UK: Real Estate Focus – December 2022

In this edition we look at the imminent registration deadline for overseas entities owning UK land; regime change for the residential PRS in Wales; the effect on guarantors of a tenant's restructuring plan; and more onerous minimum energy efficiency standards for landlords of commercial premises.

Overseas entities owning UK land MUST register in the ROE by end January 2023

Overseas entities (OEs) who own land in the UK and have not yet registered in the new register of overseas entities (ROE) (established under Part 1 of the Economic Crime (Transparency and Enforcement) Act 2021) need to start the process now. The deadline for registration is imminent, the pre-registration process can be time-consuming and the consequences of non-compliance are severe.

In a nutshell:

The ROE registration process involves:

• Taking reasonable steps to identify the OE's "registrable beneficial owners" or, if none, its managing officers.
• Collecting prescribed "required information" about the OE and its registrable beneficial owners/managing officers following a prescribed process.
• The verification of that required information by an independent "relevant person".
• Applying to Companies House for registration, the application to include the required information and prescribed statements; and
• Updating the submitted information and statements annually.

Several company service providers have registered with Companies House as "relevant persons" who can provide verification services for OEs. They can also help with the entire registration process. Companies House has compiled a (non-exclusive) list of these:

Find a UK-regulated agent to verify information for an overseas entity

We understand that the registration process is often taking longer than expected - a few weeks at least. The reasons for this include that identifying beneficial owners can prove difficult and time-consuming because of the rules that need to be followed in order to do so. Verification also takes time, as information must be verified by obtaining independent evidence, and can be particularly complex where trusts are involved.

The penalties for failing to register by the January 31 deadline are severe. An OE will not (with some limited exceptions) be able to transfer land or grant a charge over it or a lease for a term of more than seven years if it is not registered in the ROE. There are also criminal and hefty financial sanctions for non-compliance and for delivering misleading, false or deceptive statements or information to Companies House.

At the time of writing, Companies House has registered 7,019 OEs. Land Registry data indicates that there are over 31,000 registered as landowners in England and Wales so it is highly likely that, as the deadline for registration approaches, the workload of verification agents will increase exponentially and capacity may become an issue. So time really is of the essence.

The residential private rented sector in Wales – radical changes now in force

The "biggest change to housing law in Wales for decades" came into force on December 1, 2022. To describe the change as "long-awaited" would be an understatement as the core legislation – the Renting Homes (Wales) Act – was enacted way back in 2016. One reason for the lengthy delay has been the need for numerous sets of regulations to underpin the regime and also to give landlords time to familiarise themselves with its requirements.

The Act sweeps away the complex web of legislation applying to renting homes in Wales and establishes a new and radically different single legal framework in its place. Tenancies that grant to individuals the right to occupy a dwelling as a home must be one of two kinds of "occupation contract": a "secure contract" generally for use by public sector landlords; or a "standard contract" for use by private landlords.

Both types of occupation contract must clearly set out the respective rights and obligations of each party in a prescribed form of "written statement of occupation contract" which includes fundamental terms that are also prescribed and cannot be changed.

Broadly speaking the Act is retrospective, so that most existing residential tenancies and occupational licences will automatically be converted into an occupation contract.

The overall aim of the legislation is to create a simpler and more transparent system for renting homes and to strengthen the position of tenants. However, given the extent of the overhaul it may take some time to achieve the desired simplicity and transparency.

What is the effect on guarantors of a tenant's restructuring plan?

In Oceanfill Limited v Nuffield Wellbeing Limited and Cannons Group Ltd [2022] EWHC 2178 (Ch), the court considered the position of the guarantors of a tenant's lease obligations which are compromised by a restructuring plan under Part 26A of the Companies Act 2006.

The background to the case is that Oceanfill Ltd (Oceanfill) let a gym in Leeds to Nuffield Health Wellbeing Ltd (Nuffield) for a term of 25 years (the Lease), with Cannons Group Ltd (Cannons) as their guarantor. In 2000, Nuffield assigned the lease under a licence to assign (the Licence), pursuant to which Nuffield entered into an authorised guarantee agreement in respect of the assignee's obligations as tenant (the AGA), and Cannons entered into a guarantee of Nuffield's obligations under the AGA (the GAGA).

In May 2021 the High Court approved a Part 26A restructuring plan for the assignee tenant pursuant to the Companies Act 2006. This, amongst other things, compromised rent arrears in excess of £140,000 in relation to the gym. After the restructuring plan was sanctioned, Oceanfill issued proceedings seeking payment from Nuffield and Cannons under the AGA and GAGA for the rent arrears, legal costs and disbursements.

The defendants argued that the effect of the restructuring plan was to re-write the terms of the Lease and release the tenant from liability for rent and other sums, so that the sums claimed by Oceanfill had not fallen due under to the Lease; consequently, they were not due under the AGA and GAGA. In the alternative, the defendants argued that the restructuring plan operated as a variation of the Lease and, as they had not consented to any variations, it had released their obligations as guarantors.

The court disagreed with the defendants, holding that while the assignee tenant was relieved from the obligations it owed Oceanfill under the Lease, this took effect by operation of law under a statutory scheme. The plan did not re-write the Lease. Alternatively, to the extent that it could be described as re-writing the lease, it did so only as between the landlord and the assignee, leaving unaffected the rights of the landlord against third party guarantors, for whom the Lease remained valid and subsisting.

The court also rejected the argument that the plan constituted a variation in the terms of the agreement between the creditor and debtor which was liable to prejudice the guarantors and therefore discharged them from liability. The Licence clearly stated that a release would not arise on a variation of the Lease, but could only be given in a formal deed of release, which was not satisfied in this case.

To put this into context, landlords require third party guarantees precisely for the reason that their tenants may become subject to financial distress and therefore unable to perform their obligations under their lease. It would therefore be contrary to this commercial objective if a guarantor was relieved from its obligations under precisely these circumstances.

Some of the practical implications of the case are that:

• Landlords should be forward-thinking when considering the conditions of any prospective assignment and the security package they might require, particularly as financial conditions are likely to tighten.
• From a tenant's perspective, outgoing tenants and guarantors are reminded of the stark reality that where an AGA or GAGA has been provided, assignment of the lease is not the end of their liabilities under that lease and they may be susceptible to changes in the financial performance of the assignee.
• Guarantors may seek to qualify their obligation under guarantees, for example by seeking to limit their obligation to make payment to the amount the tenant is obliged to pay the landlord (rather than amounts due). Landlords, on the other hand, should be vigilant as this would significantly diminish the value of the guarantee and potentially render it worthless.

Landlords of commercial premises - are you ready for April 1st?

With 2022 drawing to a close, a reminder that the clock is ticking for landlords of commercial premises in the private rented sector (PRS) as more onerous minimum energy efficiency standards (MEES) are now just around the corner.

MEES for landlords in the PRS have been in force since April 1, 2018. These provide that, with some exclusions and exemptions, a landlord cannot grant a new – or renew an existing – tenancy of a property if it does not have an EPC rating of E or higher.

Since April 1, 2020 private sector residential landlords have not been able to continue to let a property unless it has an EPC rating of E or higher. This requirement will also apply to landlords of commercial premises from April 1, 2023.

According to research carried out by the Estates Gazette "almost £2.5bn of rental income is under threat if owners of commercial real estate that is not up to scratch fail to boost their EPC ratings above an E ahead of next year's deadline".

Landlords of commercial premises can no longer delay (i) scrutinising their letting portfolios to identify properties that don't meet the minimum EPC E rating and (ii) taking immediate action where necessary to achieve that standard by the April 2023 deadline.

Landlords that are already compliant cannot be complacent as the Government intends to introduce a minimum EPC B rating for privately rented non-domestic buildings by 2030, with a phased implementation starting in 2025.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.