of social housing), a tenancy of premises occupied by a person as their only or main residence.
Amongst other things the Regulations require that landlords meet national standards for electrical safety and have the electrical installations in their properties inspected and tested at least every five years by a person who is qualified and competent. A copy of the report must be supplied to existing tenants within 28 days of the inspection and to new tenants before they occupy the premises.
Local authorities may impose a financial penalty of up to £30,000 on landlords who are in breach of their duties.