UK: What's On The Horizon For English Real Estate In 2024?

Expect more focus on sustainability, transparency and building safety and significant reforms for residential property

2024 looks set to be another busy year for the commercial real estate industry, with the introduction of biodiversity net gain, a continued focus on building safety, government commitment to transparency of property ownership and intensified demand for sustainable practices within the built environment. Forthcoming legislation is also set to bring substantial reforms to the residential property sector. What changes are on the horizon for investors, developers and business occupiers in 2024?

Economic crime and transparency

Overseas entities

While high compliance rates have been reported, the first financial penalties have now been issued to overseas entities owning land in England and Wales that have failed to register the details of their beneficial owners on the Register of Overseas Entities. We expect to see Companies House taking a stricter approach to enforcement to mop up those remaining entities that have yet to fulfil their legal duty to register.

Overseas entities must also be aware of their annual obligation to update the register one year and 14 days after the previous year's filing (unless brought forward). Any failure to comply with this duty could result in the withdrawal of an entity's status as a registered overseas entity, putting it in breach of the legislation and potentially subject to substantial fines, criminal sanctions and restrictions on dealing with their UK landholdings. A mere administrative oversight can therefore have considerable repercussions, and sufficient time must be factored for preparing the necessary statements, supporting evidence and notices. For further information, see our Insight.

Overseas entities will also need to be aware of the changes to the registration rules introduced by Part 3 of the Economic Crime and Corporate Transparency Act 2023. These include tightening rules for trustee and nominee arrangements, disclosure of property ownership, removal from the register where an update is pending and revocation of registered status upon failure to provide information requested by the registrar under 1092A of the Companies Act 2006.

Trusts transparency

The government is currently consulting on improving transparency of land ownership involving trusts, on the grounds of public interest, to improve issues within the housing sector and to assist in tackling financial crime and corruption. The consultation considers what information should be reported and how to balance concerns around the disclosure of certain personal data (for example, where minors are involved). It particularly focuses on overseas entities but also considers domestic trust arrangements. The consultation closes on 21 February 2024.

Business occupiers

1954 Act consultation and reform

The Law Commission's forthcoming review of the security of tenure regime under Part 2 of the Landlord and Tenant Act 1954 has sparked significant interest across the industry. The regime is widely considered to be in need of modernisation, having been designed for a very different rental market some 70 years ago.

As yet, we do not know the focus for reform, although the Law Commission has indicated it will conduct a wide review. The publication of the consultation paper has been delayed and is now expected to be published shortly this year. Areas for reform might include:

• a simplified contracting out procedure, perhaps removing the need for notices and declarations and including a contracting out clause in the lease, particularly where parties are represented;
• reduction of the involvement of the court to reduce costs and delays;
• the extent to which a renewal lease can be modernised, with guidance on the inclusion of green clauses; and
• a review of the landlord grounds for opposing a lease renewal.

Whatever the approach taken by the government, it will require careful legislating and balancing of interests. The complexity of the current regime has given rise to a great swathe of caselaw and we hope reform will involve a simplification of the rules, resulting in less litigation and creating a more flexible letting process.

Business rates

From this April, business rates in England are set to rise in line with CPI, subject to a freeze for small businesses. The 75% discount for retail, hospitality and leisure has been extended for a further year but the relief cap of £110,000 per business means that larger businesses will see significant increases.

This government's consultation on empty rates avoidance closed last September. Its proposals included limiting the number of times a property can benefit from the empty-premises rates relief in a given period, extending the "reset period" from six weeks to three or six months and adding additional conditions to the meaning of "occupation", (affecting when a further rate-free period is triggered). While such measures would be intended to tackle abuse of the system, these could potentially exacerbate the current situation for owners of empty premises struggling to re-let.

Real estate investors

REITs tax reforms

Further changes to the rules which apply to UK Real Estate Investments Trusts (REITs) are to be introduced this year through the Finance Bill 2024 and include changes to whether a company qualifies as a REIT. The measures are largely intended to increase the attractiveness of the vehicle for real estate investment and to modernise the regime.

High street auctions

Local authorities in England are to be granted new discretionary powers to hold rental auctions for certain commercial high street premises which have been unoccupied for at least 12 months or 366 days of the last two years. The initial framework is set out in Part 10 of the Levelling Up and Regeneration Act 2023 (which is yet to come into force), while future regulations will provide more detail and set a commencement date.

The proposals have attracted significant criticism, particularly regarding the interference with the rights of property owners. There is concern that investors will be deterred away from high street premises, potentially undermining the very purpose of the policy.

However, the government's consultation, which closed last summer, sought to offer reassurance that it is not intended for local authorities to use these discretionary powers to undermine the efforts of proactive landlords seeking to let their premises.

The consultation focused on practical aspects of the auction process, including allocation of costs, reserve pricing, standardised lease terms and the interplay with minimum energy efficiency standards and permitted development rights.

When published, the outcome of this consultation is intended to feed into the production of secondary legislation, which will provide more detail on the scheme. We will then wait to see what appetite local authorities will have to enforce this policy in practice. For further details, see this Insight.

Protect duty

The Terrorism (Protection of Premises) Bill (also known as Martyn's Law) is expected to become law this year. It aims to increase public safety and reduce the risk from terrorism at public venues and spaces with a capacity of at least 100 people.

The bill will introduce duties on those responsible for such venues and events to improve security and preparedness, with enhanced duties for venues with a capacity exceeding 800 people. Qualifying premises must be registered and events must be notified to the regulator (which is yet to be appointed or created).

The House of Commons home affairs select committee reported on the bill in July, making recommendations which include a requirement for new buildings subject to the enhanced requirements to consider security at design stage and discusses how these duties may interact with the Building Safety Act 2022. The government is yet to issue a response to the report.

Sustainability in the built environment

Demand for sustainable real estate is set to continue across sectors influenced by a myriad of factors including social responsibility, individual publicised net-zero commitments, legal regulation and disclosure requirements, market demand and asset valuation, lender requirements, and reducing operating costs.

New high-quality buildings that boast superior green credentials will remain attractive in the market. However, challenges persist in refurbishing older buildings to improve their energy efficiency and debate continues around the impact of retrofitting versus rebuilding.

Green leases

As sustainability remains high on the agenda for owners, occupiers, investors and lenders, we continue to see an increased appetite in the market for green leases. The market is shifting, as parties are becoming increasingly willing to commit to (or require) sustainable building management practices, and with an increasing demand for electric vehicle charging and renewable energy.

The anticipated publication of the Better Buildings Partnership's updated green lease toolkit is expected to support and strengthen this trend.

Sustainability disclosure

The UK Sustainability Disclosure Standards (SDSs) are expected to be published by July 2024. They will be based on the IFRS (International Financial Reporting Standards) SDSs, diverging from these only where necessary for UK specific matters to ensure the reporting framework is consistent and comparable on an international basis.

It is expected that the UK SDSs will apply to UK listed companies and potentially to other large UK companies and limited liability partnerships, which will be decided by the Financial Conduct Authority (FCA) and the UK government. Timing for implementation is yet to be confirmed but could potentially come into force for accounting periods commencing on or after 1 January 2025.

However, the FCA has indicated it will first consult on amendments to the listing rules' disclosure requirements.

Greenwashing

Management of the risk of a greenwashing claim will become increasingly important as the dialogue evolves and what may be perceived as greenwashing becomes more nuanced. See our Insight on greenwashing risks for those operating in the European real estate sector.

Commercial energy efficiency

New buildings are likely to become subject to more stringent carbon emissions requirements as part of the Future Buildings Standard. Details of the proposals are set out in a current government consultation which runs until 6 March 2024.

As part of the government's strategy to improve the energy efficiency of the built environment, from 1 April 2023 it became unlawful not only to grant new commercial leases but now to continue to let commercial property in England and Wales with an energy performance certificate (EPC) rating below E (unless an exemption applies or the property is one that is not required to have an EPC).

The minimum rating for commercial lettings was expected to increase to C by 2027 and B by 2030 but this trajectory is now uncertain as the government has now indicated that their timelines "require updating". The lack of regulatory clarity on future requirements has prompted criticism and concern this will hinder the vital progress needed to decarbonise the UK's built environment. In particular, clarification is needed on the rules around exemptions and enforcement and whether we are likely to see the introduction of a performance-based rating scheme for large commercial and industrial buildings. For further details see our Insight.

Despite this uncertainty, property owners and developers may wish to plan ahead for more stringent requirements and to evaluate the scope for improvement works needed within their buildings, and the costs and the benefits these could yield.

Regardless of the regulatory position, the market is driving much of the change in this space with a clear two-tier market having emerged between the desirable buildings with good green credentials and older, less efficient properties.

We may see an increase in "stranded assets" that fail to meet regulatory or market standards and for which the costly process of refurbishment cannot be economically justified. The tension between business objectives and environmental and heritage concerns will play out in the courts later this year when the High Court hears Marks & Spencer's appeal against Michael Gove's refusal to permit redevelopment of their Marble Arch store.

With the need for green retrofitting very much on the horizon, whether driven by law or practice, it is prudent for landlords to examine their existing leases to determine whether they contain sufficient rights to carry out works and who will bear the cost burden. Equally, tenants should consider whether they will face increased costs passed through their service charge contributions, the extent to which they may benefit from any improvement works and the disruption they may cause.

A substantial proportion of commercial property does not yet meet even the current standard. The consequences of breach are potentially serious, not only in terms of significant financial penalties, but also due to the potential reputational damage and marketability of sub-standard buildings. While we are not aware of any significant enforcement action to date, this is expected to change in the future.

Residential energy efficiency

Let residential properties are still required to achieve an energy performance certificate rating of at least an E. Previously announced plans to make the requirements more stringent were dropped by the current government in September 2023, together with delaying the proposed ban on oil and liquefied petroleum gas boilers and new coal heating. It is unclear whether this position may change in the event of a change of government which has caused uncertainty in the market.

In relation to new homes, we can expect to see new energy efficiency requirements brought in via changes to the Building Regulations. The government is currently consulting on the Future Homes Standard.

International co-operation

'Buildings Breakthrough' was launched at COP28 in December 2023 and aims to strengthen international cooperation to decarbonise the built environment. The 27 countries signed up so far include China, France, Germany, Netherlands, Sweden, the UK and the US. To maintain momentum for the initiative, the first Buildings and Climate Global Forum will take place on 7-8 March 2024 in Paris.

Building safety

Building safety will remain a major topic this year. The implementation of the Building Safety Act 2022 passed a major milestone from the start of October, bringing into force the rules requiring the mandatory registration of higher-risk buildings (further details are available here), the new building control regime for higher-risk Buildings (including the new three-stage gateway process), the "golden thread" of information requirements, ongoing obligations for accountable persons and the dutyholder regime (for all buildings) (see this Insight).

These rules are extensive and complex, and we anticipate delays to construction projects while the regime gets underway and all parties get to grips with their new legal obligations. Parties will also need to consider the potential for delays resulting from the hard stops at gateways two and three, which could significantly impact timetables for handover.

We also expect enforcement action where applicable. Repercussions for non-compliance with the regime are often severe, including criminal sanctions against accountable persons, reflecting the importance of the underlying purpose of this new building safety regime.

Further potential changes are on the building safety horizon, which include the introduction of the building safety levy (for which we await a response to the government's second consultation. For further details, see our Insight).

We also await publication and implementation of the government's proposals for a second staircase in residential buildings over 18 metres in height. The requirement will only become mandatory following an initial 30-month transition period, provided that any approved projects without a second staircase must commence in earnest within 18 months. (Note that a more stringent regime already applies in London.)

Developers

Biodiversity net gain

The new 10% biodiversity net gain (BNG) rules will come into force for most new developments in England from January 2024, having been briefly delayed by the government to assist transition to the new system. Draft regulations and government guidance were published at the beginning of December.

As we approach implementation and in subsequent months, we expect:

• development of the market for offsite gain delivery. Natural England's online biodiversity gain site register is expected to open shortly and will be publicly accessible;
• the launch of the new digital sales platform for statutory land credits (indicative credit prices were published by Defra in July 2023 and confirmed in November); and
• development of environmental insurance to protect risk holders where units do not reach maturity.

We also wait to see how local planning authorities will approach the new rules; whether there will be regional variations and if any will require delivery of gains in excess of the legal minimums.

Developers will need to carefully assess how the requirements can be delivered when planning for their developments, which are likely to have substantial implications for project costs and scheduling. (For more, see our Insight.)

Conservation covenants

We expect to see increasing numbers of conservation covenant agreements in the market. As these can be used to secure BNG commitments, this trend is likely to pick up pace once the new BNG rules come into force this year.

Conservation covenants are agreements made between a "responsible body" and a landowner, which aim to protect the natural or heritage features of the land. They are legally binding not only against the original parties, but will also bind successors in title to the subject land (provided the covenant is registered as a local land charge).

Nutrient neutrality

The current nutrient neutrality requirements remain in force despite significant parliamentary debate on the subject last year. These require many local planning authorities to refuse planning permission unless they are satisfied that the development is nutrient neutral and will cause no adverse water quality effects. The rules have provoked strong criticism from the housebuilding industry for delaying developments.

Last year, the House of Lords' rejection of government proposals to amend the (then) Levelling-Up and Regeneration Bill to ease the rules, exposed a tension between the government's priorities to restore our waterways and increase housing supply. The government has sought to mitigate the situation with a local nutrient mitigation fund (announced as part of the 2023 Autumn Statement), which aims to assist with the unlocking of up to 40,000 new homes over the next five years.

Environmental outcomes reports

Environmental impact assessments are to be replaced with environmental outcomes reports, which assess the impact of a development on specified environmental outcomes and any steps proposed to avoid damage and mitigate the impact of development on those outcomes. The intention is to create a more efficient system whereby assessment and mitigation planning is carried out at an early stage, with a focus on environmental protection.

While an initial framework has been set by Part 6 of the Levelling up and Regeneration Act 2023, as yet unpublished secondary legislation will contain the details of the new process. We are therefore some way off implementation and await full details to determine to what extent the new regime will differ from the old.

Infrastructure levy

The new Infrastructure Levy is to replace the Community Infrastructure Levy in England over the course of the next decade. The levy is to be calculated in accordance with the final development value. However, concerns have been raised over the complexity of the new system and the uncertainties it creates for developers. We await the government's response to last spring's consultation and subsequent secondary legislation.

Construction industry scheme reforms

Construction Industry Scheme (CIS) reforms are to be implemented from April 2024, following last year's government consultation that focused on simplification of the regime, reducing administrative burdens and tackling abuse.

Full details of the forthcoming changes are included in our recent Insight and include the removal of most payments from landlords to tenants from the scope of the CIS, the addition of VAT obligations to the gross payment status compliance test and the expansion of the grounds for immediate cancellation of gross payment status. However, there will be no new grouping arrangements.

Housebuilding

Housebuilding industry review

The Competition and Markets Authority's (CMA) report on competition within the housebuilding industry is due by 27 February 2024. Back in November, it published working papers on estate management, land banks and the planning system, addressing issues in these areas and potential solutions. Further action by the CMA is expected, which could include detailed recommendations for government action through the introduction of new legislation and potentially a market investigation that could have significant implications for housebuilders.

Leasehold and freehold reform

The Leasehold and Freehold Reform Bill was introduced to Parliament in November and is intended by the government to pass into law before the next general election. Heralded as a "landmark moment for millions of leaseholders across the country", the bill offers a range of protection measures for residential long leaseholders, but shies away from the abolition of leasehold altogether. These include changes which assist tenants to purchase their freehold, extend their lease and take control of the management of their building, and increase transparency over service charges and buildings insurance commissions. The bill also proposes to reform the rights of freehold home owners on estates. For more, see our Insight.

Cap on ground rent

We await the outcome of the government's consultation in relation to various options for the treatment of ground rents in existing long residential leases which pre-date the ban on ground rents in new leases from 30 June 2022. Any ensuing government restrictions on ground rents have the potential to impact significantly the value of investor landlords' interests. The consultation closes on 17 January 2024, following which, amendments to the Leasehold and Freehold Reform Bill are expected to incorporate these measures.

Housing policy

The National Planning Policy Framework was revised at the end of 2023. Some of the more controversial aspects are watered down housing targets for local authorities and the failure to address calls to review greenbelt boundaries.

A general election is expected to take place in 2024, with housing set to be a key battleground. The imbalance between demand and supply and increasing unaffordability has prompted the leading political parties to commit to 1.5 million homes over five years. It has been suggested that a Labour government will implement wider-scale reforms to facilitate the delivery of new homes, including supporting the development of land in appropriate areas of the green belt, prioritising affordable housing and focusing more closely on planning at a regional level.

Residential

Renters' reform

The Renters (Reform) Bill is expected to make further progress this year, although significant further debate is expected. The need for reform is widely accepted, but balancing the interests of tenants and landlords remains tricky, particularly surrounding the abolition of "no fault" evictions and the ability of landlords to regain possession of their premises where there is good reason. Significant features of the bill are explained in this Insight.

Whilst the abolition of "no fault" evictions remains on the agenda, the government has indicated this measure will not be implemented until new court reforms are in place. Timings are uncertain and will inevitably delay the implementation of this government manifesto promise.

Artificial intelligence

Keeping on top of the latest developments in AI is likely to be key to unlocking competitive advantage in 2024. Launched in November 2022, ChatGPT has broken all the records for the fastest user-base growth worldwide and 2023 brought a wave of new products, apps and services that built on its technology. We expect to see a continuation of this trend as businesses continue to adopt and adapt to the transformational impact of the AI revolution. AI tools are reshaping the real estate sector with opportunities to streamline forecasting, market analysis, logistics, surveys and management.

The EU and the UK are expected to develop their regulatory strategies through 2024, which will be important for those developing their own AI solutions to keep on top of. Our AI Radar provides an overview of the latest legal developments regulating the use of AI.

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