Method in the madness: new certainty in valuation methods for viability assessments

Viability assessments for affordable housing have long been a source of frustration for developers. This difficult element of the planning phase is often the cause for delays in getting a development to the point where works can start. There is hope on the horizon in respect of one aspect at least however: a recent ruling should lead to more certainty with regards to valuation methods for viability assessments. In turn, this may reduce the time spent arguing about viability. Ground breaking it may not be, but it may speed the way to breaking ground. It must also be noted that the newly gained certainty will be offset, as the benefit of post-consent gains are most likely to be shared between the developer and the affordable housing pot.

Mr Justice Holgate, a very experienced planning judge, dismissed Parkhurst Road’s challenge to their appeal decision in Islington last year. He came down firmly in favour of factoring in local planning policy when calculating site values and requiring late-stage viability reviews to maximise affordable housing provision.  In a rare postscript, he took the opportunity to comment that it would be “opportune” for the RICS to revise their 2012 ‘Financial Viability in Planning’ guidance note, which the appellants had relied on in calculating their benchmark land value, in order to avoid a circular valuation issue.  The RICS  have responded saying that they are awaiting the review of the NPPF and will revise their viability guidance then but in the meantime will clarify the requirements for viability appraisals including making non-technical summaries.

The judgement will please the Mayor of London, who has adopted this approach himself and whose recent Housing SPG was aimed at embedding affordable housing requirements into land values. The adoption of such an approach ensures that initial appraisals on the purchase of a site factor in a 35% onsite provision.  It is thought that the next revision of the London Plan, due in 2019, will continue in this direction and the SPG may even influence the emerging NPPF changes, thereby extending this approach nationwide. The eventual logical conclusion to this will be reduced land values but it may also mean that developers will turn to non-residential schemes instead, particularly in a market where sales prices are already slipping.

Landlords, let’s be reasonable: otherwise you might pay the price

Landlords take note, on the back of a recent case, you face an increased risk that tenants will challenge costs which they are responsible for in a lease. The case in question related to tenants’ challenge of  insurance costs the Tribunal found in favour of the tenants, because the costs incurred were considered to be unreasonable.

Where leases require insurance costs to be ‘reasonably incurred’ or even just ‘reasonable’, landlords should:

  1. ‘shop around’ and be selective when renewing insurance policies. The premium charged must be reasonable and competitive in the market, but this does not mean that the cheapest insurance cover available is the only option. Other factors (such as the terms of the lease, the liabilities to be insured, the terms of the policy, credit rating of the insurer etc.) will all be relevant;
  2. be prepared to supply evidence to tenants to demonstrate that the landlord acted rationally when incurring the cost and that it is a reasonable charge in the circumstances; and
  3. when using block policies, consider whether tenants are adversely affected by the block insurance.

Whilst the recent case related to insurance premiums for a residential block, it would seem arguable that the same principle could also apply to commercial leases where  a service charge cost or insurance premium has to be ‘reasonably incurred’. It would therefore be prudent for commercial landlords to take the steps above when the costs themselves have to be ‘reasonably incurred’ or  ‘reasonable’.

Consent to Assign – taking the good with the bad.

The case of No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd surprised the legal profession in 2016 when the court held that one bad reason for refusing consent to assign a lease effectively trumped two other good reasons, making the landlord’s refusal unreasonable.

This decision provides some welcome pragmatism for landlords, residential and commercial alike, but care still needs to be taken when considering possible reasons for refusing consent, to ensure the decision is reasonable.

Best practice for refusing consent

  • Always make sure the reasons for refusing consent are related to the landlord and tenant relationship and the subject matter of the lease
  • It will be reasonable to refuse consent or impose conditions if otherwise the proposed assignee would have an adverse effect on the landlord’s rights and interest in the property or in its estate as a whole
  • Ensure any refusal is notified to the tenant in a reasonable time, giving the reasons for the refusal. This will be a matter of a few weeks, but will differ depending on the facts of the case and may depend upon how quickly the landlord is provided with all relevant information to allow him to evaluate the application properly
  • If there is insufficient information about the assignee either the application for consent to assign should be refused promptly or requests for financial and other information must be made speedily.

The Case
In the case, the tenant, East Tower, sought consent from its landlord, West India, to assign its interest in three apartments. West India withheld its consent to two of these applications on grounds that it had not received undertakings for its legal fees or for the cost of carrying out inspections of the apartments and it had not received a bank reference to enable it to assess the assignee’s covenant strength. The High Court held that the legal fees requested were excessive for a residential application and that this one bad reason overruled the two good reasons, thereby making West India’s refusal unreasonable overall.

The Court of Appeal disagreed and held that if the good reasons were independent of the bad reason then the bad reason should not “infect” the good. The vital question is whether the decision to refuse is reasonable not whether all the reasons were reasonable.

In this case the reasons were independent of each other and two of them were reasonable. The landlord would have refused consent on the reasonable grounds in any event. As a result the Court held that the decision to withhold consent was reasonable.

 

Attack of the Triffids: Knotweed nuisance cranks up a notch

Investor, developer, indeed landowner in any capacity – recent rulings mean Japanese Knotweed is now more of a nuisance (and a costly one) than ever. With over 6000 UK locations identified as containing the weed, you best be clear on how to handle this inconvenient invader or you face ending up in a bind.

What’s Changed?

The decisions in the two cases are a particular concern for landowners because:

  1. neighbouring landowners no longer need to demonstrate that the weed has caused physical damage to their property in order for a successful nuisance claim to be made; and
  2. the damages recoverable by the neighbouring owner can extend to diminution in value of their land and loss of amenity – which could amount to quite substantial sums of money.

What Should I Do?

If you are acquiring new land

  • Require the Seller/Landlord to confirm whether there have been any historic or ongoing Japanese Knotweed issues on the land and if so to provide details and copies of any guarantees or warranties which should be transferable to you and any lender.
  • Carry out your own site survey to satisfy yourself that there is no Japanese Knotweed on site. This will be very important for overgrown bare land.  It may be all you can do if the Seller tells you to rely on your own survey in answer to the question above.

If you have Japanese Knotweed on your land

  • Take immediate expert advice on how to eradicate the Japanese Knotweed – this must only be done by suitably qualified specialists. Make sure any action taken is backed by a guarantee or warranty which is transferable to successors and any future lenders
  • During the period whilst the Japanese Knotweed is being eliminated (which can take up to 3 years), take expert advice on how to minimise the risk of it spreading

GDPR: Three Months to Go

Changes to the privacy laws in the European Union reach beyond Europe. Any company regardless of location can fall under the new guidelines issued under GDPR. Reed Smith’s IP, Tech & Data Group hosted a webinar on February 22 that discussed key priorities and strategies for compliance during the final three months remaining before the Global Data Protection Regulation (GDPR) comes into force on May 25, 2018.

We believe these changes will affect many real estate clients worldwide, so we’d like to share our colleagues perspective on the GDPR.

The webinar, hosted by the authors of this blog post, can be seen on demand by registering on this page.

Buying in Wales? Why a speedy completion should be top of your priorities

Those of you involved in the acquisition of properties in Wales over the next couple of months should take note – if the value is over £1,000,000 for non-residential properties (or for non-residential leases, a net present value of over £2,000,000) or £400,000 for residential properties, then you’ll pay less tax if you can complete before 1 April 2018.

 From 1 April 2018, SDLT will be replaced by Land Transaction Tax (‘LTT’) for properties in Wales, as part of the exercise by the Welsh Assembly of its new devolved tax powers. Whilst many details of the new regime are still to be finalised (we have yet to have sight of the new return, or any online calculators, for example), the LTT system will take on board much of the existing SDLT regime – in particular, the various reliefs remain the same, according to what we know so far. Tax will be collected by the new Welsh Revenue Authority.

 The rates, however, are quite different, as you can see from the tables below – the Assembly has sought to follow a ‘progressive’ approach, in reducing tax for those purchasing cheaper properties, but increasing the tax payable on more valuable assets.  For example, the starting threshold for the payment of LTT is set at £180,000, rather than £150,000 (with no specific reductions for first-time-buyers, as there is under SDLT).

Non-Residential Freehold Properties and Lease Premiums

LTT SDLT
Value Rate Value Rate
£0 – £150,000 0% £0 – £150,000 0%
£150,000 – £250,000 1% £150,000 – £250,000 2%
£250,000 – £1,000,000 5% >£250,000 5%
>£1,000,000 6%

Non-Residential Leases

LTT SDLT
Net Present Value Rate Net Present Value Rate
£0 – £150,000 0% £0 – £150,000 0%
£150,000 – £2,000,000 1% £150,000 – £5,000,000 1%
>£2,000,000 2% >£5,000,000 2%

Residential

LTT SDLT
Value Rate Value Rate
£0 – £180,000 0% £0 – £125,000 0%
£180,000 – £200,000 3.5% £125,000 – £250,000 2%
£250,000 – £400,000 5% £250,000 – £925,000 5%
£400,000 – £750,000 7.5% £925,000 – £1,500,000 10%
£750,000 – £1,500,000 10% >£1,500,000 12%
>£1,500,000 12% [NB: 0% rate applies up to £300,000 and 5% for £300,000-£500,000, if you are a first-time buyer]

 

2017 Standard AIA forms: A summary of the important changes

The American Institute of Architects (AIA) contracts, the most commonly used set of construction contract forms on commercial projects in the United States, recently released the second part of its once-in-a-decade updates to the 2017 versions of its primary forms.

A Client Alert was issued summarizing the changes, which are described at length in a recent Client Alert written by Jim Doerfler of Reed Smith’s Energy and Natural Resources Group and Alison Wickizer Toepp of our Complex Litigation Group.

Full details on the changes to the forms used throughout the US real estate industry can be found here.

Are Contractor Joint Ventures the next development in Development?

The construction industry is witness to some fascinating developments, particularly around trophy properties in prime US coastal cities.

Within the US –and California particularly- we’re seeing a large number of reputable, experienced contractors banding together to pitch and win construction contracts on trophy properties. Companies that once ferociously competed have joined forces under Joint Venture Agreements, looking for the synergies that will win contracts on highly valued office towers, residential buildings and mixed-use developments.

One good example of a construction joint venture is found in the San Francisco mixed-use development at Ocean Center. Major contractors Swinerton and Webcor formed a joint venture to win the contract for this landmark city project. Their success is leading both companies as well as other firms to consider JV pitches for major developments across the United States.

Construction joint ventures are not without risk. Companies considering a partnership with a competitor have several issues to consider:

  • What will be the form of the JV entity impact upon construction contracts? Who has the authority to speak for all the JV partners when it comes to the contract?
  • Does the Joint Venture have any required JV contractor licenses that are required in some states?
  • The complexities of covenants between the JV partners and how they affect the agreement between the JV and the owner/developer.
  • Who in the JV has signature rights? Change orders often require quick decisions to avoid project scheduling problems.
  • Who is keeping the books? Accounting records should be on an ‘open book’ basis, available for inspection by the partners or members of the joint venture, the owner/developer or the owner’s construction manager.
  • Will the JV self perform work through its partners subsidiary organization and how will that be priced.
  • Will the need for cost expectation bar JV partner contractors from charging the owner/developer for costs and fees each JV partner has agreed to absorb due to the terms of the JV agreement.
  • Will project insurance require policies to name all the JV entities, particularly if partner contractors use their own forces at the construction site.  How will subcontractor liability insurance work on the Project.
  • Are there to be limitations on the owner/developer requirement that the JV partners agreement to joint and severally liable for the full completion of the work and for all obligations and liabilities under the terms of the construction documents.
  • How will any requirement for owner/developer indemnity protection from the JV to extend and bind the JV partners be handled.
  • In dispute resolution which is more complex when a construction JV exists will the JV partners agree that only one firm or attorney should represent them, simplifying the dispute resolution process.

Reputations are made in the construction of trophy properties. They also carry a corresponding financial risk and bonding requirement that may be beyond the capability of a single company. Joint Ventures in the construction arena address these concerns from the contractor side of the equation.

Real World results of the PA Valley Forge reverse tax appeal decision

In early July 2017, in a case titled Valley Forge Towers Apartments N, LP, et al. v. Upper Merion Area School District & Keystone Realty Advisors, LLC, No. 49 MAP 2016, the Pennsylvania Supreme Court delivered a  landmark decision constitutionally curbing the rights of taxing jurisdictions to file selective appeals under Pennsylvania’s Consolidated County Assessment Law. Often called “reverse tax appeals,” this is a practice of a number of Pennsylvania school districts to exercise their tax assessment appellate rights solely against large commercial properties. At the same time, they excluded from reverse appeals all residential properties within the same jurisdiction.

We’re now seeing the real life effects of the Valley Forge decision.

In 2016, the Philadelphia School District filed approximately 140 selective appeals solely against commercial taxpayer properties, including a retail store operated by a Reed Smith client. To put this in perspective, the School District appealed only .025% of the aggregate properties within its jurisdiction and only .19% of the commercial properties.  

During the course of preliminary proceedings, the Philadelphia School District admitted it selectively filed appeals against only commercial properties.  The Philadelphia School District further admitted that it had a “policy” to take appeals where there was a likelihood to obtain a $7,500 increase in tax revenue.  Based on the School District’s millage rate, a Philadelphia property would have to be under-assessed by over $975,000 before subject to selective appeals.

Subsequent to the landmark Valley Forge decision, a Reed Smith team advocated for and convinced taxpayers’ counsel to file Motions to Quash. Reed Smith moved on its client’s behalf to quash each appeal on constitutional (uniformity) grounds—asserting an “as applied” constitutional challenge to Philadelphia (all taxpayers asserted an “as applied” challenge) and a novel facial attack on the right of the School District’s to take selective appeals in the first instance. After oral argument, Judge Idee Fox of the Philadelphia Court of Common Pleas accepted the taxpayers’ “as applied” challenges, and quashed the approximately 120 appeals, including the appeal filed against our client.  The Judge also deferred ruling on Reed Smith’s facial challenge and agreed to permit a cross appeal on that issue if the Philadelphia School District attempts to take up the issue. 

Taxpayers have been bombarded with selective appeals throughout Pennsylvania over the past five years.  This is particularly true in areas where third-party “tax” consultants actively solicit school districts to utilize their services for the purposes of increasing tax revenues.  The school district compensates the consultant through a percentage of any increase revenue. Now that taxpayers have an effective tool to combat such abusive practices, Courts throughout the Commonwealth can expect to see an increased volume of challenges to reverse tax appeals by a commercial property sector that has been unfairly targeted by taxing jurisdictions.

 

 

Placemaking without Lawbreaking

Placemaking?

Mixed-used developments in and around London are in the midst of a golden era with the creation of mega-schemes such as those in Nine Elms and Old Oak. The new Wembley Park Development will see the creation of an unprecedented 7,000 apartments, surpassing the Olympic Village scheme in Stratford by some 4,000 residential units.

Key to the success of these developments will be the ability of the developer or landlord to ‘placemake’, i.e., create a sense of community or culture in sites that must be transformed from brown site to the hottest new postcode in a matter of months. An essential element to placemaking is the ability to attract and curate a roster of popular commercial tenants that in turn draw the desired crowd of residential tenants or buyers.

Anti-competition clauses, and predominantly exclusivity clauses, are of great importance in attracting desirable commercial tenants to letting schemes. However, it is essential not to fall foul of competition law.  Although originally excluded from the Competition Act 1998, since 6 April 2011 land agreements have also been subject to competition restrictions[1].

Why the concern?

Should competition law be breached, you could face:

  1. Investigations and fines: the Competition and Markets Authority (CMA) can launch an investigation and impose fines of up to 10 per cent of global turnover, irrespective of profits made.
  2. Third party claims: other tenants and competitors excluded by the provision may bring a claim for damages (i.e., losses suffered as a result of the breach).
  3. Unenforceability: the provision will be considered void and unenforceable, thereby making it totally ineffective.

How can you mitigate the risks?

When negotiating these types of clauses with preferred tenants there are a number of points to consider:

Geography and the Local Market

Can competitors occupy alternative schemes within a reasonable distance of the development? If so, a provision is less likely to be deemed anti-competitive as compared to a situation where competitors are totally excluded from operating in a local market.

Therefore, limiting a provision to allow competitors to operate either in a separate part of the same scheme or within the same local geographical market, means it is less likely to fall foul of the legislation.

Limitation in Time

Provisions that are unlimited in time are more susceptible to being held in breach of competition law. Limiting a provision to a specific time period is therefore recommended.  There is no guidance as to what the CMA will view as a ‘reasonable time’.  However, consideration should be given to the period of time to allow a tenant’s business to stabilise or for a tenant to recoup its initial investment.

Be Specific ­

Limiting the provision to a specific product, competitor or part of a scheme has a better chance of being enforceable because the adverse effect on competition is reduced. Making the provision personal to a specific tenant (rather than benefitting successors in title) may also assist in ensuring the provision is enforceable.

In conclusion

Exclusivity clauses can be a powerful tool in placemaking when done right. When done wrong, they can expose the developer or landlord to a great deal of risk.

To avoid issues:

  • Consider exclusivity clauses early on in negotiations and review the scope of them
  • Review existing clauses and amend if necessary, as the Competition Act 1998 also applies retrospectively

 

For more information and guidance on the Competition Act 1998 and its application to land agreements, please follow the link to the published CMA guidance or speak with your Reed Smith contact.

[1] Planning obligations (including section 106 agreements) are still excluded from the competition regime.

 

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