(US) Driverless Cars Mean Endless Possibilities for Real Estate

Companies like Uber, Tesla, and Google are racing to bring driverless cars to the public. Uber is utilizing its experience as a service provider and its knowledge of demand patterns and customer behavior to compete with carmakers.  Starting this week, Uber is offering riders in Pittsburgh the chance to hail a driverless car (though a human will be on hand to take back the wheel if needed).  Uber is also branching out into new areas, such as food delivery and long-distance cargo haulage using autonomous trucks.

Will driverless cars eliminate the need for parking lots, parking garages, or even your driveway? Analysts predict that driverless cars will have a sweeping influence on all facets of the real estate industry. Driverless cars may cause people to opt out of car ownership altogether.  Shared driverless cars could reduce the number of automobiles needed by 80-90%.  As car ownership declines, the enormous amount of space devoted to parking – as much as 25% of the area of some American cities – could free up for other more productive uses.  Freeing up parking would mean possible room for low-rise or high-rise residential developments, urban gardens, new retail or commercial uses – the possibilities are endless.  In addition, municipalities may be able to sell off municipal parking lots to raise capital or to provide supportive housing, parks and recreational areas, or other uses of public benefit.

Remaining parking lots and garages might need an overhaul. A driverless car parking itself without the need to open the door may translate into a reduced size of individual parking spaces.  Buildings may need to create more designated areas for pickup and drop off.  Cities and municipalities may plan for new lanes dedicated to driverless cars as well as new zoning and traffic laws.  If driverless cars lie in our near future, the real estate industry is in for a big shakeup – for better or worse.

Those who plan, design and build now to meet this eventuality may be the big winners.

Pubs & Planning Update

Wandsworth Council has just taken the unprecedented step of issuing a non-immediate Article 4 Direction to withdraw permitted development rights relating to demolition, alteration and changes of use from 120 pub and bar sites in Wandsworth “due to their historic or architectural value or because they make a positive contribution to their community”. Unlike an immediate direction however, it will not take effect until 14 August 2017 at the earliest.  The Council have to confirm the Direction and this cannot take place until after public consultation.  The consultation period runs until 12 September 2016 and the Council is required to take any representations into account. You can reply to the consultation at www.wandsworth.gov.uk/article4.  Also, the proposed Direction must be referred to the Secretary of State so it may yet be modified or varied.  The cynics among us believe this 12 month stay has more to do with avoiding the requirement to pay compensation for loss or damage attributable to the withdrawal of the rights than allowing the Council a period of reflection.

Wandsworth, and many other Councils, have issued individual article 4 directions to protect specific pub sites, but this is the first blanket direction, and is an attempt by the Council to stop “the relentless spread of mini-supermarkets and estate agents”. With pubs closing at a rate of 21 a week (according to CAMRA), 3 of which are in London, we may see more of these directions in the future.

Watch out for Councils beefing up planning policies to protect pubs – they need to do this first in order to be able to justify refusals for the planning applications which will have to be submitted once the Article 4 Direction is effective and permitted development rights are withdrawn.

Pubs do of course already have other protections such as listing as an asset of community value (ACV). Permitted development rights for changes of use and demolition have already been withdrawn from ACV-listed pubs (although a listing only lasts for 5 years).  Even where the pub is not currently listed owners/developers have to submit a written request to the local planning authority to ask whether the building is the subject of an ACV nomination and cannot carry out any work for 56 days (by which time a nomination may well have been triggered) and the permitted development rights must then be used within a year of the request.  This is where the would-be developers of the Carlton pub in Maida Vale slipped up – they demolished the pub 2 days after this new requirement had been introduced and were ordered by the Council to rebuild it brick by brick, an order which was upheld last month by the Planning Inspectorate.

Changes to UK Insurance Law

Major changes to insurance law came into force on 12 August 2016 by virtue of the Insurance Act 2015.

Some of the changes will be of benefit to those who have to insure UK real estate and this could provide comfort to mortgagees. The headlines are –

  • New concept of ‘fair disclosure’ by policy holders which replaces the more onerous ‘full disclosure’. Under the old law, failure to disclose fully meant that the policy was avoided even if the breach was minor. This was always an issue in looking at defective title policies taken out by a previous owner when the disclosure materials from the time the policy was taken out are not available. Now there is a proportionate remedy for a failure to disclose;
  • Updates to remedies for breach of warranty – meaning that in some cases, a breach of warranty by a policyholder merely suspends cover, rather than terminates the insurance contract altogether. Again a real improvement for the policy holders especially for minor breaches;
  • Changes apply to all UK policies after 12 August 2016 including amendments, renewals and endorsements to existing contracts.

The real estate sector should benefit from the changes and for more information read our expert insurance recovery team’s alert here

We can also see from a recent court case that even under the old law insurers could not avoid a claim despite a lie being told when the claim was made. This lie was irrelevant so in effect the policy holder was treated as if the new law applied. Not all liars will get such an outcome. Policies may change to deal with this issue so new policies need to be checked carefully. You can see an analysis of the case here

 

Partitions and Vacant Possession

We are often asked by landlords whether tenants need to completely strip out premises including partitioning when they are required to deliver up vacant possession. This is most common when break clauses are conditional on delivering vacant possession.

What does vacant possession mean?

In the leading case (NYK Logistics Limited –v– Ibrend Estates), it was decided that –

  • the property must be empty of people
  • the person needing vacant possession must be able to take immediate and exclusive possession, occupation and control of the property
  • The property must be empty of chattels and Ibrend made it clear that this element of the test is only breached if the chattels remaining are significant so that they substantially prevent or interfere with the enjoyment of the right to possess a substantial part of the property

How are partitions relevant to VP?

The recent case of Riverside Park Limited –v- NHS Property Services Limited had to decide whether the substantial amount of demountable partitioning left by the tenant on the premises frustrated the break notice.  This was another case where the break notice was only effective if vacant possession was delivered on the break date.

In the Riverside case, the partitions had been constructed by the tenant on top of a raised floor and reached up to the underside of the suspended ceiling and were only fixed by screw fixings.  They were not affixed to the structure.  They were clearly regarded by the expert witness as demountable.  The tenant had turned open plan space into a rabbit warren of small offices.

The Judge held that these partitions were an impediment which substantially prevented and interfered with the right of possession. He also held that he was not concerned that the landlord had no evidence that it could not let the property to anyone else.  The landlord’s unchallenged evidence was that it was clear that the rabbit warren configuration was not the attractive proposition it needed to be for its future lessees.

Are partitions always chattels?

This is awkward and the answer will depend on the facts in each case (and there are a lot of conflicting cases on chattels and fixtures) In Riverside the lightly affixed and demountable, partitions intended to benefit the tenant, rather than improve the premises and were chattels.

It will be possible that some partitions will have been annexed to the structure and become fixtures. Then the questions will be complex and will depend on the lease and any licence to alter before it becomes clear whether they would have to be removed at the end of the term.

Future effect

Whilst this looks like a hard decision for tenants, it is consistent with the basic principle that there has to be strict compliance with options and that as break clauses are a species of option tenants must work to achieve strict compliance (or negotiate clearer leases and licences to alter).

This case was based on its very specific facts and it is only a High Court case but landlords may be able to use the argument about demountable partitions being chattels to frustrate conditional break clauses. At present we are resisting drawing too many firm conclusions from this case and it will always be a question of fact and degree in every case.

As ever, tenants really need to consider the work they need to do to secure the effective break of their lease at a very early stage and make sure that they have taken out everything necessary (and anything they have any doubt about) before the break date. Damage caused by removal can be dealt with in a dilapidations claim but failing to remove may leave the tenant with a continuing lease liability.

 

 

(US) Give Me Some (Tax) Credit

The Texas Historic Preservation Tax Credit (THPTC) is a little known incentive program established through Texas House Bill 500 during the 83rd Texas Legislative Session. With the goal of making historic preservation projects more economically viable and feasible in the state, the THPTC offers a 25 percent franchise tax credit for eligible rehabilitation costs for buildings listed in the National Register of Historic Places, as well as in the Recorded Texas Historic Landmarks and Texas State Antiquities Landmarks.

The THPTC went into effect on January 1, 2015 and mirrors the Federal Historic Preservation Tax Incentive Program (which offers a 20 percent income tax credit for the rehabilitation of historic buildings) with its three-part application process:

(1) Part A: Evaluation of Significance

(2) Part B: Description of Rehabilitation

(3) Part C: Request for Certification of Completed Work

Applicants must apply for the THPTC before commencing on a project or while a project is still underway. Unless completed between September 1, 2013 and January 1, 2015, in which case the THPTC may be applied retroactively,[1] any major portion of a project that is completed and paid for is not eligible for the THPTC.  In order to qualify, an applicant will need to spend a minimum of $5,000.00 on building rehabilitation, which must conform to the Secretary of Interior’s Standards for Rehabilitation.

The THPTC  includes several features that are likely to appeal to a broad base of investors, such as being a fully transferable (by sale or assignment) certificated credit with a five-year carry forward, carrying a dollar-for-dollar reduction on Texas franchise tax, being uncapped, and having no recapture.

Applicants also have the option of taking the THPTC concurrent with or independent of the federal credit, but applicants are well-advised to take advantage of both financial incentives when possible and apply to both programs together.

For more information on the application process of the THPTC, Administrative rules for implementation of the program can be found in the Texas Administrative Code, Title 13, Part II, Chapter 13. The program is administered jointly by the Texas Historical Commission in cooperation with the Texas Comptroller of Public Accounts.

[1] Contact a representative at the Texas Historical Commission for more information about retroactive application.

(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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