(US) A Rising Tide For Waterfront Development in Pennsylvania

Pennsylvania organizations hoping to increase development of public amenities and parks along Pennsylvania’s waterfronts  may soon benefit from the new “Waterfront Development Tax Credit” enacted as part of Act 84, and signed into law by Governor Wolf on July 13, 2016.  Intended to “encourage private investment in waterfront property”, the new law grants tax credits in exchange for contributions made towards approved “waterfront development projects.”  Under the new legislation, qualifying  non-profit entities and authorities will soon be able submit applications and become “waterfront development organizations”.  After being designated as a waterfront development organization, an entity may submit waterfront development plans and projects to the Pennsylvania Department of Community and Economic Development for approval.  Such organizations will administrator and oversee completion of approved waterfront development projects.

The law provides tax credits valued at up to 75% of contributions made towards qualifying waterfront development projects.  The tax credits may be applied towards personal income taxes, corporate net income taxes, capital stock – franchise taxes, certain taxes on insurance premiums, and other selected taxes.  The total amount of tax credits in a single year cannot exceed $1.5 million, and the overall amount of tax credits awarded for a single project cannot exceed the costs of the applicable waterfront development project.

The new legislation signals a commitment on the part of Pennsylvania to transform its waterfronts from industrial dumping grounds into vibrant places where people work, live and play.  In time, legislators might be convinced to expand the tax credit beyond the initial $1.5 million, which would greatly “encourage private investment in waterfront property” by a broad spectrum of Pennsylvania tax payers.  For now, the tax benefits, although limited in amount, are a promising incentive and an important step in waterfront development.


Brexit Effects on the US Real Estate Landscape

In a Law360.com article published on July 12th titled “4 Ways Brexit Could Shape The US Real Estate Landscape,” Andrew McIntyre of Law360 looks at four ways attorneys say the Brexit could play out in the following US real estate market areas:

  • Office investment increases
  • Lower interest rates
  • Declining US hotel occupancy rates
  • Luxury residential gets a boost

Concerning the office sector, the U.S. commercial real estate market has for some time benefited from an influx of foreign capital as investors view U.S. real estate as a safe investment haven, and the turmoil and uncertainty post-Brexit could result in even more capital flowing into U.S. office properties, lawyers say.

“The uncertainty that’s currently been created in the London market will tend to benefit those coastal markets of the U.S.,” said Simon Adams of Reed Smith LLP, referring to markets like New York, Los Angeles and San Francisco.

The full Law360 article can be found here.


Update on Small Scale Developments

Following on from our posting about the removal of the exemption of small scale developments from affordable housing contributions, please note that the Court of Appeal reversed the High Court’s decision. The Court of Appeal has given legal effect to the Government’s intended policy and that now means that:

  • contributions should not be sought from developments of 10 units or less which have a maximum combined gross floor space of no more than 1,000 square metres;
  • in designated rural areas, local planning authorities can apply a lower threshold of 5 units or less and where that lower threshold is applied, affordable housing and Section 106 contributions should be sought from developments of between 6 and 10 units as commuted cash payments;
  • affordable housing and Section 106 contributions cannot be sought from any development involving an annex or extension to an existing home. This will not be welcomed by local authorities seeking to maximise affordable housing in their areas but will be a relief for developers with small scale developments planned!


Early Break Clauses in Lease Renewals

Be aware of the consequences of negotiating an early break right in a renewal lease. The flexibility that this might bring will come at a cost.  On a 1954 Act lease renewal, the court has power to determine the rent for the renewal lease.  The Court assesses the rent for which those premises “might reasonably be expected to be let in the open market by a willing lessor” (Section 34 of the Landlord and Tenant Act 1954).

In the case of Britel Fund Trustees Limited v B&Q plc, the question of the rent was the only issue outstanding in the lease renewal. The subject premises in this case was a DIY warehouse in Tottenham.  The rent paid at the end of the old lease was £776,139 pa.

The parties had agreed the new lease would have a rolling break after a short period which could be exercised on just six months’ notice.

Two questions arose, which are of interest to those of us involved in negotiating (and litigating) lease renewals.

  1. Whether any allowance should be made for a three month rent free period. The court took this point fairly quickly and followed recent court decisions where such rent free periods have been accepted as the norm to allow for some of the hypothetical fit out costs.  It therefore applied a discount to the rent of 2.5%, applying the rent free period over the ten year term of the lease.
  2. What was the impact of the break clause on rent? Initially both parties agreed the way forward was to ascertain the open market rent to a DIY retailer tenant and then discount that to take the break clause into account. The landlord’s expert said that would make the rent £698,500 and the tenant’s expert said it would be £281,000.  Naturally the parties’ discounts differed.  However, this was immaterial in the end because the experts went on to concede, in Court, that actually no DIY retailer would take a lease with such a potentially short term.  The tenant argued that the only potential tenant would be a discounter.

The court agreed with the tenant, but as the experts only conceded in Court there was no comparable evidence available to the court at such a late stage to assist in calculating what the market rent should be. The court, did what it could with the information available, and found that the market rent payable by a DIY retailer would be £603,100 and by a discounter £466,940.  A discount then had to be applied to take into account the break clause.  Ironically, the discount for a discounter would be less than for DIY retailer, because of the nature of its business and, in the absence of comparables, the court held that the discount would be 20% for the discounter and 25% for DIY retailer.  This took the rent to just £373,700 from the £698,000 the landlord had been requesting.


Late Relief From Forfeiture

Commercial landlords know that if a tenant fails to pay rent and the lease contains a forfeiture clause, the landlord can forfeit the lease by peaceable re entry i.e by changing the locks when the tenant is not in the premises. It can be a useful self-help remedy but it is limited by the tenant’s  right to claim relief from forfeiture and get back into the premises if he pays the rent arrears and associated costs.

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Recovering Possession of Abandoned Residential Property

The headline news from the Housing and Planning Act 2016 (the ‘Housing and Planning Act’) makes it look as though there is a good new solution to enable residential landlords to get their property back in their control when it has been abandoned.  In practice it contains a number of provisions that serve only to wrap residential landlords and their agents in another layer of red tape.  Residential landlords used to have two choices if a tenant abandoned the property part way through a tenancy: change the locks and risk prosecution under the Protection From Eviction Act 1977 or obtain a court order for possession.  Obtaining a court order in these circumstances feels like an unnecessary cost, but when weighed against a possible criminal conviction it was the only option for a prudent landlord.

In theory under the Housing and Planning Act, landlords now have a third choice: they can serve three sets of warning notices on the tenant, named occupiers and any third party deposit payers over a minimum period of two months to get possession without a court order if –

  1. (for a tenant paying rent monthly) at least two consecutive months’ worth of rent is unpaid as at the date of service of the second warning notice and the date of the final notice terminating the tenancy; and
  2. there is no response to these warning notices from the tenant, named occupier or deposit payer.

then the tenancy will end on the date specified in the final notice.

This third choice is subject to a right for the tenant to challenge the termination of the tenancy by application to the county court at any time within 6 months of the date of the final notice terminating the tenancy so removing its usefulness for most residential landlords.

In a market where tenancies are often granted for a maximum of 12 months, the risk that a tenant may be able to revive an apparently terminated tenancy for up to 6 months after termination and the effect that could have on the landlord’s ability to re-let the property in the meantime may well mean that a court order for possession remains the preferred and safe option.

That Sinking Feeling

Structuring the ownership of mixed use buildings requires care both initially and then during the management of the building.  In a recent case, an investor in the residential parts of a mixed use building faces a significant service charge shortfall that was avoidable.

Residential tenants benefit from a statutory requirement that their service charge must be reasonable (section 19 of the Landlord and Tenant Act 1985). The relevant provision also states that residential service charges demanded before the cost is incurred (e.g. on account service charge payments or contributions to a sinking fund) must be reasonable too. The question was – when the lease says the residential undertenant will pay a percentage of what has been paid by an intermediate landlord, is it presumed reasonable?

The case in question was Balkhi v Southern Land Securities Ltd and clearly the Upper Tribunal were unhappy with the quality of the evidence they had to analyse.  The outcome was what we expected and said “it is not sufficient for the [intermediate] landlord merely to say: I have paid this sum to the freeholder and so it is reasonable for me to recover it from you”.

Instead, where a residential tenant challenges the reasonableness of the amount demanded, it will be for the intermediate landlord to justify the reasonableness of the figure claimed. The Tribunal advises that the landlord may need to seek assistance from the superior landlord to do this.  Ideally the intermediate lease would contain express wording providing for this assistance and limiting the charge to a reasonable amount. If not, then before paying anything intermediate landlords should obtain as much service charge information as possible from the superior landlord in advance, in order to arm themselves against potential challenges from their residential tenants.

The facts of the Balkhi case involved a sinking fund for a mixed use building in Mayfair. The fund was to be put towards future external redecoration. The intermediate landlord paid towards the fund without seeking justification (even though the intended size of the fund almost doubled) and then demanded proportionate contributions from their tenants. However, the Tribunal did support contributions to the initial smaller sinking fund originally required. The evidence of the service charges due as presented to the Tribunal very obviously left something to be desired.

Managers of mixed use developments need to be clear and well organised and must also consider the requirements to consult on service charge expenditure if it is to be fully recoverable.

Have You Got the Right EPCs?

We were reading in the Property Week (27th May edition) just how unreliable an EPC rating can be.  This matters because from 2018 when new minimum energy efficiency regulations (MEES) start to apply, investors won’t be able to grant a lease of a property (and that includes a lease renewal) with an F or a G rating unless they qualify for a temporary form of exemption.  The article reflects what we feared which is that the cheapest EPC will generally have had less data inputted and will rely on default settings within the computer programme that generates the EPCs so making it easy (and probably cheap) to get a quick EPC but at a low rating.

As we have posted before  it is advisable for investors to carry out a review of their EPC ratings to work out which properties need upgrading before 2018 using a reputable EPC assessor and as Property Week says, may be going further and auditing the existing “stock” of EPCs to see which have been carried out properly.

Buyers of investment properties may want to carry out their own EPCs rather than rely on those supplied by the sellers who may not have inputted the very best of information and over whose process they had no control.  Similarly, banks will want to know that EPCs have been carried out satisfactorily before they lend as the 2018 deadline now is getting closer.



Small Developments Affordable Housing News

Welcome news for developers of small sites.

Following the government’s successful appeal last week against the decision in the West Berkshire Council and Reading Borough Council case nearly a year ago (click here to go to our previous posting), the National Planning Practice Guidance will be amended again. It is expected to reintroduce the relevant provision exempting developments of 10 homes or fewer from affordable housing or Section 106 contributions.

Housing minister Brandon Lewis’ triumphant statement called the case “a total waste of taxpayers’ money” and said the judgment will restore common sense to the system and ensures that builders developing smaller sites don’t face costs that could render development unviable and stop them building any homes at all.

Whether the exemption will be reintroduced in its same form immediately, or with any changes, or whether the government will wait until West Berkshire and Reading have considered whether to appeal further remains to be seen. We will update you as soon as we have more news. It is certainly going to be hard for local authorities whose affordable housing supply was anticipated to come from small housing developments


Building Around a Tenant

How much redevelopment and refurbishment work can a landlord do when it has a tenant in occupation? The recent case of Timothy Taylor Limited v Mayfair House Corporation provides a useful reminder of the obligations owed by landlords to tenants where they want to carry out redevelopment works to a building around a tenant of part who remains in occupation.

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