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Real Estate Law: What's On The Horizon In 2019?

The real estate sector continues to face considerable disruption. Developing technologies, changes to tax, the introduction of new legislation, not to mention Brexit, all present challenges and opportunities for owners, investors and occupiers alike.

We aim to anticipate change before it happens so we can work with our clients to prepare their businesses for the future. This is our summary of what’s on the horizon in 2019.

Planning

  • We’ll continue to see tension between the nation’s need for housing and the reluctance of most suburban householders to have any more of it anywhere near them, while the government and local councils will continue to demand more affordable housing as the ‘price’ for planning permission.
  • After the autumn household creation statistics undermined the government’s declared method of assessing housing need, we expect to see a lot of councils seek to lower their local plan housing numbers. The methodology now looks set to be revised almost before being used.
  • The government continues to target first-time buyers in its policies, but more needs to be done to incentivise elderly people to downsize into specialist retirement accommodation or care homes. This would release homes onto the market without the need for development on greenfield land. Demographics tell us that the retirement market will remain a growth area.
  • As we predicted last year, Sir Oliver Letwin discovered that the big housebuilders aren’t land banking planning permissions, but rather building out the larger ones at a rate that local markets can absorb. The government plans to respond to his ‘diversification’ proposal in February.
  • The government is consulting on allowing redundant shops to be turned into homes. We expect to see many councils fighting to preserve them.
  • We’ll see at least the seventh attempt to reform the Community Infrastructure Levy in its eight-year lifetime. We don’t expect it will be the last.

New accounting standards will affect occupiers

  • In January 2019, the new lease accounting standard (IFRS16) comes into force. All leases, including most that were previously off balance sheet, will be classified as finance leases and will need to be recognised on a company’s balance sheet.

A new mandatory service charge code

  • From Monday 1 April 2019, the new RICS professional statement for service charges in commercial property comes into effect. Many of the provisions aren’t new, but it’s the first time they have been mandatory. The statement aims to improve general standards, uniformity, fairness and transparency in the management of service charges.

Farewell CRC Energy Efficiency Scheme

  • 2019 will mark the closure of the unpopular Carbon Reduction Commitment (CRC) scheme. This will be replaced by an increase in the climate change levy.

Electronic Execution

  • The Law Commission’s consultation on the electronic execution of documents closed in late 2018. It will be interesting to see which proposals, if any, are implemented. For example, will we see the introduction of witnessing of signatures via a webcam or video link?

Tax

  • We could face another Budget in Spring 2019, as well as further changes to Stamp Duty Land Tax. We expect to see alterations to the legislation around what’s residential and what’s mixed-use property, as well as an additional charge for “foreign” buyers purchasing UK residential property.
  • There’ll be inevitable changes to the VAT legislation, bearing in mind this is an EU tax. It remains to be seen what and how.

Residential Property

  • If the political and macroeconomic environment leads to a more widespread decline in house prices and loss of confidence in the property market, the Government’s attempts to improve the home buying and selling process will likely catch the interest of the mainstream press and the elected representatives. The re-emergence of gazumping and gazundering will add fuel to the fire.
  • 100% mortgages, the dangers of another ‘sub-prime driven crisis’ and mortgage affordability issues are also likely to feature heavily, particularly if interest rates creep up.
  • The Government’s review of the leasehold system, particularly with regard to new build houses, is likely to feature heavily, as will the ‘ground rent scandal.’
  • In December 2018, the Law Commission launched a consultation to reform the commonhold regime. The reforms are intended to support the expansion of the hitherto unpopular commonhold structure as an alternative to leases. The stated intent is to provide a commonhold regime which accommodates homeowners, developers, mortgage lenders and the wider property sector.
  • The Law Society and the Conveyancing Association are advocating the introduction of Property Log Books to improve the conveyancing process. Sharing information early on in the transaction will speed up the process, but will the Log Books simply be Home Information Packs (HIPs) by another name?

Construction

  • Research has found that meeting government targets of 80% cuts in greenhouse gas emissions by 2050 will require considerable sums to be spent on retro-fitting the UK’s energy-inefficient housing stock. Whilst this may present an opportunity for construction and development clients, those engaged in work involving public funds should ensure they maximise these opportunities by taking proper advice on procurement, state aid and other such matters.
  • The use of cash retentions in the construction industry has moved on with the publication of a Private Members Bill Construction (Retention Deposit Schemes) Bill 2017 – 19 (the Aldous bill). The second reading of the Bill has been further delayed and is currently due on 25 January 2019. The Bill is looking to bring legislation that secures moneys so that they will be available to be returned, subject to the other party having right of recourse against the moneys. The objective is to ring-fence the retention moneys to be secured and available to be released on time. After the Act comes into force, any clause in a construction contract which enables a payer to withhold cash retentions shall be of no effect unless upon their withholding they are deposited into a retention deposit scheme.
  • Further legislation is to be introduced under the Small Business, Enterprise and Employment Act 2015. This legislation will prohibit contractual clauses which prevent one party from assigning its right to payment to a third party. There will be exemptions from the regulations, which will not apply to contracts to acquire a business or an interest in a firm, or to contracts entered into by a project company of a project, a utility project or a financed project.

Implications of Grenfell Tower

The government has introduced The Building (Amendment) Regulations 2018 to prohibit the use of combustible materials in the external walls of buildings over 18m that contain one or more dwellings. It has also reaffirmed its commitment to provide £400 million to councils and housing associations to replace unsafe cladding on 159 publicly-owned social housing blocks.

The ban won’t apply retrospectively to developments and the government has offered no money to deal with the 295 privately-owned buildings currently clad with material unlikely to comply with the promised legislation.

This reality didn't dampen the initial hard line adopted by Secretary of State for Housing, Communities and Local Government, James Brokenshire MP. In an open letter to MPs, he stated that he had “written to all relevant private sector building owners reminding them of their responsibilities towards making their buildings safe, including reminding them that local authorities have powers to enforce these improvements if building owners do not take action. We rule out no options if industry, individual building owners or developers do not come forward with their own solutions.”

The intimated imposition of financial and planning penalties on non-compliant landlords and developers, in the absence of primary legislation, raises the prospect of inevitable legal challenge in the courts. However, the implications of the Regulations may be wider than first anticipated:

  • The Regulations will have to be met in relation to all works where the external wall is involved; this will include both work on new buildings but also refurbishment work
  • The ban will also apply to buildings which are not currently within the scope of the Regulations, but in respect of which a change of use is sought (to bring the building within the Regulations) necessitating improvement works to be undertaken.

Nevertheless, with the Grenfell Tower public inquiry set to continue into 2020, the surely unpopular spectre of hundreds of privately-owned buildings not meeting the standards (and not necessarily being required to do so by the Regulations) may force the government to make funds available for removal and replacement works on privately-owned buildings.

If pressure for such a move was to mount, the government has already provided a potential mechanism through which public funds could procure such work by announcing its intention to abolish the Housing Revenue Account borrowing cap. This will allow local councils to operate without borrowing restrictions in order to build social housing and many developers may see an increase in the number and size of (at least partly) public-funded social housing development projects. The improvement work to bring privately-owned buildings in line with the Regulations may (at least in part) have to be funded in a similar way at local council level.  

Key Contact

Adrian Barlow