(UK) New Rules for ASTs

The snappily titled Assured Shorthold Tenancy Notice and Prescribed Requirements (England) Regulations 2015 come into force 1st October 2015.

In a nutshell, the landlord of any AST granted from 1 October 2015 onwards must provide the following to the tenant:

  • Government factsheet “How to Rent: the checklist for renting in England”. To ensure you always pick up the latest version go to the government website for the checklist.
  • valid EPC.
  • gas safety certificate.
  • tenancy deposit prescribed information which actually has to be provided within 30 days of receipt of the deposit.

Only item 1 is an entirely new requirement, but the sting in the tail is that failure to provide all of this information to the tenant (later prove that you did so) will prevent the landlord from being able to serve a valid s.21 notice for possession at the end of the term.

It may be prudent to annex the factsheet, EPC and gas safety certificate to the AST signed by the tenant to avoid any later suggestion that the information was not provided at the start of the term.

ESOS Regulations: Are you ready to report?

The Energy Savings Opportunity Scheme Regulations 2014 (“ESOS”) came into force across the UK last July. The purpose of ESOS is to require large businesses to identify energy efficiency savings by carrying out energy audits; ESOS is intended to deliver part of the UK’s 2020 target to reduce energy consumption by 20%. The reality is that ESOS imposes yet another obligation on businesses to calculate their energy usage and report to the regulators that is different to existing reporting obligations such as CRC and the deadline to report is 5 December 2015 which is not long for businesses only starting their compliance now.

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(US) 4 Tips For Advising Tech Companies On Real Estate Deals

In a Law360.com article published on August 18th titled “4 Tips For Advising Tech Companies On Real Estate Deals,” Simon Adams of the San Francisco office of Reed Smith offered his thoughts on the property challenges facing technology firms.

Andrew McIntyre of Law360 identifies the following tips:

Need for expansion drives many deals
Simon states that “during negotiations for technology clients I strive to understand with the client team how the current proposed use of any facility intended for the immediate business unit may change over the course of time.”  “In a large lease of space, a technology company may not have bargained at the outset for the ability to contract or expand and yet may be willing to seek such terms and incur agreed-upon fees related to these option rights.”

Connectivity is Key

Privacy is Paramount

Government Restrictions May Be In Play
Some tech companies with government contracts must deal with protocols that affect their landlords and properties. “I have dealt with clients where the lead time to move a business unit between locations can exceed two years due to a government agency requirement to audit replacement space before it may be cleared for operations,” Simon Adams says. “In this instance, remaining on program is critical, and if that program calls for a contract to be in place by a certain date, then it can be essential for the legal team to staff accordingly to meet their milestone.”

The full text of the article can be found here.

(UK) UK Government Policy Reversal on Small Developments Affordable Housing and the Vacant Building Credit

The recently introduced vacant building credit, and policy exemption for small developments from affordable housing contributions have been swiftly removed from national planning guidance this morning following a High Court ruling on Friday.

The policy excluded developments of 10 homes and 1,000 square meters or less, from the requirement to provide or contribute to affordable housing provision. In rural areas, a lower threshold of five homes applied.

Reading Borough Council and West Berkshire District Council had challenged the guidance on the basis it would reduce the amount of affordable housing nationwide by more than 20%. The High Court found in favour of the local authorities. They held that local planning authorities had not been properly consulted and the product of consultation that had taken place had not been properly taken into account. Significantly they held that the guidance was incompatible with the planning statutory framework. The Court also found that the impact of these changes had not been properly assessed.

The local authorities concerns that they could no longer provide the affordable housing they had assessed as being required in their local plans as a result of the blanket policy change were examined by the judge who saw the difficulties the authorities faced and by their judgment allowed the Government’s principle localism to continue to apply to small scale developments.

This case may be a blow for some developers of smaller sites but it is a real rap on the knuckles for the Department for Communities and Local Government (who as far as we know has not issued any comment as yet). The Councils were awarded their costs and the judge was critical of the way the Secretary of State had handled the case, including a statement submitted during the hearing “very late in the day indeed”. They had ignored their own department’s advice in coming to their policy decision. We will post if we hear of further developments.

(US) Commercial Real Estate Brokerage Agreements: Imprecise Commisson Language Can Cost You

It would be unfair (and likely bad faith) for a property owner to terminate a brokerage agreement prior to entering into a sales agreement or lease just to avoid paying a real estate commission. Yet, if a property owner is dissatisfied with the services of the broker, the owner should be able to terminate the contract and list the property with another broker or sell or lease the property on its own.

There have been a number of formulations used in brokerage contracts to come to a fair resolution of these competing interests. One is the subject of a recent opinion of the Court of Common Pleas of Allegheny County, Pennsylvania, in Pittsburgh Commercial Real Estate, Inc. v. Baum Boulevard Investors, LP, No. GD13-3233 (February 17, 2015).

In that case, the brokerage agreement provided that the broker, Pittsburgh Commercial Real Estate (PCRE), would be entitled to a commission if the owner entered into a lease within 180 days after expiration or termination of the brokerage agreement “with any tenant to whom the Premises were submitted” by the broker during the agreement term. The agreement also required PCRE to deliver to the owner, within 30 days following the expiration or termination of the agreement, a list of the prospects to whom or which the property had been submitted by the broker. The point of this provision was to allow PCRE to benefit fairly from its work performed during the contract term without tying the owner to PCRE indefinitely. This provision or one similar to it is common in commercial real estate brokerage agreements used in the Greater Pittsburgh market.

Within 180 days after the expiration of the brokerage contract, the owner’s assignee entered into a new brokerage agreement with another broker, and, still within the 180 day period, entered into a lease for the property, as a result of which the assignee now owed the second broker a commission.

PCRE sued the Owner for the payment of a commission.

There were two primary issues in the case:

  • (i) PCRE submitted their prospect list more than 30 days after expiration. Did the failure of PCRE to deliver the prospect list in time preclude PCRE from being entitled to a commission?
  • (ii) was the property “submitted” by PCRE to the tenant during the term of the brokerage agreement?

Under Pennsylvania law, an event like the 30 day prospect list is not a condition precedent unless the contract expressly provides that it is a condition precedent. The original brokerage agreement did not expressly state that delivering the list within 30 days was a condition precedent to the broker’s entitlement to a commission. The Court ruled that failure to deliver the list of prospects within the 30 day period did not preclude PCRE from receiving a commission.

With regard to the second issue, the brokerage contract did not define the conduct that would constitute “submitting” the property. The Court went to the dictionary, which defined “submitting” as “to commit (something) to the consideration or judgment of another”. The Court then described the numerous communications between PCRE and the tenant and concluded that those communications were sufficient to constitute “submitting”.

The owner argued that PCRE had not “submitted” the property to the tenant because PCRE had never actually shown the property to the tenant. The Court held that actually showing the property was not a necessary element to establish that the property had been submitted to the tenant.

Therefore, the owner’s assignee was required to pay two commissions on the same lease, one to PCRE and one to the second broker.

This case illustrates the need for careful and precise drafting of the language in a brokerage contract concerning the payment of commissions. With better language, the litigation in this matter might have been avoided entirely and a lot of money saved by the Owner on lease commissions.

(US) Limiting the Sky: Is There Space for Drones in Real Estate Law?

Real property is generally conceived of as tangible and two dimensional. We acquire land described by courses and distances in a deed, depicted by lines on a survey. The laws respecting that land are well-formed; most in the U.S. derive from English common law. These laws give landowners extensive rights in their property, including the right to exclude others. Anti-trespass laws in the U.S. generally permit landowners to use whatever means necessary, short of excessive force, to preserve their right to exclusive use and enjoyment of their land.

Real estate law does not stop at the surface, however. At least in theory, the boundary lines described in a deed extend to the depths of the earth and the reaches of the atmosphere. The ad coleum doctrine, a relic of U.S. property law, assigns to each landowner the column of air extending indefinitely above his or her parcel. Though the Supreme Court has limited that doctrine to make space for modern air travel, landowners’ air rights generally extend approximately 500 feet above the ground. Unless you’re in a large city (where air rights have a marketplace all their own), the sky is the limit.

Lately, however, a new tool for law enforcement, delivery companies, photographers, dronestagram users, real estate agents, journalists, utility companies, and myriad other industries has entered the airspace. Drones—once a product of science fiction—are now mass-manufactured, commercially-used machines that challenge existing rules regarding airspace and property rights. As drones have risen in popularity, complaints about drone activity have soared, and the question of how to integrate them into existing legal frameworks has become more pressing. What right does an individual or business have to exclude drones from the area above its land? At what point does excessive drone activity around a parcel constitute a taking?

Though academics and legislators have discussed drones at length in the context of privacy rights and modern warfare, until recently few had spoken about drones’ effect on modern property law. Part of the difficulty in answering this question is that drones challenge the conflicting (yet equally compelling) aims of real property law and aviation law. The former protects landowners’ interests by relying on firmly-drawn boundary lines and rules of exclusion, while the latter protects airspace as a regulated commons, open for the benefit of the world.

Some believe the Federal Aviation Administration is best equipped to regulate drone activity because of the extensive communal benefits and risks that drones offer. Congress has endorsed this perspective, at least preliminarily, by passing legislation in 2012 that tasks the FAA with regulating “civil unmanned aircraft systems” by September 2015 (a deadline the FAA will not likely meet). Others believe that state and local governments should dictate drone use in and around their communities. At least 17 states have already passed laws restricting drone use. (In one failed local Colorado initiative, property owners lobbied for the right to hunt drones flying above their property.) A third perspective calls for coordinated legislative action grounded in property law principles that harmonize with FAA regulations. Under this scheme, state and local legislatures would pass laws giving landowners a definite right to exclude drones from airspace in a definable area above their land. Supporters believe these laws, in coordination with a broader regulatory scheme, would balance the interests of drone users with those of property owners, as well as provide direction for courts facing novel issues arising from drone use.

Increasing drone activity in commerce, government, and law enforcement will undoubtedly affect individual property rights. Whether or not the laws surrounding drones evolve as quickly as drone technology itself, however, remains to be seen. One thing is certain: these little flying machines paint a pretty picture of home.

More UK Residential Property for the IHT Net

The headline-grabbing inheritance tax (IHT) news from last week’s Budget was the introduction, from April 2017, of an additional nil rate band when a residence is passed on death to direct descendants. However this is only one part of the changes that were announced in relation to IHT and residential property, as significant changes were also announced in relation to UK residential property held by foreign domiciled persons.

UK Residential Property Held by Foreign Domiciled Persons

From April 2017, all UK residential property held directly or indirectly by foreign domiciled persons will be brought into charge for UK inheritance tax (IHT) purposes. This will be the case even when the property is owned through an indirect structure such as an offshore company, partnership or trust.

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(UK) New Rules for Residential Landlords in Wales

Residential landlords of properties in Wales need to be aware of the extra regulatory burden that applies to them and particularly because breach could be a criminal offence.

The Welsh Assembly has added an additional layer of regulations which affect private rented residential property in Wales only and which are expected to come into force in autumn 2015.

The new regulations require –

  • all private sector landlords and letting and managing agents to be registered with the licensed authority (currently Cardiff) and
  • all those carrying out property management activities have to be licensed.

If a private residential landlord does want to manage its own portfolio, it must obtain a licence from the authority and for this it will have to –

  • pass a “fit and proper person” test,
  • follow a code of conduct and
  • attend and pass a one day training course.
  • The Regulations allow the authority to charge a fee but the fees policy is not yet available!

As part of the licensing arrangement, landlords will be required to notify the licensing authority of changes in circumstance including the sale of a rental property. There is a grace period of 28 days for the outgoing and incoming owners to notify the licensing authority of the change in ownership and for the new owner to register.

Typically the cost to a residential landlord of instructing a managing agent is around 10% of the rental income each month plus one off costs for tenant find services, AST and inventory preparation, tenant check in and check out, deposit protection and renewals. However, given the increasing regulatory burden for private residential landlords in Wales it seems increasingly advisable to pay an accredited managing agent to do the job.

(US) It’s that Time of the Year ; Pennsylvania Real Property Assessments are on the Horizon

It’s that time of year again, as Pennsylvania real property tax assessments will soon be upon us. It is important that property owners do not take an assessment or reassessment at face value. Please contact us if you would like assistance in evaluating your property for a possible 2016 appeal.

The annual appeal deadlines for tax year 2016 in Pennsylvania counties are as follows:

  • August 1: Adams, Bucks, Cambria, Chester, Dauphin, Delaware, Erie, Fayette, Franklin, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York
  • August 15: Berks
  • August 31: Wyoming and Butler
  • September 1: Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntingdon, Jefferson, Juniata, Lackawanna, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warrant, Washington, Wayne and Westmoreland

Deadline Change: Indiana County has nearly completed its county-wide reassessment and has set a July 2015 deadline for mailing all reassessment notices effective for tax year 2016. Importantly, the deadline for appealing the 2016 reassessment is 40 days from the date of the reassessment notice. Additional information regarding Indiana County’s reassessment, as well as other county-wide reassessments presently underway, can be found here:

Please contact the Real Estate Practice Group at Reed Smith to request an evaluation of your property’s assessment.

(UK) Residential Service Charges Update

As increasing numbers of investors now include residential and mixed use properties in their portfolios there are bound to be issues dealing with the residential element of service charges and you really can’t be too careful about the administration of residential service charges.

From our perspective it seems like an almost endless stream of cases appear on the subject of residential service charge and this is a short summary of the most significant, highlighting just how much attention to detail is required when setting up and managing service charges for buildings and estates with any residential element.

  • The first (and most recently decided) case is the most significant in legal terms and unusual in that the landlords were the victors.  The Supreme Court in Arnold v Britton declined to bend the usual rules of construction in favour of the tenants of holiday chalets let on long leases.

    The service charge provisions in the long leases were inconsistent but a significant minority of them provided for a fixed charge service charge with annual uplifts which resulted in a huge individual service charge liability as the term progressed.  The fixed service charge increased in an amount that was massively higher than inflation and well beyond the actual service costs.

    The Supreme Court held that, because the service charge was a fixed amount, it would be legitimate for the landlord to continue to collect that fixed amount without any need for the landlord to follow the Service Charge Consultation Regulations and without any scope for appeal to the First Tier Tribunal as to the reasonableness of the sums charged.  A warning though: the outcome was manifestly unjust to quite a number of the tenants at the holiday park and all of the Law Lords suggested petitioning Parliament for a change in the law.  That makes it difficult to say that fixed charge service charges will continue to be outside the service charge consultation requirements and incapable of challenge in the First Tier Tribunal on grounds of reasonableness.  For now, however, they are.

  • In an unusual case involving a right to manage company (“RTM”) administering the service charge, the Upper Tribunal found that the RTM had not complied with the regulations on service charge consultation to the letter.  The RTM had failed to make adequate arrangements for the tenants to be able to inspect the estimates. Failure to comply with the fine detail of the regulations means the amount that a landlord can collect is capped by statute.  The statutory cap is just £250 per tenant for one-off expenditure and £100 per tenant for ongoing contracts (an ongoing contract being 12 months or longer).  The level of the statutory caps is such that it is highly unlikely that a landlord who fails to comply with the regulations will be able to recover all or even a substantial part of its expenditure.

    The Upper Tribunal did point out that the RTM could have proceeded with an application to dispense with the need to comply with the consultation requirements and if it had successfully done so would have been afforded full recovery.  We have posted on this process before.  The moral to this Ashley Court Right to Manage Company v De-Nuccio case is that the fine details of the consultation regulations really do matter and it is the prejudice that can be suffered by the tenants that the Tribunals will consider in deciding whether or not to allow full or partial recovery, not the size of the actual mistake made by the landlord in complying with the regulations.

  • A final case worth mentioning arose when the tenant of a long lease applied to enfranchise his lease, i.e. extend his lease term and vary the service charge provisions, arguing that it was no longer fair to pay service charge on the existing fixed percentage basis.  The facts of the case were such that a much altered Victorian property had a service charge where the landlords were collecting well over 100% of the service charge.  The Upper Tribunal agreed that the service charge provisions should be amended in principle but we don’t know as yet how the new service charge percentage in the new long lease will be calculated as the Upper Tribunal sent this question back to the First Tier Tribunal. There is therefore more to come from Rossman v The Crown Estate Commissioners and we will, of course, keep you posted.