23 January 2018

Ch-ch-ch-ch-Changes (turn and face the strange)

As 2018 kicks off, Megan Wade provides a reminder of some of the key legislative developments in recent years which are set to impact the UK commercial property industry this year.

Minimum Energy Efficiency Standards (“MEES”)

2018 will see Part 3 of the long-awaited Minimum Energy Efficiency Regulations 2015 come into force. From 1 April, landlords will not be able to grant a new lease or extend or renew an existing lease of commercial premises with an energy performance rating below a band “E”. A landlord who does wish to let premises with a rating falling below this level will need to undertake specified measures to improve the energy efficiency of the premises, unless any of a few specified exemptions apply. There is also a further set of similar (but not identical) Regulations which apply to residential properties.

It is expected that the minimum energy efficiency threshold will be increased by the Government in future, so commercial landlords would be well-advised to plan ahead, to ensure the best strategy for compliance.

The Government has published guidance on the application of MEES to commercial, residential and mixed use properties. This was recently updated on 11 December 2017 to further clarify the application of the regulations to listed buildings and buildings within a conservation area.

Business rates

It was announced in the Autumn 2017 Budget that, with effect from 1 April 2018, the Consumer Prices Index (“CPI”) will be used for the annual indexation of business rates in England, instead of the Retail Prices Index (“RPI”), as has been used since the inception of business rates (in their current form) in 1990. This change has been brought forward by the Government in an attempt to support businesses adversely affected by the revaluation of business rates in early 2017. As the RPI tends to measure inflation at a higher level than the CPI, the intention is that annual indexed increases should be lower once the indexation change comes into effect, and so provide a small reprieve to business occupiers.

Stamp Duty Land Tax (“SDLT”)

From 1 April 2018, SDLT for properties in Wales will be replaced by a new Welsh Land Transaction Tax (“LTT”). The LTT rates for commercial freehold transactions will differ from current SDLT rates, as shown in the table below.

Price threshold (freehold) SDLT rates New LTT rates
£0-£150,000 0% 0%
£150,001 - £250,000 2% 1%
£250,001 - £1m 5% 5%
> £1m 5% 6%

Higher value commercial leasehold transactions in Wales will be similarly adversely affected. SDLT liability is calculated for leasehold transactions on both (i) the premium (if any) paid for the lease (using the rates set out in the table above) and (ii) the ‘net present value’ (“NPV”) of the annual rent payable under the lease, which are added together. The formula used to calculate the NPV is based on the total rent payable over the life of the lease, with tax payable on the NPV at the rates set out in the table below. The changes mean that the top 2% rate for the LTT will take effect when the NPV exceeds £2 million as opposed to the top 2% rate for SDLT purposes which does not take effect until the NPV exceeds £5 million.

NPV of rent SDLT rates   NPV of rent LTT rates
£0-£150,000 0%   £0-£150,000 0%
£150,001 - £5m 1%   £150,001 - £2m 1%
> £5m 2%   > £2m 2%

The Government’s reasoning for the introduction of a lower threshold and higher top rate of LTT is the lower average value of Welsh commercial property transactions when compared to that of England. The new rates will benefit those looking to invest in lower value commercial property in Wales, however the (relatively) few high value transactions, i.e. those valued in excess of £1.1 million, will be hit by an increased tax liability in comparison to transactions of the same value across the border in England.

The Government also confirmed in the Autumn 2017 Budget that it would be proceeding with the proposal to reduce the current 30-day window for filing SDLT returns and paying SDLT, to just 14 days, notwithstanding opposition to the change when it was consulted on last year. However, this is not expected to come into effect until 1 March 2019, and thankfully for taxpayers, the Government is expected to make improvements to the process of filing an SDLT return to assist with meeting the new deadline.

EU General Data Protection Regulation

Brexit notwithstanding, the EU General Data Protection Regulation (GDPR) will take direct effect in UK law from 25 May 2018, and is intended to ensure “unhindered data flows” between the UK and EU. THE GDPR will replace the current EU Data Protection Directive, which was considered in need of overhaul to respond to new technological challenges and provide for a more consistent approach across Member States, dispensing with the need for national implementation which allowed for key principles to be interpreted differently.

Many businesses which collect, use and process “personal data” (such as landlords and property agents) will potentially be affected, and may need to implement changes to ensure compliance with the new legislation. For example, “consent” as a legal basis for processing an individual’s personal data will be harder to obtain under the new rules, and must be affirmative as opposed to mere acquiescence. Businesses will also need to ensure that an individual can withdraw their consent at any time.

Increased enforcement powers for national data protection authorities (in the UK, the Information Commissioner’s Office) means that the risks of failing to comply will be even greater. At present, the maximum fine in the UK for non-compliance with data protection legislation is £500,000. However, under the GDPR, violations relating to, amongst other things, breaches of data protection principles and conditions for consent, may attract fines of up to 4% of annual worldwide turnover of the preceding financial year of the violating party, or 20 million euros (whichever is greater).

Whilst a new Data Protection Bill, which is currently making its way through the Houses of Parliament, is expected to replace the GDPR in due course, the Government has made it clear that any new legislation will bring the UK data protection regime in line with the GDPR, and may even go further.

Megan is an associate in our Commercial Real Estate team.

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