Real Estate Visions 2023: what’s on the horizon for UK real estate?

2022 proved to be another turbulent year for the UK real estate sector. As we moved on from the Covid-19 pandemic, the war in Ukraine and its knock-on effects gave rise to new challenges for the property industry and dominated the political agenda. However, 2022 also saw significant progress on key legislative reforms relevant to real estate that will take effect in the new year. We will be tracking these throughout the year, so look out for future Insights from us

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Overseas entities owning UK property: registration deadline of 31^st January 2023 looming

The Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA) introduced a new Register of Overseas Entities at Companies House to identify the beneficial owners of overseas entities which own registered property.  ECTEA came into force on 1^st August 2022 (with provisions relating to property ownership and the Land Registry requirements taking effect on 5^th September 2022).

ECTEA requires any overseas entity which acquires or has acquired registered property in England and Wales since 1st January 1999 (and for Scotland, 8th December 2014) to register on the Register of Overseas Entities.  Under transitional provisions, overseas entities which owned registered property before 1^st August 2022 have a six month deadline, ending on 31^st January 2023, to register in the Register of Overseas Entities.  If an overseas entity does not apply to register by this date, it will commit a criminal offence and will effectively be unable to sell, lease or charge its registered property.

Once an overseas entity is registered on the Register of Overseas Entities, it must update the information on the register annually.  It is important that this is done as the Land Registry will require the overseas entity to comply with its updating duty before a sale, new lease or charge of the land can be registered.

Energy efficiency: next MEES milestone for commercial properties – 1^st April 2023

From 1^st April 2023, landlords of commercial properties may not continue to let a property with an EPC rating below an E (so-called ‘sub-standard’ properties) unless they have:

• carried out all possible ‘cost-effective’ energy efficiency improvement works (as set out in the MEES regulations) and the property remains sub-standard; or
• registered one of the permitted exemptions on the PRS Exemptions Register.

Any landlord currently letting a property which falls below an EPC E rating must act urgently to comply with the above requirements to avoid financial penalties.  Investors acquiring a let property (or lenders funding the acquisition) must carefully investigate MEES compliance.

Looking ahead, given rising energy costs and the UK’s target of net-zero emissions by 2050, a key government policy is to further reduce energy consumption and emissions from the built environment.  The 2022 Autumn Statement contained a new commitment of funding for energy efficiency improvements and the Chancellor, Jeremy Hunt, set the country a new ambition announcing that, “by 2030, we want to reduce energy consumption from buildings and industry by 15%”.

Given the government’s direction of travel, we expect it to implement proposals for MEES reforms to tighten the minimum energy efficiency standard for commercial properties to an EPC B rating by 1^st April 2030 (possibly with a phased implementation requiring an EPC C rating by 2027).

Many commercial property landlords and occupiers now have ESG policies which include energy efficiency targets, but it is likely they will need to do more to actively meet MEES requirements, particularly with the raising of the EPC rating from an E to a B rating.  Landlords need to engage with tenants on improvement works and will want to consider whether it is appropriate to share the MEES compliance burden with them and if they are able to do so under existing leases.

The Building Safety Act 2022

The Building Safety Act 2022 (BSA) was passed on 28^th April 2022.  It is a substantial piece of legislation introducing fundamental changes to building safety for residential properties, with a particular focus on ‘higher-risk’ buildings (being buildings that are at least 18 metres or seven storeys in height).

Under the BSA, new obligations will apply throughout the life cycle of a building meaning building owners, developers, designers and contractors, funders and occupiers all need to be aware of the significant financial and operational impact the BSA will have.

The BSA will be implemented in stages.  Several key measures (focusing on remediation of fire safety defects and extending limitation periods for liability for these) are already in force (see our Insight Buildings Safety Act 2022 now in force: what does this mean for real estate developers?).  But the government is still consulting on the detail of other wide-reaching measures which it intends to bring into force between April and October 2023.  Briefly, of particular importance to the property sector, are:

• Gateways 2 and 3 of the new gateway regime:
  • Gateway 2 expands building control measures for the construction of new higher risk buildings and occurs before construction work begins.
  • Gateway 3 applies on completion of construction at the final certificate phase.  It is of key importance to developers as it prohibits the occupation of newly completed buildings until the Building Safety Regulator has issued the building regulations completion certificate and registered the building on its system.  This could delay occupation, so sale contracts should accommodate for this.  It will be a criminal offence for a building owner to permit occupation before registration occurs.
• New management duties and responsibilities for owners of occupied higher risk buildings.  The BSA introduces the concept of an ‘accountable person’ who will have ongoing day-to-day responsibility for assessing and managing building safety risks.  Where a building is already occupied when the new regulatory regime comes into force, it will have to be registered by the accountable person within a transitional period.  There may be more than one ‘accountable person’ for a building. 
• For building occupiers, obligations not to create building safety risks and to allow the accountable person to access flats for safety inspections.
• Powers for the secretary of state to set up a new Building Industry Scheme and to prohibit non-members from undertaking development work.  Developers and contractors who agree to carry out fire safety remediation works to their residential buildings can become members of the scheme.  Non-membership could prove a barrier to securing future development funding.
• A developer levy – the Building Safety Levy - on new residential buildings requiring building control approval.  The government is currently consulting on the detail.  Note, this levy will be payable in addition  to the existing residential property developer tax that was introduced from 1^st April 2022.
• Already in force under the BSA since June 2022, are statutory financial limits on leaseholders’ liability for the remediation costs relating to building safety.  The BSA introduces a new procedure for the exchange of landlord certificates and leaseholder certificates to establish whether the statutory limits apply.  Landlords and managing agents need to be alive to the new procedural requirements and statutory controls on recovery of building safety costs.  Investors acquiring properties subject to residential leases need to carry out due diligence on service charge liability relating to building safety measures.

In pursuit of the levelling up agenda: the Levelling Up and Regeneration Bill

The Levelling Up and Regeneration Bill - first introduced to parliament in May 2022 - promises to make fundamental changes to the current system of local government, planning, developer contributions and regeneration. 

The Bill is wide-ranging.  For example, it includes measures to tackle slow build out by developers (involving new development progress reports, financial penalties & refusal of further permissions); a new permanent pavement licensing scheme; discretionary powers for councils to apply a council tax premium of up to 100% on empty and second homes in their areas; and a variety of changes to the planning regime. The latter, though much narrower than those originally envisaged by the ill-fated Planning Bill (which presaged this Bill), remain wide-reaching.

Such is the scope of the Bill and the furore that has surrounded it that we expect many refinements before the Bill comes into law in 2023.  So, for now, and setting aside the planning changes, we highlight just three key proposals to watch out for next year:

• A new Infrastructure Levy (IL) to replace the community infrastructure levy (CIL) in England (Mayoral CIL in London and CIL in Wales will remain), akin to a further tax on development.  IL will be mandatory, and it will be based on a percentage of the final gross development value above a set threshold. It will apply to the development of new or existing buildings as well as to material changes of use, which means ‘permitted development’ will be within scope. Section 106 agreements will not be abolished but will only be used in specific circumstances.  As yet, we don’t know when IL will come into force, but we do know that it will be introduced in different areas at different times, to allow a ‘test and learn’ approach to IL regulations. 
• New powers for local authorities to conduct a compulsory rental auction of premises that have been vacant for at least 12 months in designated high streets or town centres.  This startling new power will empower local authorities to contract as if they were the landlord of the premises (although owners will have a right of appeal).  For more information about these proposals, see our recent Insight on this topic – Lot on the High Street: auction powers for local authorities over vacant commercial properties
• New measures to increase transparency in land ownership and control, which will make it very hard to keep sensitive information out of the public domain. The Land Registry will be entitled to require information about the ownership and control of land and demand transactional information (including details of parties, transaction terms, the source of funds and documents evidencing a transaction).  Information supplied may be made public.  Failure to comply will be an offence. Registrations will not be completed until the information is provided. The express purpose of these measures is to make land ownership more transparent (for example, by collecting and publishing data on contractual arrangements used by developers to control land, such as rights of pre-emption, options, and conditional contracts) and to identify attempts to evade sanctions or the new ECTEA disclosure requirements. However, their ambit will be far more wide-reaching than the purpose suggests, potentially capturing all registered owners of UK land.

Sweeping changes for private and public sector residential landlords: the Renters Reform Bill

Set to be introduced to parliament before May 2023, the government promises that the Renters Reform Bill will bring about a ‘generational shift’ between landlords and tenants. As you might envisage, the measures in the bill are expansive. For more information on its potential impact, see our recent Insight on this topic - Sweeping changes proposed by the Renters’ Reform Bill.

Insurance: property claims will face a perfect storm in 2023

Our Insurance Predictions Campaign, fronted by Clyde & Co’s leading insurance practice, highlights the trends, risks and opportunities likely to impact the insurance industry in 2023.  For property, our team’s prediction is that conditions are ripe for a spate of subsidence claims – see here for our Insight on this topic.