The upcoming year, 2023, promises to be eventful for commercial real estate law. Significant legislative changes are on the horizon, affecting various aspects of the industry. These include new regulations concerning overseas entities that own UK real estate, stricter energy efficiency standards, an overhaul of the building control regime, and other critical factors that demand attention from investors, occupiers, and developers. In the following discussion, we highlight some of the primary issues that will be particularly relevant to housebuilders, leasehold reform, and potential changes in the English private rented sector.
Overseas Entities and Identity Verification: Transitioning from the Economic Crime Act
The Economic Crime (Transparency and Enforcement) Act 2022, swiftly enacted in response to the Ukraine conflict, has had significant repercussions for real estate transactions. As we enter the new year, a crucial deadline looms for overseas owners of UK real estate. By January 31, 2023, beneficial owners must be identified, verified, and registrations must be submitted to Companies House. Compliance with the new regime necessitates annual updates of the registered information. Failure to adhere to these requirements can result in fines, potential criminal sanctions for officers, and an inability to engage in major dealings involving UK property.
For those purchasing from overseas entities, entering leases lasting more than seven years, or placing charges on UK land owned by such entities, it is essential to ensure compliance with the legislation. After January 31, registered titles held by overseas entities will bear a restriction preventing the registration of any transactions involving their land. Further regulations and guidance are expected to complement the new regime, particularly concerning the operation of insolvency exemptions.
Companies House Reform: Combatting Money Laundering and Economic Crime
Anticipated in 2023, a second round of legislation, the Economic Crime and Corporate Transparency Act (currently in Bill form), will focus on combating money laundering and economic crime. The most notable change will be the introduction of mandatory identity verification for individuals incorporating companies and filing with Companies House. This shift will transform Companies House from an administrator to a gatekeeper, with profound implications for the administration of UK companies. For more details on these upcoming changes, please refer to our Insight.
Decarbonization and its Impact on Commercial Real Estate
Minimum Energy Efficiency Standards
Energy efficiency regulations are becoming more stringent. Starting from April 1st, it is not only the act of granting a lease for a sub-standard commercial property that puts landlords in breach of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 – continuing to let such a property becomes unlawful (although it does not invalidate the lease).
To comply with the rules, commercial properties must have an Energy Performance Certificate rating of E or above, or landlords must register for an exemption. Failure to comply can result in financial penalties of up to 20% of the property’s rateable value. For more detailed information, please refer to our Insight.
Anticipating Long-Term Changes
Businesses need to consider their green future, not only in relation to the imminent April deadline but also in the long term. From a legal standpoint, we can expect a tightening of the legislative regime: by 2027, the minimum standard is likely to increase to a C, and by 2030, to a B.
It is also possible that alternative methods of rating properties and more frequent assessments will be introduced. Tenants negotiating leases should understand whether their terms require them to carry out environmental improvements due to future laws. If the burden of implementing necessary upgrades falls on the landlord, appropriate rights of entry to conduct the required works must be reserved, and tenants should consider the potential disruption to their business operations.
Drivers for Decarbonization
Improvements in our built environment are driven not only by the need for legal compliance but also by market preferences. Recent data from commercial lettings shows a clear demand for buildings with strong green credentials as occupiers strive to implement decarbonization strategies. Investor landlords also have ambitious net-zero goals driven by investor demand. The construction of buildings to achieve green certifications like BREEAM and NABERS-UK is becoming increasingly common as developers aim to meet the growing demand for a sustainable future and recognize the growing importance of these standards.
Decarbonization objectives are also leading to mutual agreements between landlords and tenants who are committed to reducing the environmental impact of their buildings. These agreements often include obligations related to sustainable materials, energy-efficient systems, renewable energy, and recycling initiatives. With the advancement of technology, such as digital twins, powerful insights can be gained to optimize energy usage in the built environment. Parties are increasingly collecting and sharing data to collaborate on strategies to reduce their carbon footprint. Learn more about the value of digital twins and the significance of systematic data collection in fueling digital transformation.
However, it is worth noting that according to Savills, the estimated costs of upgrades to meet 2030 requirements add an average of £40 per square foot to typical refurbishment expenses, which may pose affordability challenges for many outside major cities.
Real Estate Investment and REIT Reform
Reforms for Real Estate Investment Trusts (REITs)
Starting from April, the requirement for a REIT to own at least three properties will be eliminated, as long as it holds a single commercial property valued at a minimum of £20 million. Additionally, there are planned changes (yet to be specified) to the “development rule” within REIT regulations.
As part of the broader “Edinburgh Reforms” announced by the Chancellor in December, aimed at driving growth and competitiveness in the financial services sector, an updated Green Finance Strategy is expected to be published in early 2023. This strategy will support the government’s objective of establishing the UK as the premier global financial center for sustainable finance.
Tokenisation
The concept of tokenising real estate assets or rights related to such assets is gradually gaining traction. However, there is currently significant uncertainty regarding the legal framework governing tokenised real estate, and a lack of awareness about this asset class continues to impede widespread adoption.
Nevertheless, there is tremendous potential in the security, transparency, and efficiency offered by decentralized blockchain ledgers. The ability to fractionalize historically illiquid assets, which were previously limited to a small group of wealthy buyers, presents transformative opportunities for real estate investment. Overcoming the challenges and addressing these hurdles to adoption will be well worth the effort.
In 2023, the government is likely to introduce its first “Financial Market Infrastructure Sandbox” under the Financial Services and Markets Bill 2022. This sandbox will allow participants to pilot the use of emerging technologies in a regulated testing environment. Such initiatives may pave the way for modifying the legislative framework to accommodate trading platforms based on distributed ledger technology and other innovations, ultimately leading to wider adoption of tokenised real estate in the future.
To learn more about the tokenisation of real estate, please refer to our three-part series.
Empty Shop Auctions
Owners of high street retail premises should be aware of Part 8 of the Levelling-up and Regeneration Bill, which is currently progressing through Parliament. This bill grants local authorities the power to conduct compulsory rental auctions for certain vacant high street properties.
Under this authority, the local government can take actions that the owner could do to let the premises, including granting rights over surrounding land. Consent will be deemed given by any superior landlord or mortgagee if required. However, tenancies under the protection of the 1954 Act will not be affected by these auctions.
To be considered for auction, the local authority must designate the area where the premises are located as a “designated high street” or “town center” due to its significance to the local economy. This designation will be listed as a local land charge. The premises must have been unoccupied for at least a year within the past two years, and the local authority must determine that occupying the premises for a high-street use would benefit the local economy, society, or environment. The owner will receive notice and an opportunity to let the premises (on genuine terms) before the auction takes place.
While the enabling legislation is expected to be introduced in 2023, implementing the detailed regulations will require additional time.
Charities and Streamlined Land Disposal
Charities can expect reduced administrative burdens when it comes to disposing of charity land, thanks to the forthcoming implementation of the relevant provisions of the Charities Act 2022, expected to take effect in spring 2023.
While effective oversight will be maintained, there will be a simplification of the process. For instance, charities will still be required to seek professional advice before proceeding with a land disposal, but there will be a broader range of potential advisers available to choose from. This change aims to alleviate the administrative complexities and provide charities with more flexibility in managing their land assets.
Business Occupiers and Regulatory Changes
Appeal Deadline for Business Rates
The 2017 Rating List is set to close on March 31, 2023, serving as the final date for businesses to appeal their 2017 rateable value for the period spanning April 1, 2017, to March 31, 2023.
Tenants should be aware that seeking their landlord’s consent before appealing a rateable value is often a requirement stated in their lease, so it is important to ensure this consent is obtained in a timely manner if necessary.
Business Rates Revaluation
Effective from April 1, a revaluation of business rates will be conducted, based on property values as of April 1, 2021. Forecasts by JLL indicate that retailers are likely to experience significant decreases in their rateable values due to the surge in online shopping. However, variations are expected among sub-sectors such as high street, retail parks, and supermarkets. Conversely, logistics can anticipate substantial increases, while offices should expect a moderate rise.
Small businesses will benefit from targeted reliefs, with specific provisions available for vulnerable sectors like retail, leisure, and hospitality. However, these reliefs are capped at £110,000 per business, which limits their effectiveness for larger operations. Other reliefs are also accessible.
Landlords in challenging market conditions are increasingly facing void periods, leading to both income stream cessation and business rate liabilities. Although reliefs and mitigation strategies are available, caution should be exercised, as discussed in our detailed Insight.
Statutory Compensation and Lease Terminations
The revaluation can significantly impact the statutory compensation payable if a landlord wishes to terminate a Landlord and Tenant Act 1954 protected lease on a “no-fault ground.” The timing of statutory notices becomes crucial in this regard. Landlords contemplating opposing statutory lease renewals set to expire within the next 12 months, or tenants with protected leases who suspect their landlord may have redevelopment plans, should seek specialized advice promptly. Further information can be found in our comprehensive Insight.
Business Interruption Insurance Cases
In April, the High Court is expected to hear test cases concerning business interruption insurance contracts that provide coverage for diseases “at the insured premises.” This legal consideration aims to determine if businesses suffering losses as a consequence of the Covid-19 pandemic are eligible for payouts. This aspect was not directly addressed in the previous test case led by the Financial Conduct Authority in 2021. Notable claims, such as the £178m claim by Pizza Express and the £15m claim related to London’s ExCeL Centre, will be included in this new case.
Prescribed Clauses for Leases
Starting from November 2023, the Land Registry will reject leases exceeding seven years in term that do not include the newly prescribed clauses. It is important to verify that new leases comply with the updated form, which clearly indicates whether the parties are overseas entities.
Telecoms Negotiations and Regulations
Following an extensive consultation on changes, significant updates are expected for the Electronic Communications Code contained in Schedule 3A to the Communications Act 2003 (as amended by the Digital Economy Act 2017). These updates will be implemented through regulations, which are anticipated to pass this year under the Product Security and Telecommunications Infrastructure Act 2022.
Tensions and litigation between operators and landowners have been common, leading to delays or failures to reach Code agreements and subsequently hinder the installation, retention, or upgrade of relevant telecoms infrastructure. The upcoming changes aim to facilitate the more efficient deployment of gigabit capable broadband and 5G networks by:
- Addressing the issue of unresponsive landowners, allowing operators to obtain Code rights over certain types of land through a court application after repeated failures to engage with the landowner. This right was introduced for multi
-let residential properties starting from December 26, 2022.
- Enhancing operator rights to share and upgrade apparatus, allowing for improved apparatus sharing between operators and upgrading existing apparatus under certain conditions.
- Aligning renewal processes for 1954 Act protected tenancies with the primary purpose of conferring Code rights to ensure that renewal rent is assessed based on the same assumptions as for new agreements granted under the Code.
- Encouraging alternative dispute resolution before resorting to court applications.
Building Safety Levy and Overhauled Regime
The details of the Building Safety Levy are expected to be finalized in 2023, with the second consultation on the government’s proposals closing on February 7. Similar to the Residential Property Developer Tax, this levy aims to generate funds for rectifying unsafe defects in buildings. Local authorities will collect the levy from residential building developers, regardless of the building’s height. Exemptions will be provided for affordable homes, care homes, and developments with less than 10 units. However, it is yet to be determined whether built-to-rent properties, purpose-built student accommodation, and senior living residences will fall within the scope of the levy.
By October, an overhauled building safety regime is expected to be operational, facilitated by the publication of building safety regulations throughout 2023. These regulations will support the implementation of a more rigorous building control regime under the Building Safety Act 2022. The act aims to drive a cultural shift within the industry, establishing greater accountability and responsibility for fire and structural safety matters throughout a building’s lifecycle.
A key requirement is the maintenance of clear digital records containing essential design and safety information for high-rise residential buildings, creating an easily accessible “golden thread of information.” This information is vital for emergency responders, ongoing risk management, and evaluating subsequent changes against the building’s original design. The act also establishes a new Building Safety Regulator responsible for overseeing building safety, setting standards, and granting approvals under the new Gateway regime.
The Gateway regime includes three stages: Gateway one, which is already in force and focuses on early consideration of fire safety during the planning permission stage; Gateway two, which ensures no construction can commence until the regulator approves the designer and build contractor’s statements and plans complying with regulatory requirements; and Gateway three, which prevents occupation until the regulator certifies correct construction and the provision of appropriate golden thread information to the “Accountable Person” responsible for ongoing repairs and building safety. After Gateway three, occupation remains prohibited until the Accountable Person registers both themselves and the building with the regulator.
While the golden thread of information and Gateways primarily apply to high-rise residential buildings, the act will introduce broader changes to building regulations, aiming to improve design and construction standards across all building types. Stay informed by visiting our Building Safety pages for the latest updates as guidance and secondary legislation are published throughout the year.
Biodiversity Net Gain
Starting from November 2023, most new developments in England will be required to achieve a minimum biodiversity net gain of 10% as a condition of their planning permission. This means that developers must implement measures to enhance wildlife habitats, and these enhancements should be maintained for at least 30 years after the completion of the development.
Developers will need to conduct thorough due diligence and careful planning to evaluate the costs associated with achieving biodiversity net gain. They should consult with planning authorities to assess project viability and pricing. In cases where developers are unable to meet biodiversity requirements on-site, they may have the option to purchase off-site credits. However, it may take some time for the market for such credits to be established, and planning authorities may encourage on-site provision to create more attractive living conditions for residents.
Environmental Outcome Reports
During 2023, there will likely be consultations and further details on the framework for a new outcomes-focused system to replace environmental impact assessments in the planning application process for new developments. This new system, known as Environmental Outcome Reports, is proposed in the Levelling-up and Regeneration Bill. However, it may take several years for this regime to be fully implemented, as many details are still unclear.
Infrastructure Levy
Pilot schemes for the Infrastructure Levy (IL), which is intended to replace the Community Infrastructure Levy, may commence this year. The IL will focus on capturing land value based on gross development value rather than floor space. It is expected to become mandatory in England, excluding Greater London. For more information, refer to our Insight.
Transparency of Land Control Information
The Levelling-up and Regeneration Bill introduces provisions that could lead to greater transparency regarding the control of land. This includes disclosing information about who holds options to purchase land, conditional contracts, and other land-related rights. Currently, this information is confidential and commercially sensitive, but the bill proposes disclosing it to the Land Registry. The regime’s details will become clearer as the bill progresses and implementing regulations are published. There may be provisions allowing the redaction of potentially prejudicial information.
Housebuilding and Leasehold Reform
Housebuilding Targets
The government’s housebuilding target of 300,000 new houses per year has been scaled back due to pressure from backbenchers. It is now considered a “starting point with new flexibilities to reflect local circumstances.”
New Homes Quality Code
Residential developers were expected to register for the New Homes Quality Code by December 31, 2022. This code and its enforcement mechanism, the New Homes Ombudsman, were established under the Building Safety Act 2022 to provide a platform for homeowners of new builds to seek redress against developers and builders. This year will mark the beginning of a more consumer-friendly regime.
Rates of Build-out
Concerns have been raised about the pace of developer build-out. The Levelling-up and Regeneration Bill, currently progressing through Parliament and expected to pass this year, will grant councils new powers to impose sanctions, including the ability to block planning proposals by developers who have failed to deliver. Specific details are still awaited.
Competition and Markets Authority Investigation
The Secretary of State for Levelling Up, Housing, and Communities has formally requested the Competition and Markets Authority (CMA) to conduct a market study of the housebuilding industry. An update from the CMA is anticipated in early 2023.
Long-Leasehold Reform
The abolition of ground rents for new long-leases took effect in June of the previous year. The final implementation of the non-retrospective ground rent regime will commence on April 1, 2023, marking the end of the transition period for retirement properties. The government is reviewing the results of its consultation on recommendations to broaden access to enfranchisement and the right for long-
leaseholders to manage their own buildings. These proposals aim to simplify the current system and may allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or claim the right to manage.
The Law Commission’s 2020 report provides a pathway for key modernizations, including the ban on leasehold houses and the revitalization of commonhold. However, it remains to be seen if there will be sufficient Parliamentary time for these reforms in 2023.
Residential Private Rented Sector
Renter’s Reform
The government’s white paper, “A Fairer Private Rented Sector,” introduced the “New Deal” in June 2022, which aims to provide quality, affordability, and fairness for the 4.4 million households renting from private landlords. This year, we can expect progress on the Renter’s Reform agenda, potentially leading to the end of “no-fault” evictions, more efficient dispute resolutions, the establishment of a digital property portal, the extension of the Decent Homes Standard to the private rented sector, and increased tenant protection through a new Ombudsman scheme.
Brexit
Bonfire of Retained EU Law
At the end of the Transition Period on December 31, 2020, EU legislation and case law became “retained EU law” in the UK. The Retained EU Law (Revocation and Reform) Bill 2022-2023 aims to sunset much of this retained EU law on December 31, 2023. However, legislation specifically saved or reformed by government ministers may remain on the statute book until the end of 2026.
To avoid unintended consequences, government departments are tasked with reviewing each piece of retained EU law by the end of the year. The estimated number of laws to be reviewed has increased from 2,400 to around 3,800. If the Bill passes as currently drafted, retained EU law will be replaced by “assimilated law” actively preserved by ministers. Ministers and devolved authorities will have significant powers to restate retained EU law until the end of 2023 and assimilated law until June 23, 2026. However, concerns exist about potential losses of environmental safeguards and other key protections.
Nuisance and Privacy
The Supreme Court’s decision on the alleged nuisance case involving the Central London Tate gallery’s neighbors, who have floor-to-ceiling windows, is still pending. The outcome will determine whether the law will be extended in relation to the alleged “self-induced incentive to gaze.”
