UK real estate: What’s on the horizon for 2024?

Whilst a sluggish UK economy proved challenging to real estate in 2023, the political backdrop of a likely general election this year looks set to keep us on our toes with more legal and regulatory changes for the commercial real estate industry expected in 2024. In this insight, we take a brief look at what’s in store for investors, occupiers, and developers in 2024 on the legal front.

Leasehold reform – Leasehold and Freehold Reform Bill

The year has kicked off full steam ahead with leasehold reform remaining high on the government agenda. The call for evidence on the Leasehold and Freehold Reform Bill remained open during January and the Bill is now moving through the legislative process in the House of Commons.

The swift passage of the Bill to date gives an indication of its political importance, with the rush to publish the Bill leading to presumed errors such as the omission of the much publicised ban on leasehold houses. (The government has instead indicated that it will be picked up in amendments as the Bill is refined.)

The Bill has far-reaching consequences for all those operating in the residential or mixed use arenas and forms the second limb of the government’s leasehold reforms, the first being the Leasehold Reform (Ground Rent) Act 2023.

The main areas tackled by the Bill are:

• Making it easier and cheaper for owners of leasehold flats or houses to extend their leases or buy the freehold. It does this in various ways including removing the concept of ‘marriage value’, introducing new valuation methods for calculating lease extension premiums, and by proposing the ban of ground rents on existing leaseholds; and
• Improving leaseholder consumer rights by, amongst other things, introducing standardised and more transparent service charge collection, and banning insurance commission (to be replaced with a transparent administration fee).

The Bill will be welcomed by leasehold owners, but is not without its concerns to some investors and operators in the market. An abolition of ground rents, for example, would impact long term income streams for institutional investors such as pension funds. Therefore a challenge to the proposals may yet be mounted by interested parties.

Renters Reform

Will they, won’t they? 

The Renters (Reform) Bill is now through the Committee stage in the House of Commons. With the prospect of a general election later in the year, it is currently unclear whether the long promised reforms will become law before the year is out. 

The proposed reforms are well advertised, including the abolition of s21 evictions – read our previous piece here – and, once passed, will affect both renters and landlords in equal measure. The most recent amendment pushed back the abolition until the new court process had been put into place. This may take some time to finesse in the legislation. 

Reform of the Landlord and Tenant Act 1954 

The law commission is currently undertaking a pre-consultation on reform to Part 2 of the 1954 Act and aims to publish a consultation paper “as soon as possible in 2024”. 

Industry practitioners are generally split as to whether the 1954 Act is still relevant in today’s commercial landscape. Some are of the view that the abolishment of the 1954 Act would disincentivise growth, particularly for younger businesses where a shorter lease with the option to remain in occupation at the end is more attractive than taking out a longer fixed term lease. Others are of the view that the 1954 Act is not in the public interest, encourages inefficiency and limits the way the UK operates. Either way, modernisation of the 1954 Act will be complex (and therefore likely take time) but 2024 could bring further insights into what reform might look like.

There are three key matters the reform might cover: 

• Ground (f), under which a landlord can oppose a lease renewal if the landlord intends to redevelop or reconstruct - Practitioners are calling for a review of ground (f), which, as it stands, has the potential to inhibit sensible developers. The intention to redevelop is laden with meaning in the court system and can result in complex legal debates impeding commercial progress and inflating costs. 
• Lease terms and rent - The Court’s approach to valuing rent under the 1954 Act can be difficult for valuers. There is an argument that the market needs certainty when it comes to rental values and that any reform of the 1954 Act should address this.
• Courts - Is the County Court still the right forum for lease renewal claims? Speed of resolution is a key factor, but the court process is lengthy, causing inevitable delays to renewals. As an alternative, there is a strong argument for proceedings to be dealt with by the First Tier Tribunal – it is a quicker and more effective forum as proven by the pilot scheme (used for The Renters Reform Bill). Alternatively, reform could consider greater incentives to use PACT (Professional Arbitration on Court Terms). 

Another challenge that might be tackled by reform is the lack of binding precedents to guide renewals. The County Court’s variable stance on rent free periods, for example, begs the question of whether more cases should be referred up to the High Court or whether certain questions should be subject to a test case to settle legal principles.

Biodiversity Net Gain (BNG)

After many false starts, mandatory BNG is finally being introduced for major developments from 12 February 2024. BNG ensures that development has a measurably positive impact on biodiversity, compared with the pre-development biodiversity. The BNG concept was first introduced in the Environment Act 2021 and has been subject to numerous delays. For major developments, this mandatory regime will come into force on 12 February, before extending to smaller developments in April 2024. In terms of strategic infrastructure, these requirements are not anticipated to apply to nationally significant infrastructure projects until November 2025.

From 12 February, all planning applications for major developments must evidence that they will produce a BNG of at least 10% (unless limited circumstances apply). This means that the BNG objective is met if the biodiversity value attributable to the development exceeds the pre-development biodiversity value of the on-site habitat by at least 10%. As a result, the initial site assessments will now be critical as they will form the baseline against which the requisite 10% BNG is to be measured. 

Mandatory BNG requirements will create additional financial commitments on developers (the extent of which will fluctuate dependant on how BNG is secured) and so developers will need to factor in the cost of providing BNG at an early stage to ensure financial viability. In the short term, local planning authorities will also be grappling with the new regulations, new policies, and new conditions and planning obligations and so there may also be a risk of delays to the planning process. 

The key takeaway is that BNG must be factored in by developers, and it must be factored in early to avoid unexpected expense and potential programme delays. 

Building Safety Act 2022 (BSA)

The BSA came into force on 28 April 2022. The impact of the legislation has already been far-reaching and there is little prospect of this slowing in 2024. 

2024 will see some of the more contentious points in the BSA being considered by the Courts. There are two cases expected to be heard in the First Tier Tribunal dealing with the scope of remediation orders under s124 of the BSA and the costs of remediating unsafe cladding. 

As a reminder: 

• “remediation orders” – where a landlord may be required to remedy relevant defects in the building; 
• “remediation contribution orders” – where a landlord, former landlord, developer or any associated person may be ordered to contribute to the remediation costs if the Court says such an order is just and equitable. 

On 19 January 2024, we also saw the first substantive remediation contribution order granted. Get Living (the original developer) and its subsidiary, the Stratford Development Partnership were ordered to pay £16m (plus £2m in additional costs) to replace defective cladding on a development in the East Village of London’s Olympic Park (Triathlon Homes v Stratford Development Partnership Limited [2024] UKFTT 26 (PC)).  

The FTT’s decision in Triathlon Homes sheds light on various interpretation within the BSA. In particular, the FTT confirmed that the remediation contribution order could be made for costs incurred before the commencement of the BSA. It is worth noting that this retrospective effect is likely to be considered further by the Court of Appeal after permission to appeal was recently granted in Adriatic Land 5 Ltd v Long Leaseholders at Hippersley Point [2023] UKUT 271 (LC). The FTT also confirmed that the scope of the costs included not only costs incurred in remedying defects but also costs for preventative measures. Finally, the decision shed some light around the ‘just and equitable’ test.

Landlords and managing agents will need to get to grips with the leaseholder exemptions on recovery of remediation costs and ensure that any shortfalls in service charges are carefully accounted for. Lenders and buyers will be on the look-out for discrepancies that may expose them to risks in the future. 

Levelling Up and Regeneration Act 2023 (LURA)

LURA received Royal Assent on 26 October 2023. The scope of LURA and the changes it would make to the planning regime are potentially far-reaching, although most of its provisions are not yet in effect.
 
The changes proposed by LURA are extensive, but some of the key provisions include:

• Changing the weight given to the development plan and national policy in decision-making. This will be important for developers submitting planning applications as, ultimately, it will alter the test for determination by a local planning authority. 
• The introduction of ‘national development management policies’. Whilst the scope of these are unclear, it is expected that they will set out national policies on matters such as heritage protection and Green Belt.  
• The introduction of a new ‘Section 73B’ to the Town and County Planning Act 1990, which would permit material variations to planning permissions where the consequences of the changes do not lead to a ‘substantially different’  permission. Whilst this sounds promising for developers, we suspect that it will not take long before the scope is tested in the Courts.
• Replacing the Community Infrastructure Levy with a new Infrastructure Levy. The devil will be in the detail once regulations are issued bringing the new levy into force (which is anticipated on a phased basis).
• The (controversial) introduction of ‘street vote development orders’ as a new route to obtaining planning permission. In certain circumstances, residents will be able to propose development on their street, and to vote on whether this should be granted planning permission. The extent to which this new power will actually be used will remain to be seen.
• Replacing EU-derived Environmental Impact Assessment (including preparation of an Environmental Statement) with an Environmental Outcome Report.
• Amendments to the CPO regime (including allowing ‘hope value’ to be disapplied from CPO compensation). These provisions are due to come into force from 30 April 2024 (with changes to alternative appropriate developments coming into play on 31 January 2025).

It remains uncertain to what extent, and when, the wide-ranging changes in LURA will come into force. This is certainly one to watch  in 2024.

ESG

2023 saw a new milestone in the Minimum Energy Efficiency Standards regime, when it became unlawful from 1 April 2023 for landlords to continue to let properties with an EPC rating of F or G (subject to certain exemptions). The rest of 2023, however, did not continue the momentum that the industry was expecting.

EPC methodology remains ripe for change (as we highlighted in our Insight earlier in 2023) but there has been no further news on any government proposals on EPCs. Instead, whilst the government’s net zero target remains at 2050, the government backtracked on its EPC trajectory for private dwellings, by announcing in September 2023 that landlords of private dwellings will no longer have to ensure that their properties achieve an EPC rating of C or above by 2028. Commercial property was not mentioned and the lack of clarity has resulted in inevitable uncertainty for landlords and tenants.

So what do we expect for 2024? Despite the uncertainty of the regulatory backdrop, corporate governance commitments around ESG continue to remain a priority and act as a significant driver of change in legal obligations. We expect energy and sustainability provisions in leases to continue to be a focus in negotiations with landlords and occupiers balancing their commitments and priorities against practical and operational realities.

The release of the Better Buildings Partnership’s updated Green Lease Toolkit in January, nearly 11 years after the last iteration, also looks set to influence the negotiating positions on landlord and tenant matters, but we expect landlords and tenants alike to be increasingly alive to risks around greenwashing. 

As for the rest of ESG, we see 2024 bringing increasing focus on the social impact of real estate investment decisions. Whilst many investors have been embracing “impact investment” for some years (investments made with the specific intention of generating a measurable beneficial social or environmental return), we may start to see the focus widening across the supply chain.

Key cases to watch

Finally, decisions in a number of property cases are expected this year.  Look out for our further updates as and when they are decided: 

• Sainsburys Supermarkets v Medley Assets – the redevelopment ground under the 1954 Act is set to be re-examined by the London County Court. A landlord has proposed two alternative schemes and is being challenged on whether it holds a genuine intention to carry out the works in circumstances where it has not decided which of the schemes it wishes to pursue. This is another example of the ripple effect of the Supreme Court’s decision in S Franses. 
• Crown Estate v International Students House – this case centres on forfeiture for a breach of user covenant where the tenant’s defence is that the landlord has waived or acquiesced to the change of use. With tenants diversifying beyond the traditional retail model to survive, issues like this are becoming more common and guidance from the Court is welcomed. 
• And finally, in Fosse Urban Projects Ltd v Whyte and others [2023] UKUT 286 (LC); [2023] PLSCS 205 a developer’s gamble backfired. The developer proceeded to build a property in the hope that a restrictive covenant to keep the land as a garden would not be enforced. It applied retrospectively to modify or discharge the covenant, but lost leaving the beneficiaries with a choice to enforce the covenant either by requiring demolition or damages. The developer’s “cynical” decision to “build first, apply later” was cited by the Court when considering whether to exercise their discretion to discharge. Of relevance to developers, lenders and insurers – it epitomises the phrase “proceeding at risk”.  

For further Insights from our real estate team see our UK Real Estate Hub.