UK: Recent Changes to UK Real Estate Law

Last Updated: 19 October 2002
Article by Linda E Fletcher

Stamp Duty
As widely expected by the property industry, the Chancellor's budget on 17 April 2002 closed various loopholes widely used to avoid paying stamp duty at rates of up to 4% on real estate. A major reform of the UK stamp duty regime, including further anti-avoidance measures, was also announced for which detailed consultation will take place later this year.
One of the most commonly used avoidance routes in the market, which was closed (with effect for documents executed on or after 24 July 2002) is to leave the sale of real estate "resting on contract" – i.e., contracts are exchanged but never completed. The new legislation will however only apply to real estate with a value in excess of £10 million.
Other important points to note in relation to the 2002 budget so far as it relates to stamp duty on commercial real estate are:

  • Intra-group relief, where real estate has been transferred from one company to another in the same group, will be clawed back where the company in receipt of the real estate leaves the group within two years.
  • Partial relief under Section 76 of the Finance Act 1986 where a company acquires the whole or part of an undertaking of another company in exchange for shares in the acquiring company, will be clawed back where control of the acquiring company passes to a third party within two years.
  • The penalty regime for documents executed in England and Wales is extended to cover documents executed outside England and Wales after 24 July 2002. Penalties for late stamping of documents executed outside England and Wales will in future run from 30 days after the date of execution, rather than (as had previously been the case) 30 days after the time when the documents are brought back into the country.
  • Stamp duty will be abolished in certain specified disadvantaged areas of the country.

It was also announced that the Finance Bill 2003 will introduce wholesale reform of the UK stamp duty regime. A large-scale consultation process will commence later this year. Specific rules to stop avoidance through the use of special purpose vehicles will feature in the new regime, with the intention being to treat the transfer of an interest in these (e.g., the transfer of shares in a special purpose vehicle company or an interest in a partnership) for stamp duty purposes in the same way as a transfer of the real estate held by that vehicle, at least to the extent it is a real estate holding vehicle.
As part of the reform process, the Government also wishes to review the current stamp duty charge on the grant of new leases, with the intention that the stamp duty charge should correspond more closely to the charge levied on the consideration on a freehold transfer or lease assignment. The aim is to eliminate the use of leases as an alternative to the freehold sale of real estate in order to reduce the stamp duty costs.

Code of Practice for Commercial Leases
The Government launched a new code of practice on commercial leases earlier this year. The code is voluntary but the Government has indicated that it will monitor its use and will consider legal intervention if the new Code is not widely adopted. The aim of the Code is to help achieve choice and flexibility in the real estate market with landlords having to offer tenants a wider choice of lease terms. It sets out recommendations for landlords and tenants to consider when they negotiate leases of commercial premises. In particular, it recommends that landlords should be prepared to offer alternatives to the traditional upwards only rent review, such as upwards or downwards reviews or rents linked to inflation. However, the Code goes on to say that if a landlord gives up some of its security of income-flow, it will be able to demand a higher rent from the outset in compensation.
The Government has warned the UK real estate industry that failure to adopt the Code could leave it with no alternative but to legislate.

Commonhold
The Commonhold and Leasehold Reform Bill received Royal Assent on 1 May 2002 and introduces stronger rights for residential leaseholders in England and Wales as well as a new tenure known as "commonhold". This will become law in stages from July 2002, with the "commonhold" part coming into force late in 2003.

The commonhold tenure has been developed to deal with the problems of enforceability of positive covenants and to give owners of flats the same security as freehold ownership of houses. Commonhold has the advantage of being virtually an absolute form of ownership akin to freehold, where positive covenants are enforceable against all parties and it allows the owner of the premises to take part in the management of the common parts.

Commonhold ownership can be used for new developments and the Act includes provisions allowing existing leaseholders to convert to commonhold ownership. It is particularly aimed at blocks of flats but can be used for other interdependent buildings with shared services and common parts, and so this will extend to commercial real estate, e.g., industrial units on an estate.

Each separate property in a commonhold development will be called a "unit" and the owner will be called a unit holder. All the unit holders will be members of a company which will own and manage the common parts and facilities of the development. This will be known as the Commonhold Association. The rules of the Association will be contained in its Memorandum and Articles and a Commonhold Community Statement. There must be at least two unit holders to form the Commonhold Association.

The unit holder and the Commonhold Association will have to be registered at the Land Registry.
On the sale of a unit, members must notify the Commonhold Association. They will then cease to be liable to the Commonhold Association and the new owner of the unit will become a member and bound by the rules of the Commonhold Association.

Land Registration
The Land Registration Act 2002 ("the Act") received royal assent on 26 February 2002 and, once it comes into force (possibly as early as July of 2003) it will have a far-reaching effect on UK real estate transactions. Much of the impact of the Act will be "behind the scenes", being of interest primarily for lawyers, but it does contain a number of "highlights" which will affect owners of both commercial and residential real estate: -

  • Any lease for a term of more than seven years or which is assigned with seven or more years still to run will have to be registered. Currently this requirement applies only to leases of 21 years or more or for leases being assigned with 21 years or more to run. There is no indication at present as to the fees (paid by the tenant) that the Land Registry will charge for registration. Currently all fees are calculated on the basis of a sliding scale by reference to the rent level; for example, on the existing scale a rent of £60,000 per annum requires a fee of £500. There will be additional cost implications for leaseholders, including legal costs in connection with the registration process itself. The Act further states that the registration requirement may in the future be applied to leases in excess of three years. The importance of this stems from the peculiar effect of registration under English law, i.e. that until a transfer of registered (and registerable) real estate is in fact recorded at the Land Registry, legal title to the real estate is not acquired.
  • All registerable dealings with real estate must be submitted for registration within two months of completion. Failure to register will render the dealing void so far as the creation of a legal estate, i.e. the valuable interest, is concerned. Currently non-registration creates an equitable interest, but you can register out of time. This is of particular significance for lawyers, who will be primarily responsible for ensuring that applications are made in good time, but there is danger here for tenants who choose not to instruct lawyers on the grant of a lease.
  • It will be much more difficult for squatters to acquire title to real estate. The Act provides that a squatter can apply for registration of title to registered real estate which it has occupied for 10 years (currently 12 years is needed to acquire title). The registered owner can object to the application, in which case the registered owner must then within two years either take possession proceedings against the squatter or formalise the occupation, for example by the grant of a lease. There is perhaps an incentive here to apply for a voluntary registration of real estate which remains unregistered, which is often the case where long-established businesses are concerned, as this new law does not apply to unregistered real estate.
  • Public access to filed documents will now extend to all documents held. Currently there is no public right to access leases under which real estate is held, nor legal charges/mortgages. However, this is set to change under the Act and may mean that commercially sensitive information will be publicly available. There may be advantages, however, for a tenant negotiating with a landlord of a multi-let building, for example, as financial or other concessions made in the leases granted to other occupiers will then be a matter of public record.
  • The Act paves the way for electronic conveyancing. The aim is substantially to speed up the conveyancing process but the detail of how this will work in practice has yet to be established. A further consultation process is now planned. The formulation and adoption of PISCES (the Property Information Systems Common Exchange Standard) by City law firms is seen as an initial step towards gearing up for electronic conveyancing.

Planning Green Papers
There are currently five green papers dealing with the reform of the planning system. The overview paper, entitled "Delivering a Fundamental Change", was published in December 2001. The consultation period ended in March 2002 and a review of responses is expected to be published by the Government later this year. In brief, this paper proposes to:

  • Re-structure the way that the government, regional and local planning processes operate,
  • Change consultation procedures and alter the rights of local opposition groups and developers,
  • Change the planning permission applications process, and
  • Introduce a new category of land known as "Business Development Zones".

The other consultation papers which are being considered in parallel with this overall plan are:

Major Infrastructure Projects. New procedures are intended to enable Government to approve major infrastructure projects in principle. As a result, a subsequent public enquiry would only be permitted to investigate the details of the project and specifically would not be allowed to question the principle of, need for or location of a project. These proposals come as a governmental response to the very time consuming and expensive inquiries into such projects as the Heathrow T5 project.

Compulsory Purchase Orders. The proposals offer clearer powers to local authorities for the compulsory purchase of real estate for planning and regeneration purposes. They also provide for clearer and swifter compensation procedures.

Planning Obligations (Section 106 Agreements). The Government has suggested that the current system is arbitrary, unaccountable and ineffective. It has suggested four possible new Planning Obligation procedures but favours one whereby planning obligations would take the form of a standard tariff set locally through the local plan and varied by a negotiated element where project-specific concerns need to be addressed.

Use Classes and Temporary Uses. The main changes proposed are aimed at Use Classes A and B. Class A currently covers retail shops, financial and professional services, and establishments serving food and drink. Class B currently covers offices, research and development, general industrial, storage, distribution centres, light industrial and specialist industrial processes. Planning permission is currently needed for all changes between classes and some changes within. The Government has consulted on, first, amendment of the class definitions to reflect modern usage; second, regulatory concerns about "nuisance" developments (from noisy pubs to polluting factories) which could subject their change of use to greater scrutiny; and third, the possible abolition or (restrictive) amendment of the temporary use provisions.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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