Real Estate Legal Update : Global Corporate Real Estate Property and Planning Lawyer & Attorney : Reed Smith Law Firm

What is “residential property” for the purposes of this increase? 

Broadly, “residential property” is a building or part of a building which:

• is in use as a dwelling, or
• is suitable for use as a dwelling, or
• is in the process of being constructed or adapted as a dwelling,

plus any land forming part of the garden or grounds of such a building and any outbuilding on that land.  This means that a sale of land on which a dwelling is being built or of a building which is being converted into a dwelling is a transaction in residential property. The sale of or grant of a lease over six or more separate dwellings as part of a single transaction is treated as a transaction in commercial and not residential property.

Do I have to pay the 5 per cent charge if I complete after 6 April but entered into a contract before then?

There is only very limited transitional relief.   The SDLT increase will not apply to any transaction which is completed on or after 6 April 2011 pursuant to a contract entered into before 25 March 2010 where certain conditions are satisfied.  We can provide further details if this is likely to be relevant.

Whilst it is not yet clear when the guidance will be published, it is understood that the Government will allow a period of at least three months between publication of the guidance and the implementation of the Act. This means that the Act will not be brought into force in April as planned.

To get ahead of the game, some organisations are pressing ahead with changes in practices, procedures and internal regulation regardless of the guidance not being in its final form.

However, for many businesses and certainly the vast majority of UK property-related operations, it is the grey areas that still cause concern, such as when generous corporate hospitality could amount to bribery. For these, it is hoped the guidance will be made more specific in order that there is certainty as to what is not in breach of the Act.

The Government has come under some pressure to water down the Act from businesses and organisations concerned about the impact that it may have. As Government has international obligations to implement legislation to tackle the issues covered by the Act, we do not think radical change is likely.

We will post updates when there is more news.  

Granting New Leases -

• Some new leases are non-assignable and this is agreed in return for tenants getting a great deal of flexibility in underletting. This preserves covenant strength and value for landlords without the tenants significantly reducing their ability to offload property that they no longer need. A prohibition against assignment does mean that a tenant does not have the opportunity to be released from its obligations as it would be if the lease is assigned twice, but so far that has not been viewed as a significant problem.
• Granting a lease that is non-assignable seems to be a more popular solution than making a proposed guarantor a joint tenant.
•  It is too early to say that we are seeing a tightening of the tests that tenants and assignees have to satisfy before they can assign, but we are seeing some landlords proposing stricter conditions in the first draft of their leases.

Buying and Funding Investments -

• We have been disclosing to potential investors which guarantees would no longer be enforceable.  Banks require this information and are certainly not relying on the fine legal difference between a guarantor giving an authorised guarantee agreement and a guarantor being a sub-guarantor.

Lease Assignments -

• Many existing leases contain wording similar to that considered in the Good Harvest case and requiring a guarantor to give an authorised guarantee on assignment. Some landlords continue to seek such guarantees despite their current unenforceability. Our advice is for landlords to consider investment value based on the covenant strength of the assignee and its guarantor with only the tenant liable under an AGA.

Intra-Group Assignments -

• Where performance by a tenant was guaranteed and the covenant strength rests with the guarantor, group assignments are virtually impossible without a different guarantor of good covenant strength being available.

Sub-letting -

• Tenants are advised to consider subletting as a more realistic and often speedier option if assignments are proving difficult to agree; however, many tenants signed up to leases with tough controls over subletting which are not easy to satisfy in today’s market.  Given the depressed status of the rental market, it is too early to say whether this will have an effect on rental values upon review.

Conclusions -

• The real estate world has had to adjust to the perhaps surprising unenforceability of authorised guarantee agreements given by guarantors (rather than previous tenants), and at the moment it seems that it is tenants who are paying the price by finding it harder to deal with their leases and to offload surplus properties in a difficult market.

For further advice, do get in touch with your usual contact at Reed Smith or the authors.
 

What is the CIL?

The CIL is the new regime by which Local Planning Authorities (‘LPAs’) may charge developers for the infrastructure costs of developments in their area.

CIL can be charged by a ‘charging authority’. Generally these will be LPAs but will also include a few other bodies (one being the Mayor of London). Authorities do not have to implement the CIL and there are time and costs implications for doing so.

Authorities implementing the CIL will first have to put into place CIL Development Plan involving (after public consultation) before they can charge - these will be 12 to 18 months in the making, and so it is unlikely that any such charging structures will be in place before 2012.

What's happening to Section 106 Agreements?

We haven’t quite seen the back of Section 106 agreements. These will continue to be used by those authorities not implementing the CIL. They can also be used by authorities with CIL Development Plans in place, albeit in a more limited way than at present.

The CIL Regulations also clarify when the authorities can use Section 106 agreements - there has, until now, been some conflict between how the Government wanted them to be used, and how the Courts interpreted them.

Which developments will attract CIL?

• New non-residential buildings with a gross internal floor area over 100 square metres.
• Commercial developments which have the net effect of increasing a building’s floor area by over 100 square metres.

Note that many residential developments will fall within CIL, but this posting focuses on commercial developments.

Who pays CIL?

Anyone involved in the development can ‘assume’ liability for the CIL. If nobody assumes liability or if the developer does not pay, then liability for the CIL will be apportioned between the land owners (the freeholder, or any leaseholder having a lease of more than 7 years left to run at the time the planning permission is granted) – this is similar to unpaid sums due under Section 106 agreements.

Like Section 106 obligations, subsequent land owners may inherit liability for CIL on commencing development - queries as to assumption of liability and outstanding payments will therefore have to be raised during due diligence on acquisitions.

Extra points to note:

• For larger CIL liabilities, payments may be made on account or by instalment;
• Charities will be exempt from CIL; and
• Payment may also be made by transferring land to the charging authority– but we can see plenty of scope for negotiating those agreements and are not sure how much this will be used!

How does it work?

The authorities must produce a ‘Charging Schedule’ which is set by balancing the cost of infrastructure against the effect on economic viability of development in the area. CIL will be calculated by reference to floor area, and will be indexed.

Before issuing a Charging Schedule the authorities have to consult with and seek representation from interested parties, such as local businesses and residents. It will then be independently examined and approved before coming into force.

When is it paid?

• When a planning permission (which is granted after the authority’s Charging Schedule is in force) is implemented.
• Procedures will develop for the service of notices dealing with the liability to pay.

What should we worry about now?

When considering the development of a site, or acquiring a site for development, it will be prudent to check with the LPA the status of their CIL Development Plan. You may also consider getting involved in the consultation process.

Where the size and nature of the development would not give rise to a Section 106 agreement, it may be worth obtaining and implementing a planning permission as soon as possible in order to avoid a potential CIL charge. You will also need to consider the relationship between planning conditions, planning obligations, highways agreements and CIL for future developments. Whilst the new regime is in its early stages, you may need to negotiate carefully to ensure that you aren’t charged twice for the same things.

If you think you could benefit from further advice on this matter, please get in touch with your usual Reed Smith contact or our planning specialist, Julia Berry,  who will be able to assist.

Kwik-Fit has tested this in the past year in both England and Scotland, and the result was the same.  In the case heard by the English High Court Heronslea (Mill Hill) Ltd v Kwik Fit Properties ltd, the Kwik-Fit unit had been a petrol filling station at one time, so the potential for soil contamination was high.  The landlord wanted to drill 13 boreholes to a depth of five metres and one 20-metre deep borehole.  The potential for disruption was high so Kwik-Fit refused access.

The lease granted in 2000 reserved for the landlord a right to enter onto the premises to inspect and make surveys and drawings.  The landlord hoped this would cover its intrusive environmental survey.  The High Court held that it could not, saying:

• No reasonable person would have thought that a right granted in the year 2000 to enter to survey would have expected that to cover the drilling of boreholes and taking of samples
• The ordinary meaning of a right to enter ‘on’ to property to ‘survey’ dating back to 2000 did not include a survey of what was under property
• The tenant had a right to quiet enjoyment, which the investigations would disrupt

Given the significant due diligence now required when potentially contaminated land is sold or financed, landlords of land that may be contaminated need to think ahead.  Do they want to keep quiet when granting a lease and hope that the usual tenant covenants cover any liability for historic contamination; or do they want to raise the issue and reserve the right to carry out environmental investigations?  If they do that, they will have to expect the tenant to exclude liability for historic contamination.

In our opinion, it is appropriate for landlords to reserve rights and consider all the issues at the outset.  Hoping that contamination is covered by implied lease terms may be simplistic and might lead to trouble if a tenant cannot pay the costs in any event.

Tenants of leases drafted some time ago may receive requests from their landlords to allow them onto the property to investigate, but do not have to consent unless they have a very unusual lease covering the point.  Tenants may be able to use this as a bargaining chip.  They certainly should require the work to be undertaken in line with a pre-agreed method statement containing provisions to minimise disruption, consider requiring a rent cesser, and obtain an indemnity from their landlord for loss or damage suffered as a result of the investigation.  They may want an exclusion for any historic contamination discovered there (unless they caused it).

Landlords facing a refinancing requirement to produce environmental investigations before a loan can be made, may have some difficult negotiations either with the lender or the tenant.