(US) California Real Estate Rules to Watch in 2017

Welcome to 2017 and the first posting of the New Year on realestatelegalupdate.com.

In a Law360.com article published on January 2nd titled “California Real Estate Legislation and Regs to Watch in 2017,” Andrew McIntyre of Law360 addresses the challenges facing the California real estate market in the new year. Simon Adams of Reed Smith is quoted extensively in the article.

Here are some of the items on the 2017 legislative agenda:

  • Marijuana
  • Affordable Housing
  • Development and the California Environmental Quality Act (CEQA)
  • Property Taxes

Simon Adams  commented on the passage of Proposition 64, allowing the use of recreational marijuana. Several real estate companies are in the process of setting up dispensaries, but they still face concerns of state and federal regulations. “Landlords will continue to remain nervous about knowingly allowing such businesses in to their spaces.,” said Simon. “Even with lease covenants to indemnify the landlord for damages the potential conflict between the state laws and federal prosecution laws will create some reservation if the new presidential administration were to start to prosecute and confiscate buildings from owners.”

As with past years, California struggles with affordable housing. A push was made in 2016 to address the issue with little support in the state legislature. The issue will be again raised in 2017 through State Bill 35.

The California Environmental Quality Act (CEQA) has long been considered a focus for reform over the years, seen by developers as a major detriment to projects, adding years to a schedule. “CEQA will come under significant attack in 2017,” says Simon Adams. “The new administration in the White House is certain to be developer-friendly, seeing replacement of buildings on brown field sites as a way to create jobs, and the historic delays caused to such developments by CEQA are going to be a focus for many that object to the chilling effect it has had on progressing all forms of improvements,” he added.

Property taxes have been kept low since the passage of Proposition 13 in 1978. Now, there are efforts to consider a ‘split-roll’ proposal, allowing property taxes to rise only on commercial properties, while maintaining assessed values on residence to a 2% annual ceiling. Adams, though, doesn’t expect to see change on Prop. 13 in 2017, in part due to current economic conditions in the state. “The economy of California continues to do well … which will continue meaning that there will be no appetite for legislators to look for funding and address potential changes to adjust this taxation. Many home owners are predicted to be paying less for housing as interest rates rise,” Adams said.

The full text of the Law360 article can be found here.

The Modern Slavery Act 2015: Effects on the Property Industry one year on

Modern Slavery is broadly a term covering slavery, forced labour, servitude and human trafficking. It has been described as “the great human rights issue of our time” by Theresa May.

The Modern Slavery Act 2015 was introduced as part of an effort to tackle the issue by imposing a requirement on every large business carrying on any part of its business in the UK (including companies registered abroad but which engage in commercial activities in the UK) having a total annual turnover of £36m or more to produce a slavery and human trafficking statement for each financial year of the organisation. ‘Turnover’ means the turnover of that organisation and the turnover of any of its subsidiaries. Groups can make one statement but may have to post this on several websites depending on how complex their business is.

The Modern Slavery Act statements must set out what companies are doing to identify and mitigate risks of modern slavery taking place within their company and in their supply chains.

For more details on the corporate reporting requirements under the Modern Slavery Act, please refer to the October 2015 blog posted by our Employment team.

A large number of Real Estate companies are affected by the reporting requirements:

  • Investors using companies incorporated outside the UK that own UK investment properties having a turnover of at least £36 million will have to comply (taking subsidiaries into account for the turnover calculation).
  • Landlords and their asset managers need to think which of their contracts (or sub-contracts) might be sensitive and the examples we can think of will be cleaning companies or the employment of agency staff.
  • Even where a managing agent does not itself have an obligation to report because of the size of its business, it may receive requests for information regarding its anti-slavery practices.
  • Tenants must also be aware that landlords form part of their supply chains on the basis that landlords supply them with services so may require information each year and may request ongoing compliance covenants in their leases
  • There is a lot of publicity already about the need for the construction sector to be aware of the strong risks of exploitation of labour which exist in their supply chains.

A year has passed since the Act came into force and the reporting has been criticised in some areas for not going far enough towards tackling modern slavery.

Our Employment team’s most recent post reports that companies tended to explain their structures and policies covering modern slavery well, but failed to adequately describe the practical measures being taken to assess their effectiveness. Examples of statements published by Real Estate companies corroborate this.

It was also found that contractor relationships are a key omission from statements. For the Real Estate sector, and particularly in the context of the contractor and sub-contractor relationships mentioned above, these clearly will be key points to be addressed.

The negative conclusions coming from the research into these initial company reports are not unexpected given that most companies are still attempting to find the most effective ways of reporting and many lack sufficient resources to conduct due diligence and to support supplier improvements to tackle the issue.

Be aware that changes to the legislation to make it stricter are already pending and Real Estate companies will need to ensure that they are adequately aware of their increasing obligations.





(US) With new laws, it just got easier to demolish blighted properties in Pennsylvania

Blighted residential and commercial properties are a major impediment to rehabilitation and redevelopment efforts in cities and towns throughout Pennsylvania. However, late in the 2016 legislative term, the Pennsylvania House and Senate enacted new laws that will change the rehabilitation and redevelopment landscape.

On November 4th, 2016 Governor Tom Wolf signed into law Senate Bill 486, amending the Recorder of Deeds Fee Law. The bill, introduced by Senator David Argall (R, West Chester), is a response to the difficulty many Pennsylvania counties face in dealing with blighted properties. These troubled buildings often affect the value of surrounding properties and, in some instances, are health and safety hazards.

The new law authorizes each county to charge a fee, up to fifteen dollars ($15), for each deed and mortgage recorded. The funds generated by this fee will be used solely for the demolition of blighted properties within the county where the deed and mortgage was recorded.

Many properties are beyond repair, requiring total removal of the building before the property can be repurposed. Advocates of this legislation believe that lack of funding is the central obstacle to rehabilitating blighted properties and neighborhoods. This law will substantially increase the funding available for demolition. The PA Department of Revenue estimates that the fees would have generated $14 million in 2013 and almost $12 million last year.[1]

Critics of the bill believe that homeowners and homebuyers should not be the primary source of funds for demolishing these blighted properties, but rather the entire affected community should contribute to blight remediation.[2] Some counties impose an even greater burden on homeowners and buyers. For example, the city of Reading, in Berks County, applies a four percent (4%) local realty transfer tax, in addition to the one percent (1%) state realty transfer tax.

Senate Bill 486 was the second of two bills signed into law by the Governor on consecutive days that address the problem of blighted properties. On November 3rd, Governor Wolf also signed House Bill 1437, which amended the act of December 20, 2000 (P.L.724, No.99), known as the Municipal Code and Ordinance Compliance Act, giving property owners only one year after the purchase date to remedy code violations. The prior law gave property owners eighteen (18) months. Failure to make the necessary changes could result in the demolition of the property that is in violation of the code at the purchaser’s expense.

Of course, these changes are not a complete cure to the difficulties surrounding the rehabilitation of blighted properties. Ownership determination, liens and overall community redevelopment planning still present significant challenges in the rehabilitation and redevelopment arena. Still, both bills are positive steps in efforts to correct years of delays in the process of redeveloping blighted homes and neighborhoods.

No Pennsylvania county has yet to impose the recording fee authorized by Senate Bill 486. Look for a follow-up blog as counties begin to adopt this fee.


[1] Emily Previti, Pa. Counties on Track to get Millions for Blight Demolition, Keystone Crossroads (Nov. 1, 2016), http://crossroads.newsworks.org/index.php/local/keystone-crossroads/98412-pa-counties-on-track-to-get-100m-for-blight-demolition.

[2] Kim Shindle, PAR Urges Legislators to Stop Adding Fees to Real Estate Transaction, JustListed PA Association of Realtors (Aug. 5, 2016),  https://www.parjustlisted.com/par-urges-legislators-stop-adding-fees-real-estate-transaction/.

So is this the time for developers to think big and build big?

On Monday 28 November 2016 the City of London’s Planning and Transport Committee approved (19 votes in favour, 2 against) a resolution to grant permission for the development known as 1 Undershaft which at 73 storeys will be the tallest building in the City of London (that is 304.94m or a little over 1,000ft for the imperial brigade).

So is this the time for developers to think big and build big?

The proposed development is (self-evidently) a “tall building”. It will deliver a gross floor area of 154,100m2 (GEA), including 131,937m2 of office space and a 2,930m2 public viewing gallery on Levels 71 and 72.  The Undershaft scheme appears to have many similarities with another recently debated “tall building”, the Pinnacle.  Like the Pinnacle, if the benefits of a scheme and the delivery of objectives in line with planning policy guidelines can be demonstrated, planning permission is more likely to follow.  See our previous post on the Pinnacle.

The City of London commented that “the proposal accords to the development plan as a whole”. Further 1 Undershaft will deliver 7% of the additional office floor space sought in the London Local Plan, which aims to increase City employment by 35.6% by 2036, and is also in line with “strategic objective 1 in The City of London Local Plan 2015” which is “to maintain the City’s position as the world’s leading international financial and business centre”.  1 Undershaft may eventually house up to 10,000 workers.

This Decision could further be seen as a rubber stamping of the Government’s comments that “London is open for business”. Chris Hayward, the chairman of the City Planning Committee, said: “This development shows the high levels of investor confidence in London’s status as a global city following our decision to leave the European Union.”

We now expect a period of negotiation to begin between the landowner/developer and affected neighbouring land owners whose rights to light may be infringed by the development of 1 Undershaft. These discussions will be set against the new powers that can be used to extinguish neighbours’ rights to light under s203 of the Housing and Planning Act 2016.  When the Pinnacle was in difficulties with rights to light the City used s237 Town & Country Planning Act powers to extinguish such rights.

We therefore wait to see how this matter unfolds and whether this may be a “test case” for the new legislation.

Remember, developers, if you can think big and justify that the benefits of the scheme outweigh the burdens and rights deprived, the sky might just be the limit…

(UK) Welsh Residential Private Rented Sector – Key New Regulations in Force

As we mentioned in an earlier post Regulations for dealing with private rented housing in Wales are increasing. From 23 November 2016 all properties need to be registered and anybody undertaking, letting or management work has to go further and be licensed.


1. Registration by all landlords

  • Why register? The Welsh Government is creating a centralised comprehensive register of the private rented sector. All properties must be registered.
  • Who has to register? All landlords operating in Wales have been required registered with the relevant authority for nearly a year.
  • What is the deadline for registration? The final deadline is 23 November 2016.
  • How do you register? Cardiff County Council administers the registration process for the whole of Wales through a new service called ‘Rent Smart Wales’. Applications to register can be made online.
  • How long will the registration last? 5 years and then it will need to be renewed. There is an ongoing requirement to keep the information on the register up to date, so if contact details or personal circumstances change the register must be updated.

2. Licensing – landlords and agents

  • Why? The intention behind the prosed licensing system is that it will enable landlords and agents who undertake letting and management tasks to be better informed of their obligations in view of the compulsory training they will be required to undertake in order to become licensed.
  • Who? All landlords and agents who carry out defined letting and management activities/work at a rental property in Wales are required to be licensed with the relevant licensing authority. To get a licence the applicants and their staff will be required to undertake approved training and to adhere to a Code of Practice.
  • What if the landlord does not carry out letting and management activities? If a landlord decides not to carry out any letting or management activities at its properties because it employs an agent to do this work, it will not need a licence but the management or lettings activities at those properties must then only be carried out by an agent who is licensed. Regardless of this however that landlord must still register itself and its properties with Rent Smart Wales. The obligations to register and be licensed are entirely separate.
  • What if the landlord shares the letting and management activities with an agent? Where letting/management activities are shared with a licensed agent, then that landlord must also be licensed.
  • How to apply for a licence? Cardiff County Council administers the licensing process. The applicant must be deemed ‘fit and proper’ (which defined in section 20 of the Act) and be appropriately trained before a licence will be granted. There is also an ongoing requirement on a licence holder to keep the information held by the licensing authority up to date similar to the register.
  • Will there be conditions on the licence? – Cardiff County Council will place conditions on the licence, one of which will be the requirement that the licence holder must comply with a Welsh Minister approved Code of Practice setting out letting and management standards in relation to rental properties. Other conditions may also be imposed as the licensing authority may feel appropriate
  • Can the licences be revoked? Licences can be revoked if a licence holder breaches a licence condition or is no longer ‘fit and proper’.
  • How long will the licence remain valid? Again 5 years after which date it will need to be renewed.      
  • Do I need a licence for each property? No. The licences are awarded to the person who applies. Therefore if a landlord has 20 properties they only need obtain a single licence. Similarly, a person acting on behalf of a landlord will apply for a single licence regardless of how many properties they act in relation to.

3. What Happens if these Regulations are Ignored

There are a range of penalties that can be enforced either by the licensing authority or a local authority should someone not comply with the provisions. These include Rent Repayment Orders, Fixed Penalty Notices, Rent Stopping Orders and summary convictions (with fines).

Investors with portfolios should check compliance by their professional agents.



(US) A parking garage today, but what about tomorrow?

In a recent Law360.com article written by Andrew McIntyre, the author addresses three issues in converting parking to accommodate the growing need for E-commerce delivery space and the future effects of driverless vehicles:

  • Zoning
  • Market unpredictability
  • Cost

The article discusses the efforts some developers are making to build flexibility into today’s parking space construction to allow repurposing of these assets in the future.

One of the hurdles facing developers are zoning codes that are centered on today’s parking requirements. Zoning regulations often trail changing market trends by years, if not decades. “Lots of zoning ordinances require more parking than is necessary,” says Dusty Elias Kirk of Reed Smith’s Global Real Estate Practice Group. “Zoning ordinances have not changed…They haven’t gotten there yet.”

A complete discussion of the three issues can be found here.

(UK) A Construction Industry Scheme Is Taxing For Both Landlords And Tenants

It is all too easy for landlords and tenants not to realise that their deal can fall foul of the Construction Industry Scheme (CIS) requiring contractors to withhold tax from sub-contractors, designed to make sure that sub-contractors income tax is paid.

How does this happen? – A landlord can be deemed to be a contractor when they spend over an average of £1,000,000 a year for three consecutive years on construction operations.

What constitutes a construction operation? – This is quite wide and includes all usual construction works and even painting and decorating etc.

What are the implications for landlords and tenants? – Where an agreement for lease provides for the tenant to carry out works at the landlord’s cost, the arrangement could fall within the CIS if the landlord is a contractor (e.g. because of its history of spending money on construction operations). In those circumstances, the tenant would be a sub-contractor for the purposes of the CIS.  For the tenant to receive its money gross the parties need to comply with the CIS, and we have written a longer client alert on this which you can read by following this link

(US) Does your condo insurance really insure you?

In a recent Washington Post article titled “Don’t be confused when it comes to condo insurance,” Robert Diamond of Reed Smith’s Tyson office offered his observations on the complexities of condominium insurance coverage.

In some jurisdictions, when a unit owner is found to be negligent — such as when a bathtub overflows or there is a kitchen fire, and other units or common areas are damaged — the owner can be held responsible for paying the entire association deductible. However, that’s not always the case. In Maryland and the District, said Robert M. Diamond, a partner at the Reed Smith law firm in McLean, “there is a limit or cap of $5,000 on the master policy deductible that owners — who may or may not be negligent — could be required to pay.”

Mr. Diamond also considered the difficulties of finding knowledgeable insurance advice.  “You can’t expect your personal insurance agent to read through the association documents, but you can expect him or her to call the property manager and request a copy of the certificate of insurance for the master policy and then make a determination as to the insurance coverage you should have.”

The complete article can be found here.


(UK) Business Rates and Compensation for Tenants

Following our recent update on business rates, we are warning developers to look at their budgets for statutory compensation that may be due at the end of a 1954 Act protected tenancy because of the VOA’s reassessment of rateable values, which comes into force next April 2017.  The timing of the notices served to end the lease could change the amounts to be paid very substantially.

Key Business Rates Changes

  • On 1 April 2017, the rateable value of properties will be reassessed for the first time since 2010.
  • Some occupiers know they are facing a substantial increase in rateable value.
  • The Valuation Office Agency published its draft revised valuation list on 30 September 2016 and the government’s business rates calculator can now be used to check what the rateable value for specific properties will be from 1 April 2017.

Effect on Statutory Compensation Payments

  • 1954 Act statutory compensation payments are calculated based on the rateable value of the relevant property at the date of the relevant landlord’s notice (more on this below).


  • The rateable value used to calculate the statutory compensation due to a tenant is based on the valuation list in force at the date either of the following is served:
    • The landlord’s notice ending the tenancy (section 25 notice); or
    • The landlord’s counter-notice opposing the tenant’s request for a new tenancy.
  • 31 March 2017 is the last day on which the old valuation list will be in force and so the timing of service of either of the above notices could have a significant impact on the amount of statutory compensation due to some 1954 Act protected tenants.
  • The service of the section 25 notice by the landlord can, of course, only take place during the last 6-12 months of the lease term.


(US) Guarantor Services can help you land the dream New York City apartment

Finding an apartment in New York City is a journey in stress management. You’ve done your internet research. You’ve climbed a thousand steps. Now, you’ve found the place of your dreams. Is it too good to be true?

It might. Why? Because the financial standing to qualify for that apartment is an entirely different matter.

Landlords in New York City typically demand that prospective tenants have an annual income of up to at least 40 times one month’s rent and a credit score of at least 700. In a market where increases in rent outpace increases in income, it is often difficult for prospective tenants to meet these high thresholds.

To help prospective tenants overcome qualification difficulties, companies like Insurent and TheGuarantors offer rental payment insurance on behalf of tenants  that provides landlords with a guarantee that the landlord will be made whole in rental payments if the tenant defaults under the lease. Companies like Insurent and TheGuarantors have capitalized on strict landlord requirements by offering tenants less stringent financial standards than typical New York City landlords. TheGuarantors, for example, insures tenants with incomes as little as 27 times one month’s rent and who have credit scores as low as 630. The company also considers liquid assets and income earned outside of the country, a benefit for international tenants. The premiums for TheGuarantors’ policies range from 5 to 7% of the annual rent, depending on how risky the tenant profile.

Companies like Insurent and TheGuarantors fill an important niche by helping prospective tenants who would otherwise never qualify for many quality apartments while reducing landlord exposure to default risk and vacancies. Developers of new construction are also provided protection in high cost markets where the prospective applicant pool of qualified renters may be smaller, allowing for a larger number of applicants to qualify as tenants.

In markets with rising rents, Landlords now have a new guarantor option. It will be interesting to see if similar services make their way into the world of corporate real estate.