What's the latest on the Living sectors?

17 minute read
13 December 2021

Gowling WLG's Living team brings together specialist expertise from across the Living asset classes. In this article, we consider some of the raft of legislative proposals the UK Government is bringing forward that stakeholders in the Living sectors will have to navigate.

The legislative programme is attempting to tackle a broad range of policy issues from protecting the interests of consumers in the residential sector, to structural reforms to the planning system; and from regulations to move us towards net zero carbon to reform of our social care system. Our Living team advises clients from across the general housing, affordable housing, BTR, student housing. Senior Living and Co-Living sectors. The various Living asset classes have much in common but key differences in their markets and models mean that "one size does not fit all" when considering the effect of recent and emerging legislation across the sectors.

This update highlights just some of the new and prospective legislation that is likely to be relevant across various of the Living asset classes and which our team will be tracking as it emerges.

New-style neighbourhoods - Proposed planning shake-up

The planning white paper, published on 9th November 2021, seeks to speed up the local plan making process and make local planning policies more interactive and accessible. And while housing secretary, Michael Gove, says that he wants to overhaul the way in which housing needs are calculated, he 'loves' the idea of a new street based system of neighbourhood planning with net zero carbon at the heart of thinking.

Earlier this year, the Government confirmed a new permitted development right to allow the change of use in England from any use with Class E (Commercial, Business and Service Use Class) to residential use (Class C3). This is a further step to enabling Class E premises to be converted to deliver more new homes. Whether this will deliver significant additional numbers of good quality homes in decent locations remains to be seen.

While some developers will welcome this, they will be less than enthused by the Planning and Local Representation Bill - referred to as the "Use it or lose it bill". The bill proposes to reduce the time period to implement full planning permission for major developments from three to two years - after which time planning may be lost. Given the unstable economic climate and supply chain issues, this will rightly make developers more nervous.

Changes to the National Planning Policy Framework in July 2021 have added emphasis on creating sustainable and attractive developments in accordance with local design codes and identify that the supply of large numbers of new homes should be supported by a genuine choice of transport modes, which developers will need to be more cognisant of.

Building greener homes

The Government's heat and buildings strategy published in October comes down firmly in favour of electric heat pumps, subject to "expected" cost declines, while a decision on the widespread use of hydrogen gas in heating systems has been delayed until 2026. With heating from buildings accounting for nearly a quarter of UK emissions, a plan for improving the energy standards of homes and decarbonising heating is, therefore, widely seen as a top priority as the Government develops its overarching plan for reaching net-zero by 2050 - and developers must take heed.

In addition, legislation is expected that will require all new homes to have charging for electric vehicles, with local authorities requiring developers to install them as part of their developments.

While the main media focus on the new Environmental Bill has been centred on sewage discharges, developers need to look carefully at the new biodiversity net gain (BDNG) condition that requires developers - prior to commencement - to submit a BDNG plan to the local authority for approval. The aim is create a minimum 10% gain in biodiversity in developments. More guidance is needed, but it is likely that this will have a big impact on Living schemes.

The Government's net zero strategy focuses on the delivery of a decarbonised power system by 2035. This means that developers will need to factor in smart meters, energy storage, smart and bidirectional charging of electric vehicles, flexible heating systems and interconnection to help reduce the amount of generation and network needed to decarbonise in order to help meet the UK's goals.

The Government's recently published report - "Greening Finance - A Roadmap for Sustainable Investing" sets out how it intends to 'green' the financial system and meet its commitment to achieving net zero emissions by 2050. This will require more sustainability disclosures and governance as 'green schemes' will benefit from cheaper funding models - something developers, investors and funders will no doubt have at the forefront of their minds.

Leasehold overhaul

In July 2020 the Law Commission issued three reports focussed on reforming residential leasehold and commonhold. Many of the recommendations are yet to be brought forward, but, in order to promote the use of commonhold tenure, include provision of flexibility for developers to build new commonhold developments and for these to be used on complex developments. This will be done by creating sections that allow for commonholds to be built in phases and to cater for different needs, irrespective of their size, make-up or complexity so they can respond to the changing needs of a site as the development progresses.

The Government's long-held goal has been to ban leasehold new-build houses, and to allow existing leaseholders to have the right to extend their lease by a maximum of 990 years and to a ground rent of zero. The changes to the right to extend are broadly welcomed by many, as - until now - landlords could increase ground rents and charge arbitrary premiums to extend their leases by a maximum of 90 years, but the length of the proposed extensions will cause problems for landlords with portfolios traditionally held on shorter lease terms. The proposed ban on leasehold houses and the commonhold proposals may cause issues for operators structuring schemes with houses as part of a managed community more suited to a leasehold model. When the proposed legislation finally materialises, stakeholders will be interested to see what exemptions are available and how it will apply to live, part-built schemes.

The Leasehold Reform (Ground Rent) Bill had its second reading in the House of Commons on 29 November 2021 and will now be considered in detail in the committee phase. It prohibits new long leases (i.e. over 21 years) of single dwellings that are granted at a premium from reserving a ground rent, and administration charges for the collection of rent. These measures are proposed to be delayed until 1st April 2023 at the earliest for later living housing leases, and will only be applied to single dwellings (rather than multi-unit, such as student accommodation leases). The proposals do not affect existing leases, but will impact sites under option or rights of first refusal. While integrated retirement communities are unlikely to be materially impacted by this legislation, stakeholders in other Living sectors are working through how to mitigate the effects of the ban on ground rents.

We will be watching closely to see what steps the Government takes to move forward with its wider programme of residential leasehold reform proposals in the New Year.

Navigating new responsibilities - The Building Safety Bill

The Building Safety Bill continues its progress through Parliament with the Government being open about its intention to make it law in Autumn 2022. Interest has been focussed on construction and management (particularly fire safety) but it has been suggested that the measures could apply to broader safety concerns.

New roles and duties in construction and building management aim to ensure safety is paramount. Strict record keeping and information requirements will undoubtedly be useful for managers and occupiers as well as regulators but will obviously come at a cost.

Many aspects of the new legislation remain uncertain and the subject of ongoing review by the Parliamentary process. Particularly liability for remediation of existing unsafe cladding and the structure and operation of the proposed building safety charge to sit alongside service charge in residential buildings.

The development of the New Homes Ombudsman scheme will also be watched closely by developers as the Government clearly wants the scheme to offer an easier dispute resolution and complaints procedure for home owners. The Bill also proposes to streamline the complaints procedure for social housing residents.

The scope of the new regime is wide ranging and we will be looking at specific parts of it in future updates.

Living greener

Recent national press coverage of COP26, the commitments made by the public and private sectors and in particular the UK's net zero strategy have refocussed attention on the built environment's environmental impact. Read our article about the UK's net zero strategy to find out more.

One part of the Government's strategy to deliver net zero by 2050 is to improve the energy efficiency of buildings earlier than that. The minimum energy efficiency standards (MEES) were first introduced in 2018 with a phased implementation to April 2023. Essentially introducing a minimum EPC rating of E for letting property (subject to exemptions) - with different regulations applying to domestic and non-domestic property. However, the Government has already committed to increasing the minimum standard over the next decade.

The intention is clearly to set the minimum EPC rating at Band B for non-domestic property. A minimum of Band C for domestic property in 2028 is also proposed. The Government favours a phased trajectory in both cases. Under proposals, new leases of domestic premises would be caught from 2025 and existing leases from 2028. For non-domestic premises, a phased increase in the minimum standard is proposed - being Band C in 2027 and Band B in 2030.

We have been exploring the challenges with a number of clients to help develop strategies for their approach to the minimum standard. The right strategy depends on the nature of the asset, the long-term plans for it, available funding and current occupational arrangements.

Issues in the Living sectors are sometimes compounded due to buildings being a mixture of domestic and non-domestic property (for the purposes of MEES) with the possibility of some assets (or parts of buildings) potentially being exempt while others are not. The thought process is further complicated by moving goalposts - it is very unlikely that regulation as it is even proposed now will deliver the environmental benefit the Government hopes and so further regulation, removal of exemptions or a greater focus on public sector led energy efficiency improvements could continue to pose challenges over the coming years.

Together with new green reporting obligations for large organisations, requirements for greener equipment in domestic and non-domestic buildings and the availability of various funding to support initiatives mean there is plenty to navigate.

Feeling the connection - Smarter homes

One of the key drivers for all types of Living assets is the occupier experience and whether for the resident, guest or employee, part of the modern package is digital connectivity. At the top of the occupier's list of wants is a strong phone signal and fast broadband but as buildings and building management become smarter, the digital infrastructure is going to have support new technology in user experience and asset management - for example to meet the demands of increased agile working, entertainment, security, health and safety and much more. Digital infrastructure will become even more integral to Living assets.

The Electronic Communications Code has been around since 1984 and in its latest form since 2017.The Government has been reviewing it again and 2022 is likely to see a combination of further reform to Code operators' package of code rights and court decisions, which will probably continue to tip in favour of operators' rights and powers driven by the public interest in having powerful digital infrastructure offering the latest technology and consumer choice.

Managers of existing Living assets will be watching closely to see how this may affect their relationship with operators with equipment in buildings. Developers are likely to have less bargaining position with operators when entering into new code agreements to provide for infrastructure in new developments. Where existing equipment needs to be removed or relocated to facilitate development, the process will continue to be difficult - requiring significant advanced planning and management to avoid unexpected cost and delay. However, delivering communications infrastructure that works for the operator and residents of existing and new schemes is in the best interests of all so everyone's interests are aligned even without that equipment being materially income generating for the landowner. Incorporating relocation sites for infrastructure within schemes and engaging with operators early is likely to be key.

Taxing changes

There are three pieces of new tax regulation of significance to the Living sectors.

The Residential Property Developer Tax ("RPDT"), which applies to accounting periods ending on or after 1 April 2022, will be charged at 4% and will apply to profits derived from UK residential property development (including from care homes, retirement homes and student accommodation) when a group's profits from such activity exceed £25 million. RPDT will apply only to trading profits (where land is held in stock) and so profits made by investors in UK residential real estate will not be caught (including those in the build-to-rent sector). Draft legislation is in the current Finance Bill, and is subject to further change.

Non-UK residents will be subject to a 2% SDLT surcharge for residential acquisitions. Since 1 April 2021, a different rate of SDLT has applied to individual, trust, partnership and corporate buyers of residential property in England & Wales who are not UK residents. A UK corporate purchaser may also be caught by the new surcharged rates if it is under the control of non-UK resident persons. There are special and specific tests to determine UK residence. The rates are 2% higher than those applying to purchases by buyers who are UK residents, and apply to purchases of freehold and leaseholds as well as rent on the grant of a new lease.

The Domestic VAT reverse charge ("DVRC") has applied to most supplies of building and construction services (including constructing, altering, repairing building or structures/installing heating, lighting and water supply) from 1 March 2021 and so applies to many "Living" activities and developments. The charge applies to both standard and reduced-rated VAT services for individuals and businesses who are registered for VAT in the UK that are reported within the Construction Industry Scheme.

If you are buying goods and services caught by the DVRC, then you must not pay VAT to your supplier. Instead you charge VAT to yourself (account for it as output VAT as if you had paid it to the supplier). If you can recover VAT, then you can reclaim it in the usual way. If (as a customer) you are an end user or an intermediate supplier and you give your supplier written confirmation of that status, then the DVRC is 'turned off' and you will then pay VAT to your supplier in the normal way.

Living and social care

The long awaited white paper, People at the Heart of Care, published on 1 December 2021, sets out the Government's vision to transform support and care in England. Media attention has been focused on the proposed cap on the cost of care for individuals, but for those in the sectors most likely to be affected by the reforms, including the Senior Living and Supported Living sectors, the white paper clearly identifies the need to put people's housing needs at the heart of their care provision. There is also recognition of the important role that specialist housing schemes (such as Integrated Retirement Communities) have to play in meeting the diverse and growing needs of our rapidly ageing population.

In this article, we have looked at some of the broad range of new and prospective legislation that stakeholders in the Living sectors need to be considering. Look out for more legal update briefings from the Gowling WLG Living team in 2022.

If you have any questions, please contact Dominic Morris or Daniel Leather.

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