Can rent concessions result in a VATable supply?

• 30 July 2020
• News

A question which has been considered by many landlords, tenants and advisors over the past few months but for which we now have the answer courtesy of HMRC.

The impact of COVID-19 on businesses has meant that some landlords have been prepared to offer rent concessions (such as rent deferrals and rent free periods) to their tenants. In return, a tenant may agree to enter into a reversionary lease or amend or remove a break clause in the existing lease.

While such agreements are to be welcomed at the current time, there has been concern amongst landlords, tenants and their advisors that HMRC could view these transactions as involving a barter for VAT purposes, with the landlord’s supply being agreeing to the rent concession in return for the tenant’s supply of taking a reversionary lease or varying a break clause.

Fortunately, HMRC have now published a briefing note (Revenue & Customs Brief 11 ( 2020): VAT and Stamp Duty Land Tax when existing leases between landlords and tenants are varied) confirming that if the tenant just agrees to pay rent under an extended lease or agrees to vary a break clause, they will not be regarded as having made a supply to the landlord; HMRC see this simply as an agreement by the tenant to pay rent.

That said, it is important to bear in mind that the position would be different if the tenant agreed to do works for the landlord in return for a rent concession; in those circumstances, the tenant would, in doing the works, be providing a supply to the landlord.

The HMRC briefing note also reminds tenants that they need to consider the Stamp Duty Land Tax consequences of the agreement reached with the landlord. For example, if the tenant is granted a reversionary lease the Stamp Duty Land Tax liability will be triggered when the lease is granted and not later when the term of the lease actually starts.

The confirmation by HMRC will be welcomed by landlords, tenants and their advisors alike and will hopefully mean that there is one less issue keeping us awake at night.

Heather Corben is a Partner in the Corporate Tax team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

Changes to the Use Classes Order in England

• 29 July 2020
• News

The Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020 (SI 2020 No.757) were introduced by the government on 20 July, and take effect on 1 September 2020. The new Regulations make radical changes to the 1987 Use Classes Order. These changes sit alongside the recent additions to permitted development rights, forming part of the government’s “Project Speed”, with the aim being to support the high street revival and allow greater flexibility to change uses within town centres without the need for express planning permission.

The Regulations introduce three new use classes:

1. Class E (Commercial, business and service) – including retail, restaurant, office, financial/professional services, indoor sports, medical and nursery uses along with “any other services which it is appropriate to provide in a commercial, business or service locality”;
2. Class F.1 (Learning and non-residential institutions) – including non-residential educational uses, and use as a museum, art gallery, library, public hall, religious institution or law court; and
3. Class F.2 (Local community) – including use as a shop of no more than 280 sqm mostly selling essential goods, including food and at least 1km from another similar shop, and use as a community hall, area for outdoor sport, swimming pool or skating rink.

It will be apparent from the above that Parts A and D of the original Schedule to the Use Classes Order have been entirely deleted, with Use Classes A1, A2, A3, parts of D1 and D2 subsumed into new Use Class E along with Class B1. Changes of use within this new Class E will not constitute development at all (as opposed to permitted development). This new flexibility is not linked to spatial considerations and therefore will apply both to high streets and all town centre uses located outside of centres. It thus has the potential to result in the introduction of non-office type activities (including retail) in traditional out of centre business parks, which runs contrary to current national and local planning policies designed to protect town centre retail.

The remaining Use Classes within Parts A and D of the original Schedule to the Use Classes Order (including A4/A5) have now become sui generis uses, with the effect that no changes of use to or from these uses fall within permitted development. This includes uses as a pub/drinking establishment (A4), hot food takeaway (A5), venue for live music (D2), cinema (D2(a)), concert hall (D2(b)) and bingo hall (D2(c)). It is currently unclear whether a mixed restaurant and takeaway use (A3/A5) would now fall within the new E class or sui generis. A sui generis use may make it harder for takeaway operator clients to find premises given that any new tenant at the end of the term would need a change of use permission.

Use Class B2 remains in what is now Schedule 1, in an amended form. Part C of the original Schedule to the Use Classes Order is not affected by the new Regulations and therefore Use Classes C1, C2, C2A, C3 and C4 remain unchanged.

Full details of the new and revised Use Classes are set out in the table below.

Drafting considerations

Landlord clients should consider whether they are happy for tenants to take advantage of the new flexibility afforded by Use Class E. If not, it would be wise to define the use in the lease by description (e.g. use as a restaurant) rather than by reference to Use Class alone.

When do the changes take effect?

From 1 September 2020, where a building or other land is being used for a purpose falling within one of the original Use Classes, that building or other land will be treated as if it is being used for the corresponding new Use Class (for example – an existing retail shop within Class A1 would be deemed to be occupied for a use falling within new Class E). New planning applications (including variations and reserved matters approvals) will also be determined by reference to the new Use Classes. The previous Use Classes will, however, remain relevant for certain change of use permitted development rights until 31 July 2021. There are also some complicated transitional provisions in the Regulations relating to permitted development prior approvals and planning applications or Article 4 Directions made before 1 September 2020 and the uses or Use Classes that apply to those. These transitional provisions will remain in place until 31 July 2021. If in doubt, please seek the advice of the Planning team.

A PDF copy of the article above is also available to download here.

*Unless the use falls within Schedule 2, Part A, Class E(g) – i.e. it is an industrial use that can be carried out in any residential area without detriment to the amenity of that area by reason of noise, vibration, smell, fumes, smoke, soot, ash, dust or grit. If this is the case, the use will fall within the new Class E.

Laura Parrish is a Senior Associate in the Planning team.

Government Introduces New Permitted Development Rights

• 23 July 2020
• News

As the independent review into residential properties built under existing permitted development rights is published, the government has introduced three new statutory instruments (coming into effect in September 2020) further amending both permitted development rights and the use class system, to ‘deliver much-needed new homes and revitalise town centres.’

1. Demolition of buildings and construction of new homes

A new Class ZA Permitted Development Right has been introduced, for the demolition of the buildings listed below and replacement by either a single purpose built detached block of flats, or a purpose-built detached house.

• A single purpose-built detached block of flats, and
• Any single detached building established for:
  • Office use within Class B1(a);
  • Research and development within Class B1(b); or
  • Industrial process within Class B1(c).

There are a number of restrictions on this right and of particular note, where the above Class ZA development will not apply, are the following:

• If the old building was constructed after 31 December 1989;
• If the building is listed;
• If the footprint of the building exceeds 1,000 square meters; and
• Unless the old building has been vacant for at least 6 months immediately prior to the application for prior approval.

Any developer must apply to the local planning authority for prior approval with an extensive range of factors open for consideration including the design of the building, its external appearance, impact on the neighbouring amenity and notably, the provision of adequate natural light in all habitable rooms of each new house/flat.

2. Additional storeys to homes

Home-owners will now be entitled to increase the size of their homes by adding:

• Up to two additional storeys, where the existing house consists of two or more storeys; or
• One additional storey, where the existing house consists of only one storey.

Again, there are a large number of restrictions on the operation of this right including the following:

• The house was constructed before 1 July 1948 or after 28 October 2018;
• Additional storeys have already been added to the original house, whether by operation of this right or otherwise;
• Following the development, the height of the highest part of the roof does not exceed 18 metres.

Any development will need to comply with a number of conditions, an example is the external materials used must be similar to those in existence and that it must not include a window in any wall or part of the roof on a side elevation of the house. An application for prior approval is necessary and can be refused by the local planning authority on the basis that the development does not comply with the extensive restrictions and conditions set out in the legislation.

This is in addition to legislative amendments introduced last month, permitting blocks of flats with at least three storeys to be extended upwards by an additional two storeys (subject to a range of detailed restrictions on both the location and age of the building, as well as the extensions itself).

These new rights have been criticised for not fast-tracking the planning process, on the basis of the very extensive grounds for refusal in the prior approval process. Concerns have also been raised that these rights will create poor standards of residential development which do not accommodate wellbeing and quality of life, leading to communities which are less attractive to business and to residents, at a time in which regeneration of town centres has hit the headlines.

This is a particularly relevant point in light of the independent report into permitted development built housing published this week.

Review of Permitted Development Housing

The independent report highlighted its findings into the difference in residential accommodation constructed pursuant to permitted development rights, against those subject to full planning permission. In some areas, there was found to be minimal or ‘no obvious differences’ between the categories of housing, for example in relation to open space and provision of parking.

However, the report makes it very clear that in some areas of comparison there is a ‘much more significant difference between schemes created through planning permission and those created through permitted development”. A particularly stark contrast is in relation to whether the units met the national described space standards, of which only 22.1% of units created through PD met compared to 73.4% created through full planning permission.

Whilst provision has been made in the prior approval process of the new legislation discussed above, that each residential unit has adequate natural light, this is a minimum level of protection when considered against the concerns which this report publishes. If the operation of these new rights leads to an intensification of housing which is located in commercial areas, with the consequential loss of business space, it is unclear how the concerns raised by this report will be eased.

It therefore remains to be seen to what extent the residential units created by the new permitted development rights will accommodate the findings of this report. Given that the government’s message is ‘Project Speed’ and as discussed in my colleague’s recent blog, it seems likely timescales will prevail over quality. We also query whether this is the right way to deliver new housing as the residential units created under permitted development rights will not attract Community Infrastructure Levy or provide affordable housing. This will therefore not address the country’s ever increasing affordable housing shortfall or fund much needed infrastructure. Surely a better way to get the country building again would be to properly fund local planning authorities? We are not alone in voicing concerns over these proposals with RIBA, the RTPI, RICS and 22 London Boroughs all writing to the Secretary of State urging him to reconsider these latest measures.

Sophie is an Associate in the Planning team.

Government response to the EU 5th Money Laundering Directive and Trust Registration Service consultation welcomed

• 22 July 2020
• News

The Government has now published its response to the technical consultation on the implementation of the Fifth Money Laundering Directive (5MLD) and the Trust Registration Service (TRS). The TRS consultation ran from 24 January until 21 February 2020 and responses were received from a range of stakeholders including Forsters LLP.

As a reminder, the TRS rules have required trustees to collect, maintain and file details about affected trusts (essentially, express trusts that are taxable in the UK) from 2018 onwards. 5MLD significantly broadens the scope of the TRS, potentially including all express trusts with a connection to the UK. It also provides for enhanced access to the register, opening it up to anyone with a “legitimate interest” in the “beneficial ownership” of the trust, or in certain cases, to anyone who writes to HMRC to request information with a justifiable reason.

The UK Government appreciated that the broad scope of the changes to the TRS proposed in 5MLD raised concerns in the UK and this understanding was reflected in its technical consultation. The response now published indicates that the Government took into account the legitimate concerns of stakeholders who responded to the consultation, and the amendments it has made to its original proposals are welcome.

UK business relationships

A particular concern had been the proposed requirement to register a trust where there is a “business relationship” with a UK-based adviser by anyone in the world, even in the absence of any other UK connection. A “business relationship” in this context is defined as a business, professional or commercial relationship that arises out of the professional activities of the “obliged entity” (e.g. a lawyer or accountant) and that is expected, at the time the relationship is established, to endure for a period of time – at least 12 months.

Given that UK-based advisers are subject to very stringent regulatory requirements and are well-versed in assisting clients with complex trust, tax and compliance-related queries, the potential scope of this requirement seemed particularly counterproductive. UK tax legislation is constantly evolving and the Government should be encouraging those that may be affected to take appropriate advice so as to properly meet their obligations.

In response to concerns raised on this issue, the Government has now confirmed that non-UK trusts will only be required to register on entering into a UK business relationship if the trust has one or more UK resident trustees. A non-UK settlor or trustee merely appointing a UK-based adviser to act will not prompt registration. This is a sensible and welcome change, which allows UK based advisers to advise on overseas trusts without restriction.

Access

A further concern was the proposal to grant increased access to information on the TRS, including to those with a “legitimate interest” in the “beneficial ownership” of a trust or to anyone who writes to HMRC with a justifiable request to such access in circumstances where a trust holds a controlling interest in a non-EU entity.

A further welcome concession by the Government is their confirmation that, while non-UK trusts that acquire an interest in UK land will be required to register whether or not they have a UK-resident trustee, they will not be subject to the third-party data sharing provisions if they do not have such a trustee.

With regard to information to be provided by trustees with a controlling interest in a non-EEA entity, the provisions granting access remain unchanged from the original proposals, except that they will now also only apply to trusts that have a UK resident trustee.

These measures are significant as it should be rare (and avoidable) for a non-UK trust to have a UK resident trustee.

Where the data sharing provisions do apply, the response states that each request under the “legitimate interest” process will be reviewed on its own merits and access will only be provided where there is evidence that this will help counter money laundering or terrorist financing activity. It will remain to be seen how this operates in practice. The response notes that representations were received from those who felt greater access should be given, as well as those who felt that the proposals unduly threatened privacy.

This remains an area of concern where it applies, and it is to be hoped that this will be handled carefully so that legitimate privacy concerns are addressed.

Types of trust to be registered

The Government response notes concerns raised about the broad range of trusts that were initially proposed to be registered, especially where these presented very low risks of being involved in money laundering or terrorist financing.

The response sets out a list of trusts that should generally be exempt from registration. Among others, the list includes the following:

• UK registered pension trusts.
• UK regulated charitable trusts.
• Pure protection life insurance policies and those that pay out on critical illness or disablement.
• Certain will trusts that are wound up within two years of death.
• Pilot (or standby) trusts (or other trusts holding assets worth less than £100).
• Trusts for vulnerable beneficiaries, including those created on the death of a parent for young people between the ages of 18 and 25, or bereaved minors.

This should reduce the compliance burden on numerous low value family trust arrangements, where the compliance costs would have been disproportionate. Unfortunately, the list does not mention bare trusts for minors, even though we are told that these received more objections than other types of trust that have been exempted. Bare trusts are a commonly used method of holding assets for children or disabled persons and it is hard to see how they are a target of 5MLD.

Deadline

The response states that a registration deadline of 10 March 2022 should provide sufficient time for trusts to register, or to update their details if they are already registered. A deadline of 30 days for new trusts set up on or after 10 March 2022 is also considered to be sufficient, although the Government considers that this should not apply to will trusts, which should not require registration at all if they only receive assets from the deceased’s estate and are wound up within two years of death.

These provisions should give trustees adequate time to register where required before March 2022. Registering new affected trusts within 30 days of establishment should become part of trustees’ new trust checklists.

Penalties

The response states the intention to proceed with the previously proposed penalty regime, where there is a failure to register on time or a failure to keep up-to-date and correct records. The proposals include the typical use of nudge letters for first failures to comply, in the absence of deliberate behaviour, and fines of £100 for second and third instances of a failure to update. This is unlikely to be an area of significant concern, although trustees should be concerned about possible penalties and reputational risks around non-compliance.

Next steps

Proposed legislation has been prepared and we are told that it is being considered by committees in the House of Commons and the House of Lords. The response states that there are some remaining policy issues that the Government will continue to explore and that further input may be sought from the respondents to the consultation regarding guidance on the new rules.

The UK, along with a number of EU countries, has been served with an enforcement notice by the EU for failure to implement these rules by 10 January 2020. The UK was asked to provide a satisfactory response by mid-September and this indicates that they should be in a position to do so.

Forsters’ Regulatory Group

The Regulatory team advises trustees, other fiduciary service providers, companies and individuals about their obligations under the UK’s ever increasing regulatory framework and the global reporting issues that they need to consider.

If you have any questions prompted by this note, please do get in touch with the authors or your usual Forsters contact.

A PDF copy of the article above is also available to download here.

Reform to leasehold Enfranchisement, The Law Commission’s final report

• 21 July 2020
• News

The Law Commission has today published its three final reports on leasehold reform and the future of home ownership. Their recommendations about leasehold enfranchisement and the right to manage are aimed at improving the existing system of leasehold ownership, whilst the third report about commonhold seeks to create a viable alternative to leasehold ownership, with a view to its widespread use in the future.

The enfranchisement report represents the last stage of the enfranchisement section of the project, which commenced in September 2018 when the Commission published its consultation paper on enfranchisement reforms, provoking more than 1000 responses from landlords (and their advisors) and over 1,500 responses by leaseholders. 

In total the Report makes 102 recommendations, many of which are far reaching and, if enacted, would fundamentally change the enfranchisement sector as we know it.

The key recommendations are:

1. The New Regime

The Commission has proposed a simpler enfranchisement regime, with the purpose of broadening the availability of enfranchisement rights to leaseholders. The core elements are:

(a) The existing two-tier system (which requires properties to be categorised as “houses” or “flats”) is to be replaced by a new unified qualification scheme. A property will now qualify for enfranchisement rights if it is a “Residential Unit”. A Residential Unit must (i) be a separate, independent premises which either constitutes a building or part of a building and (ii) must be constructed or adapted for use for the purposes of a dwelling.

(b) A leaseholder will qualify if they have a (i) a long lease of over 21 years of (ii) a premises which includes at least one Residential Unit. If this initial test is satisfied, the tenant will be entitled to a lease extension (see paragraph 2 below) and may be entitled to acquire their freehold (see paragraph 3).

2. The right to a lease extension

The Law Commission has recommended a new uniform right to a lease extension for both leaseholders of houses and flats. The basic right is:

(a) The right to a lease extension of 990 years plus the remaining term of the existing lease at a peppercorn rent on payment of a premium.

(b) The landlord will be entitled to obtain possession of the property for the purposes of redevelopment during the last 12 months of the term of the original lease or in the last five years of each period of 90 years after the commencement of the extended term.

(c) The new lease should be on the same terms as the existing lease, subject to any necessary modifications. A necessary modification would include remedying defects in the existing lease or amending the new lease to reflect alterations which have occurred to the Residential Unit.

In addition to the above, in an attempt to tackle the issue of onerous ground rents, the Law Commission has recommended two new rights are created:

(a) First, if the Government does not follow the Commission’s recommendation, as set out in their report on enfranchisement valuation, to cap the level of ground rent that is taken into account when assessing the premium payable at 0.1% of the freehold value of the property, the Commission recommends that leaseholders with onerous ground rents should be entitled to extend the term of their lease without buying out their ground rent. This would mean that a leaseholder can obtain long-term security by extending their lease without needing to pay for the “term” element of the premium.

(b) Secondly, the Commission recommends that a leaseholder who already has a very long lease is entitled to buy out their ground rent obligations without extending the term. This is effectively the reverse of (a) above. A leaseholder could extinguish its ground rent payments without needing to extend its term and pay for the reversion element of the premium.

3. Freehold Acquisition

The Commission recommends that the new regime should include three acquisition rights:

(a) The right to acquire the freehold of the tenant’s building. This will replace the individual’s right to enfranchise their house under the Leasehold Reform Act 1967. A tenant will have the right to acquire the freehold of the building if the relevant building is in the ownership of a single long leaseholder.

(b) The right to collective freehold acquisition. This right will exist if there are (i) two or more Residential Units in the building (ii) two thirds of the Residential Units in the building are held on long leases and (iii) at least half of the Residential Units participate in the claim.

(c) The right to estate acquisition. This new right will permit long leaseholders of Residential Units on an estate comprising of multiple buildings to acquire freehold of whole estate.

The Law Commission have also recommended the removal of a number the existing restrictions on enfranchisement, notably:

(a) The percentage limit of permitted non-residential use is raised from 25% to 50%. This will vastly increase the number of buildings that are eligible for enfranchisement.

(b) The two-year ownership requirement (which is currently relevant to house claims and lease extension claims) will be abolished.

(c) The restriction that prevents tenants who own three or more flats in the same building from enfranchising will no longer apply.

(d) The financial tests under the Leasehold Reform Act 1967 will no longer be relevant. 

4. Procedure

The Commission recommends that a new, single procedure should be adopted for all enfranchisement claims.

(a) Regardless of which enfranchisement right the leaseholder is exercising, the claim will be commenced by  serving a prescribed Claim Notice on the competent landlord (that is, the first superior landlord who holds sufficient interest in the premises to grant the interest claimed).  The notice can be served by post, hand or email. Provided the notice is served at one of the landlord’s addresses (which are prescribed by the new regime), it will be deemed served. It will then be the competent landlord’s responsibility to serve the claim on any intermediate landlord.

(b) If the leaseholder considers that it has a missing landlord, it can apply to the Tribunal for permission to proceed with the claim without serving a Claim Notice.

(c) The competent landlord must respond to the Claim Notice using a single prescribed Response Notice within two months of the date of the Claim Notice. If this deadline is missed a landlord will be entitled to apply to the Tribunal for permission to join the claim and serve a Response Notice late. If no Response Notice is served, the Tribunal will determine the terms of the acquisition, but are not bound by the terms of the Claim Notice.

(d) The Commission also recommends that a leaseholder’s claim will not be treated as withdrawn because they have failed to apply to the Tribunal for a determination of the claim within six months of the Response Notice. However, if no such application has been made a landlord can apply to the Tribunal for the claim to be struck out.

(e) The service of the Claim Notice will no longer create a statutory contract.

(f) A claim notice will automatically transfer on the assignment of a lease unless it is disclaimed by the assignee.

(g) All disputes will be determined in the Tribunal. With certain valuation disputes being heard by a single valuer member of the Tribunal.

(h) The Tribunal will have the power to execute a transfer or the new lease where a party has failed to sign. Similarly, it will have the power to set-aside a determination or discharge a contract between parties because the premium has not been paid.

(i) If the Government adopts a valuation methodology based on market value, leaseholders should not generally be required to contribute to their landlord’s non-litigation costs.

(j) If the Government adopts a valuation methodology which is not based on market value, leaseholders should be required to make a fixed contribution to their landlord’s costs.

5. Voluntary transactions and contracting out

The Commission has recommended that the Government should regulate lease extensions and individual transfers which are not on statutory terms. This should be done by requiring that all such transactions are first approved by the Tribunal as objectively reasonable and priced. The Commission has also recommended that any attempt to contract out of the new regime will be void.

6. Conclusions

The Commission’s reforms will be welcomed by leaseholders. The Commission set out to undertake a “root-and-branch” review of enfranchisement rights with the purpose of making “our homes our own, rather than someone else’s asset”, and these reforms go a long way to achieving that aim.  They will also make the process easier by removing some of the usual statutory time limits that regularly cause claims to fail.

However, in doing so, they will profoundly shift the market for all those who operate in the sphere of enfranchisement. Reforms such as the 990-year lease extension at a peppercorn rent and the removal of the 25% non-residential restriction will concern landlords who rely on ground rent and lease extension premiums for income. 

Nonetheless, much will depend on how/ when the reforms will be enacted. The fastest that the Law Commission’s programme of reform has moved from consultation paper to legislation is just over five years. We also have the added complications of Brexit and economic ramifications of coronavirus. Nonetheless, it is evident that that landlord and tenant reform is high on the Government’s agenda. This was evident yesterday when the Government announced the Building Safety Bill to fire safety. It will be interesting to see whether Boris Johnson also has the appetite for an aggressive programme of leasehold reform.

James Carpenter is an Associate in our Property Litigation team.

You may also be interested in

• Home Ownership Reform
• Commonhold, The Law Commission’s final report
• Exercising the Right to Manage, The Law Commission’s final report

Home Ownership Reform

• 21 July 2020
• News

The Law Commission has published its three key proposals for home ownership reform today with a firm focus on re-invigorating the largely ignored form of commonhold ownership.

The three reports which deal with enfranchisement, right to manage and commonhold tie in with the Government’s aim to make home ownership in the UK fairer and more transparent. It is encouraging to see the Law Commission addressing these three areas in such a cohesive way.

The recommendations which concern leasehold enfranchisement and right to manage are aimed at solving the current problems with leasehold ownership. Many of the proposals are very sensible and, if adopted, will shift the balance firmly in the direction of leaseholders. The proposals for a revised commonhold are aimed at offering a viable alternative where leaseholders can own a flat forever.

The proposals are extensive particularly on the issue of commonhold. It remains to be seen if they have gone far enough to reinvigorate a system that so far has only been used 20 times in the UK since it was introduced in 2002. The issue of home ownership is high on the political agenda and these proposals will certainly provide the Government with plenty of food for thought.

You may also be interested in

• Commonhold, The Law Commission’s final report
• Exercising the Right to Manage, The Law Commission’s final report
• Reform to leasehold Enfranchisement, The Law Commission’s final report

Commonhold, The Law Commission’s final report

• 21 July 2020
• News

The Law Commission has today published its three final reports on leasehold reform and the future of home ownership. Their recommendations about leasehold enfranchisement and the right to manage are aimed at improving the existing system of leasehold ownership, whilst the third report about commonhold seeks to create a viable alternative to leasehold ownership, with a view to its widespread use in the future.

Arguably the greatest change suggested by the Law Commission is their recommendation that commonhold become the preferred alternative to leasehold ownership. This would be a huge change to the status-quo given that many practitioners will never have come across commonhold.

In summary, the Law Commission’s recommendations look to:

• make it easier to convert to commonhold ownership
• improve the management of commonhold ownership

What is Commonhold?

In brief, commonhold is where each person owns the freehold of their unit, which could be a flat, a house, a car parking space etc. That unit owner then becomes a member of the Commonhold Association which owns and manages the common parts of the block or estate. The Commonhold Community Statement is the document which sets out the boundaries of the common parts and the rights and obligations of the unit owners and the Association. The Commonhold Community Statement has a number of prescribed terms which are determined by Government to provide consistency. The intention is that there is no landlord in charge, instead the unit owners run the block or estate for themselves.

Making it Easier to Convert to Commonhold

The Law Commission’s recommendations intend to make it easier for leaseholders to convert to commonhold. They main proposals are, in summary:

1. Allowing conversion without freeholder’s consent by a streamlined “acquire and convert” process which will entail the leaseholders acquiring the building by a collective enfranchisement process as a first step.
2. Reducing the required number of leaseholders that support the process to 50%.
3. Government to work with lenders to ensure they will accept the transfer of the mortgage to the commonhold title.
4. Making the registration process easier at the Land Registry and providing that the leaseholders as well as the freeholder can register the commonhold.
5. Developers should be able to register the development as commonhold in phases and they should be able to reserve rights in the Commonhold Community Statement to allow completion of the development.
6. Shared ownership leases and lease-based home purchase plans are permitted as under the current commonhold scheme they are not.

One particular area of difficulty arising from the above is what happens with those leaseholders that do not participate in the conversions to commonhold. The Law Commission have suggested that non-participating leaseholders’ units should also convert to commonhold and they will become members of the Association on conversion. The funding for such non-participating leaseholders will be provided by Government equity loans, similar to the Help to Buy scheme, which will rank after any existing mortgage and would be repayable on sale. It is also suggested that these loans are made available to the participating leaseholders as well. However, the Law Commission appear to accept that this may not be viable as they have also suggested that if the Government is not able to provide these loans, there should instead be a two-tier ownership where non-participating leaseholders will continue to hold their unit on leasehold after conversion on the remainder of the block to commonhold. It is proposed that leaseholder ownership will then be gradually phased out by replacing the right to a lease extension with a statutory right to convert to commonhold.

Improving the Management of Commonhold

The Law Commission has also made various recommendations to improve the way commonhold is managed moving forward. The main recommendations in this regard are:

1. To facilitate the management of mixed-use buildings, “sections” can be created to allow for management of different areas to be separated where necessary.
2. Any change to the Commonhold Community Statement would require 75% of those attending to agree to the change.
3. It should be possible for a Commonhold Community Statement to restrict certain short-term lettings. This is specifically intended to allow commonhold owners to prohibit lettings such as Air BnB should they wish to do so in their block.
4. “Event fees” (sums payable on the occurrence of an even such as a sale or letting of a unit) should be prohibited.
5. The Association should have the power to apply for the sale of a defaulting owner’s unit if they are in arrears, subject to certain safeguards.
6. Directors of the Association should be elected on an annual basis by ordinary resolution. If unit owners are unwilling to be directors, an affected party can apply to the Tribunal for a professional director to be appointed. Furthermore, there should be a right to apply to the Tribunal for the temporary appointment of a replacement director where it is considered that they are failing in their duties.
7. Various recommendations are made to avoid disputes in relation to service charges and to make the payment regime fairer. In particular, unit owners will be given the opportunity to vote to approve the annual budget. The commonhold will also be able to set an expenditure threshold for the amount they can spend without challenge. It will also be compulsory for an Association to have a reserve fund.
8. Allowing sale or mortgaging of common areas to raise emergency funding for large projects that the unit owners are unable to fund.
9. There are a number of recommendations in relation to dispute resolution, including giving the Tribunal jurisdiction to deal with disputes and providing that when a unit owner is in breach that they must indemnify the other unit owners and the Association for any loss.
10. A minority protection regime is suggested to provide some protection where the majority decision impacts upon a minority that does not agree. The minority will be able to apply to the Tribunal where they are concerned about: variation of the Commonhold Community Statement, the creation or combination of a “section” or the approval of a budget in excess of a cost threshold.
11. Clarity on insolvency of the Association by making it clear that a liquidator cannot demand contributions from unit holders but they will have the power to sell saleable common parts.
12. The Courts should be given a discretion to decide whether a voluntary termination of the commonhold should be allowed.

Next Steps

There may certainly be some benefits to the commonhold system. It is clear that the Law Commission’s recommendations have sought to take the lessons learned from the issues that arise in leasehold ownership to improve the way commonhold ownership is regulated. However, it remains to be seen whether these proposals will result in the dramatic change that a shift to commonhold ownership would require.

Lucy Zaremba is a Senior Associate in our Property Litigation team.

You may also be interested in

• Home Ownership Reform
• Exercising the Right to Manage, The Law Commission’s final report
• Reform to leasehold Enfranchisement, The Law Commission’s final report

Change of business activity? – HMRC guidance

• 7 July 2020
• News

As a result of COVID-19, many businesses have been forced to stop trading during the lockdown or have changed the nature of their activities. Aside from the commercial aspects of a change in business activity, various tax implications may also arise, including the business’ ability to carry forward losses.

But what constitutes a change for these purposes? Although there is no clear-cut answer and each case will need to be considered separately, HMRC has recently updated its guidance concerning whether and when there has been a change in the nature of a trade during lockdown, as well as a number of other issues.

New trade or not?

Normally, if a business starts up a new activity which is unrelated to what it has done before, this would amount to a completely new trade. However, if the new activity is “broadly similar” to the previous activity, the profits and losses of the new and old activities should be merged and treated as one trade.

HMRC uses the example of a restaurant trade which starts manufacturing gowns and face masks; this would be viewed as the commencement of a separate trade. In contrast, where a business used to manufacture clothing and instead starts to manufacture gowns and face masks using the same staff and premises, this would merely be viewed as an extension of the same trade. This should provide some comfort to those clothing manufacturers who have changed their products and are now making protective clothing for the NHS.

However, each case will need to be considered individually and the position is not always obvious. Restaurants and pubs, for example, that have started selling takeaway food and have effectively converted themselves into food shops, will need to analyse their position.

Temporary trading breaks

HMRC has also confirmed that the temporary breaks in trading activity which many businesses have experienced will not be treated as a permanent cessation of trade provided that the business is then able to resume the same or similar activity after lockdown. If, however, the business is unable to start trading again then it will be necessary to work out when its trade ceased for tax purposes, based on the individual circumstances of the business.

Donations

The guidance also includes a reminder to taxpayers that if a business receives donations (for example, from the public or employees) which enables the business to meet revenue expenditure or to supplement trading income, the amounts received will be taxable as trade receipts.

The tax position of a business which itself makes donations is complicated and specific advice should be taken based on the particular circumstances. If a business donates trading stock to a charity for homeless persons then it is not treated as having sold the stock for tax purposes but that would not be the case if the stock is donated to non-charitable bodies, individuals or another business. In that case the stock would be treated as having been sold at its open market value, although HMRC states in the guidance that what represents market value would now have to take into account the disruption caused by COVID-19 and the lockdown.

That said, there is a specific relief for companies which make corporate donations of medical supplies and medical equipment for humanitarian purposes anywhere in the world and this is not just restricted to donations to registered charities.

Partial refunds

HMRC confirms in the guidance that where a business gives partial refunds on items such as gym membership and car insurance policies, these should be allowable if they are treated as trade expenses in GAAP-compliant accounts, on the basis that the original receipt would have been included in calculating trade profits.

Heather Corben is a Partner in the Corporate Tax team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

Project Speed: “to build better; to build greener; to build faster”

• 2 July 2020
• News

Giving a speech on 30 June 2020, Boris Johnson declared the UK government’s intention to deliver “the most radical reforms of our planning system since the end of the second world war” as it attempts to offset the economic impact of the coronavirus pandemic.

Ambitiously titled Project Speed, the government’s proposals include a £5 billion capital investment package focused on schools, hospitals, roads, rail development and “shovel ready” local growth projects, as well as amendments to the General Permitted Development Order from August to allow blocks of flats of more than three storeys to be extended upwards by an additional two storeys. Further regulations are to be introduced in September to extend permitted development rights as follows:

1. to enable vacant and redundant commercial buildings (including shops) and residential buildings to be demolished and replaced with new homes;
2. to allow a wider range of commercial buildings to change to residential use; and
3. to enable homeowners to build upwards via a fast track approval process, subject to neighbour consultation.

The government is also proposing a reform of the Use Classes Order to give commercial premises “total flexibility” to be repurposed for another commercial use without requiring any form of planning application or prior approval. Pubs, libraries, village shops and other types of uses deemed to be “essential to the lifeblood of communities” would be excluded from this change.

Further details regarding the government’s plan for a “comprehensive reform” of the planning system are to be announced in the government’s planning Policy Paper in July, followed by a Local Recovery White Paper later this year.

Despite the government’s rhetoric, the latest announcements seem unambitious in scope. Whilst the details are yet to be ironed out (and the devil is always in the detail), what has been proposed so far amounts to little more than tinkering with the current planning system rather than the wholescale reform that had been promised in recent weeks. Certainly, there is no mention of the new zonal approach to planning touted by Housing Secretary Robert Jenrick back in March and it is hard to reconcile these latest tweaks to the system with any imminent reforms of that scale. We may also find that the new regulations are ultimately not as flexible as promised, with controls being put in place by way of prior approvals (as is the case with the new controls being proposed for upwards extensions of blocks of flats), or with individual local planning authorities applying for Article 4 Directions to withdraw the new rights in certain areas.

Having said that, the proposals are not without merit. They will go some way to enabling better use of vacant office space and commercial properties, which is only likely to increase as the shape of the working world changes post-COVID-19. And they will undoubtedly increase certainty for developers by reducing red tape and what Johnson calls “Newt-counting delays”. However, the proposals do seem at odds with the Prime Minister’s other stated ambitions – to build “greener” and to build more beautifully.

Moreover, they highlight the government’s continued commitment to rely on permitted development for the delivery of new homes – an interesting decision given the widespread criticism of the existing office to residential permitted development policy. One 2018 report into the functioning of the planning system by former housing minister Nick Raynsford found that the prior approval process for office to residential conversions, in bypassing planning requirements on issues such as space standards, affordable housing, play space and school provision, was “creating the real and alarming prospect of a new generation of slums”. Sadiq Khan has also repeatedly spoken out on this issue, arguing in February that the permitted development rights should either be devolved to London or be scrapped on the grounds that they were contributing to a shortage of viable business space, lower levels of affordable housing and creating unsuitable and substandard housing.

The government’s decision to extend permitted development rights in light of these criticisms raises concerns that its commitment to tackle the housing shortage and support the high street revival will come at the price of quality and strategic placemaking. The new proposals do ensure that such conversions no longer result in rooms with less than “adequate” natural light, but that does not address space standards or mitigate the impact of such developments in terms of affordable housing or section 106 contributions. If the extension of permitted development rights is the government’s main source of housing delivery then it would be sensible to ensure that Community Infrastructure Levy is payable for such conversions and to implement measures requiring developers to deliver affordable housing. No such proposals have yet come forward. Nor does there seem to be any strategic plan for high streets, which – given the latest reforms – are likely to look very different in the years to come.

So which of Johnson’s pledges to build “better” “greener” or “faster” takes priority? I think the clue is in the name when it comes to Project Speed.

Laura Parrish is a Senior Associate in our Planning team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

When is a listed building a ‘building’?

• 1 July 2020
• News

The recent Supreme Court case of Dill v Secretary of State provides an important decision as to whether a Planning Inspector of a listed building enforcement case can decide whether an item which has been expressly included on the statutory list is in fact a ‘building’ and the criteria for determining whether an item listed in its own right does constitute a building for these purposes.

This case related to a pair of urns which had both been expressly entered onto the register of listed buildings along with the property within the grounds of which the urns were situated. The urns were not listed because they were appended to a listed building, or because they were within the curtilage of a listed building, but because they were listed in their own right. Mr Dill, the owner of both the urns and the property, and being unaware that they were considered listed buildings, had sold the urns at auction in 2009. Subsequently in 2015, the local authority became aware of their removal and issued a listed building enforcement notice under s.38 of the Planning (Listed Buildings and Conservation Areas) Act 1990 (“LBA 1990”) requiring them to be reinstated. Mr Dill applied for retrospective listed building consent which was refused.

Mr Dill appealed this decision on the grounds that the urns were not ‘buildings’ and therefore their classification as ‘listed buildings’ was incorrect. This would have the consequential result that a listed building enforcement notice was inapplicable as the urns were not protected as listed buildings under s.1 LPA 1990. The appointed Planning Inspector dismissed the appeals on the basis that he could not ‘go behind the list’ and challenge the status of the urns as buildings. The Inspector’s position was that the status of the urns as buildings was established by them being included on the list itself and that the status of the item could not be challenged.

Following unsuccessful appeals to both the High Court and Court of Appeal, the Supreme Court held in Mr Dill’s favour holding that it was “the rule of law that individuals affected by legal measures should have a fair opportunity to challenge these measures”. The Court determined inclusion on the statutory list was not necessarily conclusive to establishing the status of the urns as buildings. An applicant is therefore entitled to appeal against a listed building enforcement notice on the grounds that the item in question is not a building.

For Mr Dill, the Court acknowledged that he had been looking to obtain a clear ruling on the issue and ‘that opportunity had been wrongly denied to him for five years.’ The enforcement notice appeal will have to be reconsidered by the Planning Inspectorate and in giving judgment, Lord Carnwath suggested the respondents should consider whether pursuing the enforcement process further was in the public interest, particularly given the difficulties in this case of restoring the urns to their previous location.

Additionally, this judgment has helpfully also confirmed that the test courts have endorsed in pre-existing case law to determine what classifies as a building in relation to the core planning acts, is applicable in the context of section 1(5) of the LBA 1990. Namely the threefold approach of size, permanence and degree of physical attachment (derived from Skerritts of Nottingham v Secretary of State).

This decision has implications for many items which are currently designated as buildings and included in the statutory list, where the inclusion has the potential to be controversial. Particular examples of this include statues or other items located in gardens of properties which are themselves listed buildings. The fact that the urns were listed as buildings in their own right and not because they were within the curtilage of another listed building makes the decision to allow their status as a building to be challenged perhaps more surprising.

We regularly advise clients on amending the description of listed buildings on the statutory list to remove reference to certain items and we anticipate this case will facilitate such matters. It would certainly be advisable to try to amend the list to remove reference to certain items, rather than relying on this case if enforcement proceedings are brought following the removal of the relevant item(s). Removing or demolishing listed “buildings” without the necessary listed building consent is a criminal offence and as well as the sanctions available under the LBA 1990, local planning authorities could seek to recover any sale proceeds under the Proceeds of Crime Act. However, if enforcement proceedings are brought then this case clarifies that the appellant can challenge whether certain items are “buildings” (to be determined in accordance with the Skerritts test) and therefore whether enforcement action can be taken.

Dill v Secretary of State for Housing, Communities and Local Government and another [2020] UKSC