Real Estate monthly digest - May 2019

  • Submitted 3 June 2019
  • Applicable Law UK (England & Wales)
  • Topic Real Estate

Government to fund replacement of cladding on privately-owned high-rise residential blocks

The Government has issued a press release stating that around £200m will be made available to remove and replace unsafe cladding from around 170 privately owned high-rise buildings. The Government is already funding works to its local-authority-owned social housing blocks. In short, the intention is that private building owners will now have ready access to a pool of funds to pay for remedial works, allowing disputes as to liability that have often delayed or prevented such works, eg due to lack of cashflow, to be deferred.

Further detail and analysis in relation to this announcement can be found here.

Limited relief…

This is an interesting decision concerning relief from forfeiture in circumstances in which the tenant is, and will remain, unable to comply with a keep open covenant.

The case arose out of the insolvency of the former BHS, the tenant of a 125-year lease of a unit at the Mall at Cribbs Causeway in Bristol. The lease had been purchased in 1998 for a premium of over £7m at a peppercorn rent; at the date of the trial the lease still had 104 years left to run. The lease included a “keep open” covenant which required BHS to keep the store open 7 days a week during specified opening hours.

Following the administration of BHS, the store closed permanently on 28 August 2016 placing BHS in breach of its keep open covenant. In response to the closure the landlord served a section 146 notice citing (principally) the breach of the keep open covenant and on the basis that the tenant could not remedy the breach or comply with the covenant going forward. The tenant (now in liquidation), and its mortgagee (which held the lease as security for a large loan which it had advanced to BHS shortly before its eventual collapse) both sought relief from forfeiture for a period of 6 months to allow further time to assign the lease. The landlord, in response, sought immediate possession on the basis that the breach was incurable and two and half years had already passed since closure of the store which was sufficient time to secure an assignment.

At trial, HHJ Ralton sitting in the Bristol County Court, had regard to a number of factors in exercising his discretion whether to grant relief from forfeiture, and if so, on what terms. In particular, the Judge heard extensive evidence from the parties’ respective letting experts about whether there was any market for the lease given its terms and the nature of modern retailing. The tenant’s agent maintained that there was still a real market for the lease and a real, rather than a fanciful, prospect of finding an assignee. The court also heard expert valuation evidence that the lease had a value of over £1m. If relief was refused the tenant would be deprived of the opportunity to reduce its debts by this amount. Further, the tenant’s evidence was that the value to the landlord’s reversionary interest if relief was refused was in the region of £65m. The tenant argued that such a significant windfall to the landlord meant that relief ought to be granted.

In balancing the competing interests of both landlord and tenant the Judge concluded that it was right to grant conditional relief from forfeiture. The principal conditions attaching to the order were that the tenant should complete an assignment of the lease within 3 months (ie by 5pm on 28 June 2019) and pay certain specified sums in the meantime. If an assignment does not take place the Judge has made clear that it is likely that the mortgagee (who has the real financial interest in the lease and is the driving force behind the proceedings) will be required to pay mesne profits for the period that the landlord has been kept out of occupation.

This was an unusual order because the tenant was manifestly in breach of covenant which could not be remedied until an assignee could be found who was prepared to re-open the store for trading. In such circumstances the landlord would reasonably have expected the court to allow the lease to be forfeited.

The case illustrates the difficult task facing the court in trying to balance the competing interests of landlords on the one hand and the interests of creditors on the other in a scenario where the tenant is insolvent, and the lease is a valuable asset. Given the current challenging economic climate for the retail sector it will be surprising if the court is not called upon to undertake similar balancing exercises in the near future.

SHB Realisations Ltd v Cribbs Mall Nominee (1) Ltd [2019] 3 WLUK 588

VAT reverse charge for construction services

The legislation to introduce a reverse charge on certain supplies of construction services with effect from 01 October 2019 has been enacted. The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019 (SI 2019/892) will, in general terms, introduce a VAT reverse charge on supplies of construction services to which the provisions of the Construction Industry Scheme (CIS) also apply. However, since the purpose of the legislation is to prevent missing trader fraud opportunities within the construction industry, the legislation includes a number of exceptions for low risk situations, such as where the supply is made to the final consumer.

The new rules will affect a large number of businesses, hence the long lead time for the legislation. Whilst the additional complexity will provide an additional administrative burden for businesses, it is to be welcomed that the final form of the rules has closely tied its application to the operation of the CIS rules.

As the Government considers that the risk of fraud in the construction industry is principally centred on the supply of construction services between construction businesses in the supply chain, the rules continue to exclude supplies to end user businesses or between landlord and tenant, for example.

Further details can be found here.

SDLT: application of s.75A does not require "objective tax avoidance”

The FTT has held that the SDLT anti-avoidance provisions in s.75A contain, essentially, a stand-alone definition of those transactions within its ambit and that it is not necessary to revert to any wider concept of tax avoidance to determine its scope: Hannover Leasing v HMRC [2019] UKFTT 262. The FTT rejected the argument that it should only apply the provisions of s.75A where the transactions concerned had not been taxed “appropriately” in the absence of s.75A.

Since the provisions of s.75A are notoriously widely drawn, the decision is potentially a very serious one for any tax structuring involving UK property. Great care should be taken that any arrangements put in place in the context of a UK property transaction, no matter their motivation, do not fall foul of s.75A.

Further analysis and case detail can be found here.

Draft Registration of Overseas Entities Bill: Joint Committee issues report

On 20 May 2019 the Joint Committee on the Draft Registration of Overseas Entities Bill (the committee) issued its report on the content of the Bill.

The Bill was first published on 23 July 2018 and a summary of the Bill’s key provisions can be found here. By introducing a publicly accessible register of beneficial owners of overseas entities linked to UK property ownership the Bill "aims to increase the transparency of information about who really owns UK land". The committee’s task was to examine whether the draft Bill is likely to achieve this aim. Tackling corruption is a key objective for the Bill and the committee emphasises that the report considers the Bill in the "context of complementary anti-money laundering measures". The report is a detailed document which provides pre-legislative scrutiny in respect of the draft Bill and indicates that the Government remains on track to introduce the Register by 2021. The committee’s overall conclusion is that the "draft legislation is timely, worthwhile, and, in large part, well drafted". However, the committee chairman notes "there are still some loopholes in the draft Bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation’ and concerns are raised in relation to insufficient verification checks to identify those submitting false information.

Some further points of note from the report can be found here. In addition, it is also worth noting the BEIS consultation below.

BEIS consultation: Corporate transparency and Companies House reform

On 05 May 2019, BEIS published a consultation on its proposals to strengthen the UK’s company registration framework at Companies House. The consultation considers reforms to the information that companies are required to disclose, increasing the checks on that information and measures to improve the exchange of information between Companies House and law enforcement bodies.

If all of the Government’s proposals were to be implemented, this would amount to the most significant reform of the company registration system in the UK since a register was first introduced in 1844.

The closing date for the consultation is 05 August 2019.

Further details on the consultation can be found here.

Is it ready yet (revisited)?

In the recent Court of Appeal Decision in Mears Ltd v Costplan Services (South East) Ltd [2019] EWCA Civ 502 the court provided a detailed analysis of what practical completion means and when it can be certified. The court’s findings reaffirm concepts addressed in the case of Jarvis & Sons Ltd v Westminster Corporation [1969] - the most recent prior occasion the appeal courts had opportunity to consider the meaning of “practical completion”.

In considering the degree of a defect in construction works and whether or not “completion” of such defective works can (or should) be certified it must be balanced against the "purpose of allowing the employers to take possession of the works and use them as intended". Coulson LJ (delivering leading judgement) agreed with Wacksman J’s decision that a patent defect in construction (whether or not capable of being remedied) will only be construed as rendering works incapable of being “practically completed” where such defect is more than “trifling”.

Further detail and analysis in relation to this decision can be found here.

VAT and supplies of fractional shares in apartments

The Court of Appeal has held that grants of fractional interests giving rights to annual short term stays in a property providing luxury serviced accommodation were excluded from the VAT exemption for supplies of land: HMRC v Fortyseven Park Street Ltd [2019] EWCA Civ 849. In overturning the decision of the Upper Tribunal, the Court of Appeal considered that the overall nature of the supply of the interests to buyers under a Membership Agreement and the accompanying rights and obligations under that agreement was sufficient to distinguish the situation from the usually passive activity of leasing or letting immovable property. As such, either the supply did not fall within the concept of “letting or leasing of immovable property” or, in the alternative, the supply fell within the exception for the provision of accommodation in a hotel "or similar establishment".

For further details please click here.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.