Client Alert
UK Real Estate Quarterly Bulletin – May 2016
May 05, 2016
By Mark Shepherd
Lease Assignment and Guarantees: Case Update and Recap
Summary
Following previous significant rulings relating to the application of the Landlord and Tenant (Covenants) Act 1995 (the “Act”) in the well publicised cases of Good Harvest and K/S Victoria, the High Court has recently considered one of the outstanding points not previously settled by the Court of Appeal in the K/S Victoria case. In EMI Group Ltd v O & H Q1 Ltd ([2016] EWHC 529 (Ch)), the High Court ruled on the effect of an assignment of a lease by a tenant to its guarantor and held that under the Act a tenant is unable to assign a lease to its own guarantor. Any attempt to do so would frustrate the purposes of the Act and is therefore void and the lease would remain vested in the tenant seeking to assign to its guarantor.
This ruling has closed one of the perceived outstanding routes by which a tenant could restructure where its current guarantor was the only group company of sufficient covenant strength to satisfy a landlord on an application for consent to assign. Case law had not, previously, ruled out a direct assignment to the guarantor but following the ruling in the EMI case, this route is now firmly closed.
This summary is intended to briefly recap and summarise the developments in relation to the application of the Act to assignments of leases.
The Act
The Act came into force on 1 January 1996 and applies to all leases granted on or after that date (which the Act calls “new” leases and such term is commonly used in the property market) and introduced an entirely new regime in relation to lease assignments. Key provisions that were introduced include: (1) An automatic release of the outgoing tenant from all tenant covenants of a lease on a lawful assignment of the lease; (2) The assumption by the incoming assignee of the benefit of the landlord’s covenants in the lease and the burden of the tenant’s covenants; (3) A mechanism for landlords to be released from the landlord covenants on an assignment of the reversion; and (4) The release of any guarantor of the outgoing tenant from its guarantee of the tenant covenants at the same time and to the same extent as the outgoing tenant.
In mitigation of the automatic release of the outgoing tenant of its covenants in the lease, the Act provides that an outgoing tenant may enter into an authorised guarantee agreement (“AGA”) to guarantee the assignee provided that the AGA meets the requirements set out in the Act. Common practice has therefore developed since the Act came into force requiring, as a condition of assignment, the tenant to provide an AGA to the landlord.
The Act also contains comprehensive anti-avoidance provisions which render void any agreement which seeks to exclude, modify or otherwise frustrate the operation of the Act.
The Act has been the subject of a number of cases over the last few years which have assisted in resolving some of the uncertainty surrounding its provisions but have also led to significant rulings regarding the way in which a landlord and tenant can contractually agree to behave in respect of the assignment of a lease. The following is a summary of some of the primary rulings.
Cases in Respect of the Act
Good Harvest Partnership LLP v Centaur Services Ltd [2010]
In Good Harvest a tenant assigned its lease and, as required by a condition of the landlord’s consent, the tenant and its guarantor entered into an AGA under which both directly guaranteed the assignee’s obligations under the lease. The High Court held that the guarantee given by the outgoing tenant’s guarantor following the assignment was not enforceable as a result of the anti-avoidance provisions of the Act. On assignment of the lease the guarantor had been released from its original guarantee by operation of the Act and it would frustrate the aim of the Act if the guarantor could be required to enter into a further direct guarantee. The Act only permits the outgoing tenant to give a guarantee for the assignee and this must strictly be in the form of an AGA as prescribed by the Act. It does not permit the outgoing tenant’s guarantor to do so.
Whilst the case of Good Harvest raised this fundamental concept under the Act, it was a High Court decision only and caused significant controversy and uncertainty in the property market. Landlords became increasingly nervous in respect of the provision of guarantees in the drafting and application of assignment provisions.
K/S Victoria Street v House of Fraser (Stores Management) Ltd [2012]
In K/S Victoria the Court of Appeal confirmed the High Court’s judgment in Good Harvest and held that an outgoing tenant’s guarantor cannot guarantee the assignee even if such a guarantee is offered voluntarily. However, recognizing the controversy caused by Good Harvest, the Court of Appeal proceeded to review a number of questions that had arisen in order to clarify the position and has therefore become the leading case on the subject. K/S Victoria specifically concerned a common mechanism whereby a parent company guarantees a group company assignee’s liabilities in a pre-ordained intragroup arrangement (i.e. allowing for an intragroup assignment provided the guarantee was replicated). The Court of Appeal determined that any such arrangement was void.
However, a number of general principles were also addressed, including (1) that an outgoing tenant’s guarantor may validly guarantee the performance by the outgoing tenant of its obligations under an AGA (known as a “GAGA”) as this was not precluded by the Act; and (2) that an outgoing tenant’s guarantor may guarantee the performance of a subsequent assignee provided that there has been at least one assignment before the fresh guarantee is given.
The Court of Appeal did not directly address whether the guarantor could take a direct assignment of the lease in respect of which it was currently providing a guarantee.
UK Leasing Brighton Limited v Topland Neptune Limited and Zinc Cobham Limited v Adda Hotels [2015]
These cases involved assignments where the outgoing tenants had not obtained their landlords’ consent and were found to be in breach of the terms of the relevant leases. The Act provides that an assignment of a lease in breach of the terms of that lease will not operate to release the tenant and its guarantor, so the tenants and their guarantors remained liable for the tenant covenants of the leases. The assignees, as the current tenants of the leases, were also liable for the tenant covenants. The outgoing tenants’ guarantors had guaranteed the assignees (which is void under the ruling in K/S Victoria). The parties sought to reverse the assignments and applied to the High Court for directions as to how to achieve this without falling foul of the Act. The High Court confirmed that it was not a breach of the Act for a lease to be reassigned to the tenant with the guarantor giving a fresh guarantee. When the lease is reassigned, the tenant is released from its original obligations but becomes bound by the tenant covenants as the new tenant. If the guarantor is released from its original obligations under the original guarantee but enters into a fresh guarantee of the tenant covenants upon this subsequent assignment, then it is released to the same extent as the tenant is released. This is consistent with the Act.
EMI Group Ltd v O & H Q1 Ltd [2016]
The previous cases left unanswered the question of whether the Act precludes a tenant from assigning its lease to its guarantor. It was suggested by one of the judges in K/S Victoria that the Act does prohibit such assignment but this comment did not form part of the binding judgment. In this case the outgoing tenant assigned its lease to its guarantor, with the landlord’s consent, so all parties had freely agreed to the arrangement. The assignee (being the previous guarantor) applied to the court for a declaration that, while the assignment validly transferred the lease to the assignee and this did not fall foul of the provisions of the Act, the assignee should not be liable for the tenant covenants of the lease (despite directly covenanting in respect of these in the licence to assign) as the application of the Act had released it from all liability.
The High Court decided that the assignment was void in its entirety as it frustrated the anti-avoidance provisions of the Act. The lease would instead remain vested in the original tenant and the guarantor remaining liable under the original guarantee. Prior to the assignment, the tenant and the guarantor were equally liable for the tenant’s covenants under the lease. At the point of the assignment and at the same moment that the guarantor was released pursuant to the Act, it became bound as the new tenant. Therefore, in all respects there was no release at all for the guarantor. Any suggestion that there were two separate events that could be considered severable was rejected as it frustrated the operation of the Act and was therefore void.
The effect of this case is that a tenant cannot assign its lease to its guarantor even if all parties concerned wish for this to occur.
Commentary
While the Act has achieved a satisfactory result for tenants in that they no longer remain liable for the tenant covenants of a lease once they have disposed of their interest, the subsequent case law has raised some difficulties, particularly in the context of intragroup reorganisation. Where a company wishes to assign a lease intragroup (and this is permitted by the lease or landlord’s consent has been obtained), the outgoing tenant’s guarantor cannot guarantee the assignee as the guarantee would be void by virtue of the anti-avoidance provisions of the Act. This may pose a problem where there is only one company within a group with a financial strength sufficient to satisfy the landlord, acting reasonably, in considering the consent to the assignment. Whilst it is permitted to require an AGA and a GAGA to be provided, the landlord cannot be compelled to take into account the nature of this AGA and GAGA when considering the covenant strength of and security for the incoming assignee.
Similarly, it has now been established that an outgoing tenant cannot assign its lease to its guarantor as a means to facilitate the reorganisation. The fact that any previous attempt to do so would be automatically void means landlords and tenants will need to consider any such previous transactions in order to ascertain whether a previous guarantor has taken an assignment of a lease. If this has been implemented in the past, either pursuant to express terms of the lease or where a landlord has consented to the assignment, then as the assignment is deemed void, the original tenant will be deemed to be the tenant going forward and the guarantor retains its role under the lease guarantee. Issues may arise where there have been subsequent corporate disposals or winding up of the tenant entity and it is important for both landlords and tenants to address any such transactions in order to provide certainty going forward.
From a practical point of view, the following should be considered:
The landlord should seek to include an obligation on the guarantor to a provide a valid GAGA;
Any provision permitting group assignments on condition of a guarantee being provided by the existing guarantor is void but close scrutiny should be given to the language of such a requirement;
Any previous assignments involving either repeat guarantees or an assignment to a guarantor will need to be investigated; and
A tenant's guarantor can volunteer to guarantee subsequent assignees - however, to do so in a scheme of transactions (i.e. agreeing to an assignment to the initial assignee, subject to a requirement to immediately further assign to a subsequent assignee with the guarantee from the existing guarantor) would fall foul of the anti-avoidance provisions of the Act.
Right to Recreation - Regency Villas Title Ltd and others v Diamond Resorts (Europe) Ltd
Summary
The High Court, in Regency Villas Title Ltd and others v Diamond Resorts (Europe) Ltd and another [2015] EWHC 3564 (Ch), has recently considered the question of whether an easement can exist to use recreational facilities and has held that there is no legal impediment to the grant of an easement of a recreational nature. The grant must be provided on the basis of an intention to grant an easement as opposed to a personal right and the Courts will consider this on the proper construction of the grant subject to the material circumstances surrounding the grant. The ability to grant an easement in respect of recreational facilities means the right can run with the benefiting land and would be binding on successors of the burdened land.
The ability to create a recreational easement may be something property owners were not aware was untested in the Courts but until Regency Villas, this had no previous authority. The case serves as a useful reminder that the class of possible easements is not closed. The Court considered Re Ellenborough Park [1955] EWCA Civ 4 and considered the continuing position that any right or rights having the characteristics set out in that case was capable of taking effect as an easement.
Easement Characteristics and Re Ellenborough Park
In order to be classified as an easement the Court of Appeal in the case of Re Ellenborough Park held that a right must satisfy the following four key characteristics:
There must be both dominant land and servient land (i.e. land, and not simply people, benefiting from and burdened by the right).
The right must benefit (or “accommodate”) the dominant land.
The dominant and servient land must be owned by different people.
The right must be capable of forming the subject matter of a grant.
The first three limbs are normally determinable by matters of fact and in deciding whether a right is capable of forming the “subject matter” of a grant for the fourth limb, the Court went on to identify several questions for consideration:
Whether the rights are expressed in language which is too wide and vague.
Whether the rights would amount to rights of joint occupation or substantially deprive the servient owners of legal possession of the servient land.
Whether the rights would constitute mere rights of recreation, possessing no quality of utility or benefit.
This final question therefore raised doubt as to whether rights of recreation could form an easement. In Re Ellenborough Park, a right to use a pleasure ground was accepted as being capable of being an easement but subsequent cases questioned whether the grant of a right, for example, to use a neighbour’s swimming pool could ever qualify as an easement.
Facts
The claimant company was the freehold owner of land and buildings forming timeshare units (the timeshare land) and effectively held the timeshare land on trust for the individual timeshare owners (who had the exclusive right to occupy a particular unit at specified periods each year). An adjacent estate was owned by the defendant company and housed certain sporting and leisure facilities such as a tennis court, swimming pool, gardens, golf course and squash courts (the recreational land).
The timeshare land had been transferred to the claimant’s predecessor in title in 1981 and the transfer effecting this included the rights as follows:
“AND thirdly the right for the Transferee its successors in title its lessees and the occupiers from time to time of the property to use the swimming pool, golf course, squash courts, tennis courts, the ground and basement floor of Broome Park Mansion House, gardens and any other sporting or recreational facilities (hereafter called “the facilities”) on the Transferor’s adjoining estate.”
The recreational facilities were also open to members of the public, in respect of which charges were made. The issue before the Court was whether these rights took effect as easements. The defendant argued that the rights to use the facilities were personal rights between the parties to the 1981 transfer and therefore incapable of running with the land (so as to bind or benefit successors in title) whereas the claimant argued that as easements they ran with land and were available free of charge in line with the rights granted.
Decision
The High Court held that the right to use the facilities met the necessary characteristic requirements and therefore took effect as easements.
The first three characteristics set out in Re Ellenborough Park had easily been met. There was clear land identified as benefiting and burdened, the right benefits the timeshare land and there were and remain separate people owning the relevant land. The key issue determined was therefore whether the fourth characteristic had been met. That is, whether the right was capable of forming the subject matter of a grant. Again, applying the questions raised in Re Ellenborough Park: (1) The rights were not too wide or vague as they extended to all sporting or recreational facilities from time to time (any alternative construction that they were restricted to the specifics in place at 1981 would not have made sense and would have restricted the owner’s ability to adapt their land); and (2) The rights did not amount to joint occupation or substantially deprive the owners of legal possession of the servient land as the use was to be operated in conjunction with the owner and other users of the facilities. Therefore, the key question was whether the rights in question did not qualify as easements because they amounted to no more than mere rights of recreation.
In Re Ellenborough Park the use of a pleasure ground took effect as an easement. The court considered that it was a small extension of this principle to include the enjoyment of sporting and other recreational facilities and therefore concluded that there is no legal impediment to the grant of an easement to use specific or future facilities. Provided the intention was to grant an easement (as opposed to a merely personal right) and that this is evident on the proper construction of the grant (construed in the light of the material surrounding circumstances), the right can be an easement.
Comment
Whilst the point may be one that a property owner would not expect to be contentious, this case was the first authority providing that right-to-use recreational facilities could be a legal easement and therefore capable of running with the land. The reverse of this principle is that where the parties intend for such a right to be personal, clear drafting should be provided to reflect this.
Implied Terms and Break Clauses
Summary
In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor ([2015] UKSC 72), the Supreme Court confirmed the previous decision of the Court of Appeal in a ruling that has disappointed the tenant community. If a tenant breaks its lease, unless the lease contains an express obligation, the landlord will not be obliged to refund to the tenant any advance rent paid for the period after the date that the lease terminates. The Marks and Spencer decision is important and justifies its progression to the Supreme Court because it will change the common expectations of tenants. Prior to the decision, most tenants would be likely to have assumed (at least as a matter of fairness) that a landlord would refund advance rent paid by the tenant in respect of a period beyond the break date where the lease has been successfully determined. The decision of the Supreme Court, however, restates the legal position that there is no implied term requiring the refund of monies. This ruling combined with the common condition of many break clauses that the tenant must not be in arrears of rent at the break date leads to an unfair prejudice to the tenant or a windfall for the landlord but this did not sway the Supreme Court.
Background
Marks and Spencer was a tenant pursuant to a lease containing a conditional break right. One such condition was that there were no rent arrears, a common condition appearing in many break clauses. In the standard position, the annual rent under the lease was payable by way of quarterly instalments in advance on the usual quarter days. The lease was for a term expiring February 2018 but with an earlier break right on 24 January 2012 which the tenant duly exercised. Given the condition of the break, it paid the full quarter’s rent on 25 December 2011 and the issue before the Supreme Court was whether the tenant was entitled to recover the apportioned rent for the period from 24 January to 24 March 2012. There was no dispute as to whether the break was effectively operated and there was no express provision in the lease obliging the landlords to refund the apportioned rent for the period after determination.
The High Court decided that the tenant was entitled to a refund (a decision that was widely welcomed by tenants everywhere). The Court of Appeal allowed the landlords’ appeal (a decision that was not).
Decision
The Supreme Court affirmed the Court of Appeal’s decision. The tenant had argued that there should be a term implied into the lease obliging the landlord to refund the apportioned rent such that even in the absence of an express obligation, the tenant would still be entitled to a reimbursement of the rent for the period following the determination of the lease. The Supreme Court therefore considered the principles on which a term is to be implied into a contract. Given this, the importance of the Court’s comments extends well beyond the law of landlord and tenant.
A key element is that a term will only be implied if it satisfies the test of business necessity (it is strictly necessary for business efficacy) or is so obvious that it goes without saying. A number of issues were considered in respect of these principles.
In respect of business necessity, the test is not one of absolute necessity but whether, without the term, the contract would lack commercial or practical coherence. It must be necessary to imply the relevant term and it is not sufficient that it would be reasonable to do so
In respect of a term being so obvious it goes without saying, a term should not be implied into a detailed commercial contract, merely because it appears fair or one considers that the parties would have agreed it if it had been suggested to them. Where the question is what the parties would have agreed, it is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time they were contracting. A term will not be implied where it ‘lies uneasily’ with the express terms in the contract.
Marks and Spencer made out a significant case that it was necessary for business efficacy that the refund obligation should be implied into the lease. The opposing arguments on the landlords’ part included that the implied term would lie uneasily with the express lease terms. It was considered significant that the express provisions of the lease highlighted that the parties had directed their minds to the specific question of what payments were to be made if the tenant’s break was or was not to be effective. Given this, it was a forceful argument that this made it inappropriate for the court to step in and fill in what was no more than an arguable gap.
An important additional factor for the Supreme Court was the established legal background against which the lease was entered into, particularly, in relation to the apportionment of rent payable in advance. It has long been well established that rent, whether payable in arrear or advance, is not apportionable in time in common law. While the Apportionment Act 1870 allows for rent payable in arrear to be apportionable (based on a day to day accrual), the long established case of Ellis v Rowbotham [1900] 1 QB 740 held that the Act does not apply to rent payable in advance. The Supreme Court rejected the argument that Ellis should be overruled. Therefore, rent payable in advance could only ever be apportionable as a result of a clear and unambiguous clause in the contract.
There appeared to be a strong case for the implied term, not only because it would be fair, but also without it the break right would operate capriciously. However, set against that was the fact that the lease was a very full and carefully considered contract, which included express obligations of the same nature as the proposed implied term and that term would lie somewhat uneasily with those provisions. Except in a very clear case, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it was so clear that the effect of the case law was that rent payable and paid in advance can be retained by the landlord, except in very exceptional circumstances (such as where the contract could not work or would lead to an absurdity), express words would be needed before it would be right to imply a term to the contrary.
Comments
Tenants will regard this decision as unfair and producing anomalies, but construction of the express lease wording against the clear legal background when the lease was entered into, meant that there was no scope to imply a refund obligation. The lease remained workable and the result was not absurd.
Case law surrounding break clauses has continued to produce harsh decisions for tenants over the past few years and Marks and Spencer was looking for a way of mitigating the onerous effects of unfavourable lease terms. It is long established that without an express provision a tenant cannot apportion its rent and must pay in full where a break requires there to be no arrears. Therefore, a refund being provided to the tenant may seem fair and avoid a windfall to the landlord but it is the responsibility of the parties to agree this and provide for this in the lease. Whilst the Supreme Court’s decision is harsh on the tenant, it does have the benefit of providing certainty which benefits everyone. The Supreme Court has made it clear that where there is a detailed commercial contract, the bargain will be respected and a Court must resist interfering with what the parties have agreed.
Whilst the result will concern many tenants holding leases with onerous break terms, going forward it is very important for tenants to ensure that the operative terms of a break clause are carefully scrutinised when exercising the break. One comment raised by Lord Neuberger in his judgment raises the possibility of paying an apportioned rent in the situation where the only pre-condition is payment of rent but this was obiter and there is no binding authority sanctioning such an approach. Given the consequences of a failure to exercise a break (i.e. that the lease continues for the remainder of the term), there is also the much greater concern for tenants of having the exercise of their break right challenged and therefore will often err on the side of caution.
It is equally important that, when negotiating new leases, the terms are carefully considered. Factors to consider include:
Providing for the break to operate on the last day of the relevant quarter, thereby removing the need for a refund.
In the absence of this, provide expressly for an apportionment of the rent such that the break is only conditional on the rent being paid up to the break date and not for the remainder of the quarter.
Always include an express landlord’s obligation to refund rents (whether or not the condition is subject to apportionment as a tenant may have paid the quarter in full where there are other conditions to the break).
Conditional Contract Termination
Summary
The Court of Appeal in Bristol Rovers v Sainsbury’s Supermarkets Ltd ([2016] EWCA Civ 160) has upheld the judgment of Proudman J finding in favour of Sainsbury’s and determining that they had lawfully terminated a conditional contract to purchase the ground of Bristol Rovers FC (the Memorial Stadium).
The Facts
The contract in question had provided that Sainsbury’s would buy the stadium for approximately £30m subject to obtaining an acceptable planning permission for the construction of a new supermarket on the site. Bristol Rovers had intended to use the consideration to fund the development of a new stadium under a related agreement with the University of the West of England. In 2013, Bristol City Council granted planning consent for the supermarket, but that consent was subject to conditions which were considered onerous by Sainsbury’s who made an application under s. 73 of the Town and County Planning Act 1990 (the 1990 Act) to vary the relevant conditions. This application was refused.
Consequently, Sainsbury’s considered that they had complied with their obligations in the agreement to pursue a planning permission and sought to terminate the contract. Bristol Rovers, however, argued that Sainsbury’s was under a duty to make a further s. 73 application or an appeal under s. 78 of the 1990 Act as part of its obligation to use all reasonable endeavours to achieve an acceptable planning permission.
The contract provided that Sainbury’s was only under an obligation to make an appeal if the parties first obtained a joint opinion from planning counsel that the prospects of success were at least 60%. On the construction of the contract, the High Court found a further s. 73 application would be an “appeal” and therefore without the 60% success opinion, no further action by Sainsbury’s was required.
The Appeal
On appeal, Bristol Rovers argued that the construction applied by the High Court was wrong and that Sainsbury’s owed a continuing duty to make a further s. 73 application or, alternatively, to lend its name to an application made by Bristol Rovers. The Court of Appeal found that as a result of a separate agreement entered into between the parties in correspondence, Bristol Rovers were estopped by convention from asserting that Sainsbury’s was obliged to make a further s. 73 application without first obtaining a positive opinion from planning counsel. Both parties were proceeding on the basis that a s. 73 application qualified as “an Appeal” under the contract and it would now be unjust to permit Bristol Rovers to resile from that common assumption. Furthermore, Sainsbury’s was not obliged to lend its name to Bristol Rovers to enable the club to make its own application because the relevant clause in the contract could not be construed as requiring Sainsbury’s to do so in circumstances where it was not otherwise obliged to make the application itself.
Conclusion
Agreements for sale or lease subject to the obtaining of planning are common in the property market where one party is only willing to enter into the arrangement if a favourable permission is obtained for the use it intends to use the property for. It can be a significant area of contention between the parties as to whether the requirements for an acceptable planning permission are met as it is often the case (as it was in this case) that one party has no interest in the acceptability of the permission and just wishes to see the conditionality satisfied. Conversely, circumstances may change for the party seeking the permission and it may no longer wish to pursue the application as fully as it may have originally intended. It is therefore essential to provide for clear and unambiguous drafting as to the nature of the assessment of whether an acceptable permission has been obtained, what the obligations on the parties are to progress such applications and the ability for the parties to draw a line in the sand and terminate the arrangements when these are exhausted.
Round Up
Planning – Development Right to Convert to Residential
On 6 April 2016 the permitted development right to convert offices (within Class B1(a) of the Town and Country Planning (Use Classes) Order 1987) to residential use (within Class C3 of the Town and Country Planning (Use Classes) Order 1987) became permanent. The original right, which came into force in May 2013, was subject to a 30 May 2016 deadline by which residential use had to have commenced. There had been some concern in the market about whether and to what extent local planning authorities would take enforcement action against developers failing to meet the deadline. Now that the office to residential permitted development right has been made permanent, these concerns are no longer applicable.
The office to residential permitted development right remains subject to the condition that before development is commenced, the developer must apply to the local planning authority for a determination as to whether the prior approval of the authority will be required as to (a) transport and highways impacts; (b) contamination risks; and (c) flooding risks. As of 6 April 2016 this condition has been extended to allow the local planning authority to also consider impacts of noise from commercial premises on the intended occupiers of the development.
The original office to residential right exempted certain areas including parts of central London and Manchester. These exemptions have now been extended until 30 May 2019. It should be noted that in addition to the exempt areas, a number of local planning authorities have removed the right in relation to areas within their authority using the Article 4 Direction procedure. Separately, the Mayor of London has recently issued new supplementary planning guidance covering London’s so-called ‘Central Activities Zone’. The guidance states that new residential development is not appropriate in the commercial core of the City and that commercial use should be given priority over residential use in certain parts of central London. The Mayor’s recommendation is that Article 4 Directions are used to remove office to residential permitted development rights in such areas when the exemption expires in May 2019.
A new temporary permitted development right has also been introduced which will allow light industrial buildings (within Class B1(c) of the Town and Country Planning (Use Classes) Order 1987) to be converted to residential use. This right is to last for three years and will apply where an application for determination as to whether prior approval is required is made on or after 1 October 2017 and the prior approval date occurs on or before 30 September 2020. The right only applies where the gross floor space of the existing building does not exceed 500 square metres. It remains to be seen whether this right will prove popular among developers and the extent to which it will affect industrial and residential stock.
2016 Changes to Taxation on Property Transactions
In the March 2016 Budget, the Chancellor of the Exchequer announced a number of tax changes affecting the property sector.
5% SDLT Band for Non-residential
From 17 March 2016, new stamp duty land tax (SDLT) rates will apply on commercial property and mixed use property. The new rules introduce a new marginal “slice” system that mirrors the rules that apply to residential property as well as introducing a new 5% band. The effect of the change is that buyers of properties costing over £1.05m will be paying more in SDLT than under the previous rate regime.
The new rates and tax bands are
0% for the portion of the transaction value up to £150,000;
2% between £150,001 and £250,000; and
5% above £250,000.
The Chancellor has stressed that with the new banding and ratcheted calculations over 90% of commercial transactions will see no change or a reduced tax bill with only 9% paying more. However, given the Chancellor has stated that it is anticipated that the reforms with raise up to £500m a year it is clear that the 9% who are to pay more will shoulder a disproportionate burden.
2% Band for Leases
SDLT rates for leasehold rent transactions will also change, with a new 2% SDLT rate on leases with a net present value over £5m introduced from 17 March 2016. Again, the Chancellor has stated that only 9% of lease transactions will see an increase in the SDLT liability but it will be those tenants paying significant rents that will fall into the 9% and lose out, which can mean significantly higher SDLT liabilities. For example, a tenant taking a 10-year lease at a rent of £1m where VAT is payable on the rent will be liable to pay SDLT at approximately £150,000, an increase of £50,000 on the previous banding. In more extreme cases, a 10-year lease at a rent of £5,000,000 (with VAT payable) would incur a liability of nearly £1m (an increase of almost £500,000).
SDLT Surcharge on “Additional” Residential Properties
From 1 April the surcharge announced in the 2015 Autumn Statement and Spending Review of 3% on SDLT in respect of purchases of “additional residential properties” applies. Therefore, going forward any person acquiring additional residential properties (such as buy-to-let properties and second homes with a value above £40,000) will pay the additional 3% in SDLT. The higher rates of SDLT will apply in England, Wales and Northern Ireland. Despite earlier consultations suggesting otherwise, there is to be no exemption for corporate bodies and funds owning more than 15 residential properties. Whilst this is perceived to put large scale investors and individuals on an equal footing, major players looking to invest in the growing PRS sector within the UK were hoping for encouragement given the growing need for rented accommodation. There is also to be a 36-month window to allow a purchaser of a second home to sell their main residence.
Offshore Property Developers
Offshore developers of UK property will be brought into the UK corporation tax net, where they have historically relied on treaty relief to avoid paying UK tax. The new changes will only apply to development and trading activity, and not genuine property investment. The changes will apply to disposals of UK land that occur on or after the date the legislation is introduced in Parliament at Report Stage, expected to be June 2016. Anti-avoidance measures will take effect immediately to prevent arrangements to circumvent the rules.
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