Living in 2024 - Living sector talking points for the new year

34 minute read
14 December 2023

Our Living team brings together specialist expertise from across the living asset classes, helping clients from across the open market housing, affordable housing, build to rent, student housing, senior living and care, hotels and co-living sectors. As we have in previous years, we look back at 2023 and forward into 2024 to consider some of the legislative proposals the UK Government is bringing forward, some key case decisions and emerging market trends that stakeholders in the living sectors will have to navigate.

What we've seen this year

Last year, we pointed to the unpredictability of government policy, ongoing supply chain issues, economic instability and high rates of inflation all impacting the cost of living, buying, borrowing and building. Those factors have impacted significantly this year and will continue to do so in 2024, but we are seeing some easing of conditions and growing confidence across the living sectors despite ongoing uncertainties.

With a general election on the horizon, it seems living (housing, planning, tax and regeneration in particular) is going to be a key policy battleground. There is an opportunity to refocus housing policy to better enable the housing and Living sectors to bring about a step change in the delivery of new, good quality housing, which better meets the diverse needs of customers across the UK. There is also a risk that emerging housing reform legislation may be rushed through Parliament, bringing with it adverse collateral impacts across individual living asset classes. It is a challenge for all political parties to balance their desire for consumer-friendly, vote-winning housing policies with the needs of the housing and living sectors' developers, operators, investors and funders who are critical to solving our "housing crisis".

Our Living team has tracked all of these issues and more this year. In this article, you will find commentary on some key topics and a series of links to multi-media content from our team.

The issues facing housebuilding in 2023

2023 has seen housebuilders face multiple challenges including preparing for new legislation and regulation against a backdrop of political uncertainty, while dealing with challenging market conditions and increased costs. Earlier in the year, we spoke to a variety of people from around the housebuilding industry to ask them "What's on your desk?". The conversations gave a fascinating insight into the housebuilding sector.

Single family rentals

Single family rental (SFR) is a rapidly growing market within the housebuilding industry, attracting substantial and sustained investment. We recently launched a series of short video guides around SFR, providing essential insights for each stage of a successful SFR portfolio. The series introduces single family rental as a concept and then goes deeper into planning, land acquisition, construction, tax considerations, and the challenges of estate management and site set-up.

We anticipate significant further SFR interest and opportunities throughout 2024 as the asset class continues to evolve.

The role of tech andAI

Digitalisation, technology and artificial intelligence are transforming how we develop, operate and deal with real estate. Nowhere is this seen more clearly than in the living asset classes. Tech applications are being used to support the whole lifecycle of living assets at single property and portfolio levels. It is critical for living operators to have an integrated tech strategy that is consumer friendly, easily adopted by employees and has flexibility to accommodate the rapid technological advances we are presently seeing. In this article, we explore some of the key issues around digital transformation for the living sector.

We have seen a significant interest from developers, operators and asset owners in engaging in these digital systems. In 2024, we anticipate more discussions and focus in the area as the market seeks to understand the risks when buying IT systems and how to make the most of the data they produce and the customer experience benefits they can bring.

Biodiversity net gain

Anecdotally, biodiversity net gain (BNG) appears to be near the top of the in tray for many of our clients. It is a critical component of any ESG strategy but can bring with it significant practical and viability challenges. Last year, we wrote that new provisions in the Environment Act 2021 relating to BNG would take effect from November 2023. This has now been and gone and the relevant provisions have not yet been brought into force. The Government has since delayed implementation until January 2024 and draft secondary legislation was laid before Parliament on 30 November 2023.

The provisions require that all planning permissions will provide for a mandatory increase of 10% BNG in the post-development biodiversity value, when compared to the pre-development biodiversity value. A number of options to deliver BNG will be available to a developer. The preferred method will be for delivery to take place on-site, through habitat creation and enhancement as part of the development. However, there will be many cases where this is simply not possible, notably due to constraints in the area of the development site. Therefore, in these instances the developer will need to turn to off-site solutions.

Due to numerous local planning authorities already adopting their own BNG policies ahead of the implementation of the Environment Act 2021 provisions, a market for the sale of biodiversity units is already developing. Natural England has published a biodiversity metric which developers must use to calculate the pre-development baseline biodiversity value and therefore calculate the value of biodiversity (measured in biodiversity units) required to deliver a 10% BNG. Once this value is established, they can approach the market and enter into an agreement with a third party landowner, who will sell the developer the required number of biodiversity units, which they will generate on their land through biodiversity creation and enhancement. Due to the infancy of this market, it will not be likely that these units have already been generated through works already carried out, and so developers will need to give thought to timings regarding the delivery of works and payment for the biodiversity units.

As these rules are brought into effect across the whole country in the beginning of the new year, developers will need to get to grips with the BNG rules set out in the Environment Act 2021 and the soon-to-be-made secondary legislation, if they have not done so already, and plan how they will deliver their BNG and factor the potential cost of acquiring biodiversity units into land acquisitions.

DLUHC announcement regarding brownfield sites

In October and December the Department for Levelling Up, Housing and Communities (DLUHC)announced the second and third tranches of the £180 million Brownfield Release Fund and it is hoped that it will lead to the building of new homes on brownfield sites.

The funds are released directly to councils to accelerate the process of making land available for construction. The Government's ambition is to reinvigorate communities by restoring abandoned car parks, industrial sites and deteriorating town centre buildings for productive use.

This is part of the Government's brownfield-first approach to building homes. Brownfield development poses a number of legal issues and these are often some of the most challenging to de-risk and deliver. While the funding pot is small, it may be signposting future intent for the Government to do more to support brownfield development.

Notable judgments

2023 was a busy year for cases in the living sector and, taken together with the significant legislative reform proposed, there is much to digest.Cases that particularly caught our attention this year include:

  • Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 – a case that impacts the approach to litigation when alternative ways of resolving issues could be considered first. Landlords of living assets risk large numbers of tenant disputes escalating into costly litigation, and could instead be re-directed by the court to alternative means to settle the dispute.

    The claim by a homeowner was for damage caused by the encroachment of Japanese knotweed from a neighbouring property owned by the Council. The Council argued that the claimant should have used its dispute resolution and complaints service before bringing proceedings. Ultimately, the Court of Appeal found that a court can lawfully stay proceedings for, or order, the parties to engage in a non-court-based dispute resolution process (which would include the requirement to participate in an internal complaints procedure).

  • In another Court of Appeal case, Avon Ground Rents Limited v Canary Gateway (Block A) RTM Company Ltd [2023] EWCA Civ 616, it was decided that even where a shared ownership lease has not staircased to 100%, it is still a "long lease" for the purposes of the Commonhold and Leasehold Reform Act 2002 with qualifying rights to form Right to Manage (RTM) companies. This judgment will also have important implications for lease extensions.
  • Rakusen (Respondent) v Jepsen and others (Appellants) [2023] UKSC 9: Of interest, to those using the rent-to-rent model, the Supreme Court found that, where there had been a breach under the Housing and Planning Act 2016, a Rent Repayment Order (RRO) could only be made against immediate landlords (and not the superior landlord). But it is significant that amendments have been proposed to the Renters (Reform) Bill that could reverse this decision, and so ensure that superior landlords could be held liable for breaches by intermediate landlords.
  • Back in February 2023, we covered the Supreme Court case of Aviva Investors Ground Rent GP Ltd and another v Williams and others[2023] UKSC 6 in which the Supreme Court looked at when the court could interfere with a landlord's 'discretionary management decisions'. Leaseholders of apartments were required to pay a fixed portion of common costs "or such part as the landlord may otherwise reasonably determine." Therefore, the landlord had a contractual right to vary the service charge payable. The Supreme Court held that, where there is a contractual provision in a lease giving a landlord discretion to determine a point about service charges, this was not void.The decision as to whether to re-apportion, and what the re-apportionments would be, were "discretionary management decisions" for the landlord. The court could only determine whether the resulting service charges were payable in light of the contractual requirements (here, that the landlord must act reasonably) and well-established statutory requirements. However, the court could not stray into the landlord's management functions and undertake the apportionment exercise itself.

Building safety and related matters

No living sectors legal review would be complete without a mention of building safety legislation. The implications of the Building Safety Act 2022 (BSA 2022) are too far-reaching to capture properly in this update. The headline from 2023 is the constant pace of secondary legislation, regulation, guidance and further consultation. The volume of material and unrelenting pace of publication has kept lawyers, developers and property managers busy throughout the year. Our recent updates include:

RAAC hit the headlines at the end of the summer with high profile cases in schools. But RAAC was used in many buildings including in the living sectors. We looked at where the liability for RAAC repair sits as between landlords and tenants.

Social housing regulation, tenants charter & consumer protection

The intention behind the Social Housing (Regulation) Act 2023 is to drive significant change in landlord behaviour to focus on the needs of their tenants, to facilitate proactive regulation of social housing and to hold landlords accountable for their performance. There are significant changes, but only some of these changes are in force and more detail is expected in the form of secondary legislation in the course of the coming year. However, there are some things providers should be doing now to be prepared. Read our article to find out more about the Social Housing (Regulation) Act 2023 and what operators and managers need to know.

Levelling Up and Regeneration Act 2023

The Levelling Up and Regeneration Act 2023 (LURA 2023) was passed on the very last day of the last Parliamentary term. Although now on the statute books, most provisions have yet to come into effect.It has the potential to significantly reshape the planning system and makes significant changes to the way the real estate market operates.

There are numerous implications for the planning process which developers will need to consider so that implementation of LURA 2023 does not create obstacles on future (or current) schemes. Two of the headline planning changes are the abolition of the four-year enforcement rule (so that the enforcement window in all cases will be 10 years) and the replacement of community infrastructure levy (CIL) in most places with Infrastructure Levy. We expect to be assessing the detailed regulations for the new infrastructure levy in 2024.

LURA 2023 also provides for the replacement of the Environmental Impact Assessment (EIA) regime with a new Environmental Outcome Report (EOR) regime. The current regime requires an assessment to be carried out in relation to certain projects which will or are likely to have a significant impact on the environment and an environmental statement to be produced (often amounting to hundreds if not thousands of pages long) which can inform the decision maker of the environmental effects of the project on the environment. The new EOR regime is outcomes-focussed and will assess the extent to which the proposed project will impact the delivery of a clear and tangible set of specified environmental outcomes, to be set by the Secretary of State in Regulations yet to be made. The EOR may also specify any steps which will be taken to avoid, mitigate or remedy the effects of a specified environmental outcome not being delivered. This is another change where detailed regulations are expected next year and the full impact on living Sector developers will be assessed.

LURA 2023 also makes a number of non-planning changes as highlighted in our recent article, including a new power for the Government to require information to be provided if:

  • useful in identifying the beneficial ownership of land,
  • useful in understanding relevant contractual rights in land;or
  • there is something about the land which may give rise to a threat to national security.

The provisions are extremely widely drawn but there is little detail in LURA 2023 itself and draft regulations are eagerly awaited. LURA 2023 does expressly allow those regulations to apply retrospectively. The information which will have to be disclosed will include transactional information about contracts and other arrangements which create, change, terminate, evidence or transfer interests or rights in land. It could conceivably catch things which are usually kept confidential e.g. sale contracts, agreements for lease, options, pre-emption agreements, lock-out agreements, promotion agreements, development agreements, forward funding agreements, share sale agreements for SPVs etc. The extent to which ownership and transactional information can be kept confidential is likely to be significantly reduced and will be concerning to many living sector developers, operators and investors for a variety of reasons. When the Government publishes the proposed regulations (or consults further) in 2024, we expect this will be a hot topic of discussion.

Older people's housing taskforce

In May, the Government launched the independent Older People's Housing Taskforce to examine the options for the provision of greater choice, quality and security of housing for older people. The taskforce, is chaired by Professor Julienne Meyer and has a strong membership of key stakeholders from across the senior living sector. The taskforce's objectives are "to examine enablers to increase supply and improving the housing options for older people in later life, and to explore way to unblock any challenges". It has submitted a report of interim findings to the Department for Levelling Up, Housing and Communities and the Department of Health and Social Care and expects its final report to be published next summer.

Taking legislative steps to help enable the growth of specialist housing for older people can deliver a boom in rightsizing, boosting the availability of mainstream family housing for the general housing market. There is also a growing body of evidence that older people living in a retirement community can derive significant health and wellbeing benefits delivering significant savings for both the NHS and social care system. These are two of many reasons why the rapid growth of a thriving UK senior living sector is essential. It is notable that, in all of the countries with a large senior living sector, specialist legislation has been put in place which helps to give confidence to both consumers and investors. In setting up the Taskforce, the Government acknowledges the opportunity and the challenges faced by the senior living sector. We are hopeful that the Taskforce's report will result in the profile of the sector being raised further and lead to greater priority being given across Government to promoting the growth of the sector to help meet the needs of our rapidly growing ageing population.

Minimum energy efficiency standards

In both 2021 and 2022, we suggested that the following year would see certainty as to the Government's proposals to increase the minimum energy efficiency standards in privately rented domestic property. The proposal had been to increase the minimum to EPC rating B – but the when and how had not been finalised. We do now have clarity from the Government in that the proposal has been scrapped. At least for the time being. It seems likely that in the build-up to the next general election, proposals will be made for how to improve energy efficiency in domestic buildings in a way that would not have such an immediate and costly impact on the private rented sector. It will be interesting to see whether the next Government prefers a subsidised approach – or one where landlords still take on the cost burden but are given more time.

Although the Government has been very quiet about the proposals to increase minimum energy efficiency standards for non-domestic property, there has been no suggestion that there is a change of policy on that – other than Government's response to the Committee on Climate Change (CCC) 2023 Progress Report, which acknowledges that "the proposed timelines within the original consultation will require updating to allow sufficient lead in time for landlords and the supply chain". This means minimum EPC rating C in 2027 and B in 2030 will now apparently be pushed later. Anecdotally the suggestion is that detailed proposals will be published in early 2024. This is important for the living sectors because there are many living assets that come within the definition of non-domestic property for the purpose of the minimum standards. We will be keeping a close eye on any government announcements next year.

The Leasehold and Freehold Reform Bill

In the first King's speech for 70 years, the Government (through the King) announced that this bill would be introduced into Parliament (which it subsequently has been). It is part of the Government's ongoing commitment to reforms to home ownership in the leasehold sector. The Bill as published does not include all of the reforms outlined by the King but the Government has confirmed that amendments will be added as the Bill progresses through Parliament. It is also clear that the detail of many of the Bill's provisions require secondary legislation so there is a lot we still do not know. While most of the proposed reforms seem to have met with approval across the living sectors, some provisions of the Bill are potentially of real concern. The main reforms include:

  • Making it easier and cheaper for existing leaseholders in houses and flats to extend their leases or buy their freeholds. To achieve this, changes will be made so that residential tenants in mixed-use buildings can exercise their right of collective enfranchisement to buy the freehold or take over management of the building by increasing the threshold of commercial space at which the right ceases to apply from 25% of the building to 50% of the building. This may affect the design of future mixed-use schemes. Tenants wanting a lease extension will have a right to a new lease of 990 years (currently flat tenants are only entitled to a new term of the unexpired residue of the existing lease plus 90 years and for tenants of houses it is even less). Changes to ground rent on lease extensions will bring them into line with the position on the sale of new leasehold properties which already have a ban on ground rent. It appears as though there will also be no minimum ownership requirement for a tenant before they can exercise their right to extend their lease. Landlords are also set to lose their ability to oppose a claim on the grounds of redevelopment, on the basis they are a resident landlord or if the land is required for public purposes.
  • Changing the way in which a valuer will calculate the compensation payable when a tenant extends its lease or acquires the freehold. The provisions in the Bill will need to be worked through but the effect is that the new valuation method should make it cheaper for tenants to exercise their rights to enfranchise. Marriage value will no longer be taken into account. Also, if the valuation under the existing law would be more favourable to the tenant, they can choose to use that method instead.
  • Making service charges more transparent – residential leaseholders already enjoy rights to challenge certain service charges. The Bill will extend this to fixed service charges. Fixed service charges are typically used to give cost certainty to residents and pass cost overrun risk to the operator. By potentially bringing fixed service charges within the ambit of wider service charge legislation, there is a real risk that this model could be undermined.
  • Making estate management charges fairer - homeowners within an estate will only be liable for estate management charges which are reasonably incurred and, if the charges relate to services or works, will only be payable if the services or works are of a reasonable standard. Regulations will be brought forward to specify a procedure that estate managers must follow when carrying out works. Owners of regulated rentcharges will not be able to take possession of a property due to non-payment of a rentcharge, even if the document creating the charge expressly grants this right. Before action can be taken to recover a regulated estate rentcharge, a demand must have been served and 30 days must have passed since service of it.
  • Banning the creation of new leasehold houses – while in many cases there is not a good reason for houses to be leasehold, there are situations where it is desirable e.g. in the senior living sector where the operator provides a wide range of services and a lease structure is the most suitable of the current tenures to achieve a workable operational model. This reform is not in the current version of the Bill and will have to be added by way of amendment – the exceptions to the ban will be key.
  • Capping existing ground rents – the announcement came in the King's Speech and the Government launched the consultation it promised would precede any change in the law on 9 November 2023. Five options are being considered – capping ground rent at either a peppercorn, an absolute maximum value, a percentage of property value, the original amount set or the amount currently payable. The current version of the Bill grants tenants of existing leases rights to "buy out" their ground rent, reducing it to a peppercorn in return for a premium where they have more than 150 years left to run on their lease. It is not clear how this provision fits with the Government's consultation. Proposals to cap ground rents at a peppercorn have caused widespread concern in the market. Ground rents can be an important source of income for investors, including pension funds and some local authorities, and the announcement has created a great deal of uncertainty in the investor community. Ground rents often rise in line with inflation and it is not clear why such rises need to be capped. While there have been some instances of gratuitous ground rent increases, such a broad mechanism will have the consequence of cutting income streams where there is no legitimate reason. While many commentators understand the desire to cap future increases of ground rents under existing leases, it is widely felt that this should not be introduced on existing leases. Retrospectively changing existing contractual arrangements is something we expect to be controversial and the subject of debate in Parliament. It seems likely that whichever route the Government chooses following the consultation, the portfolio values of many professional and institutional landlords and investors could be significantly adversely affected – and already industry groups are making representations to the Government on this point. This will be a key conversation over the coming weeks.

There had been speculation that the Government would attempt a much more radical reform of tenure, to either abolish leasehold completely and enforce use of commonhold, or replace it with something else entirely. It appears that any such plans have been scaled back and the Government's focus is now on trying to work within the existing system of tenure to make it fairer for homeowners.

Renters (Reform) Bill

The much-anticipated Renters (Reform) Bill was introduced into Parliament in May. As we reported at the time, the main points of the Bill which affect residential occupational tenancies are:

  • Changing the way rent can be reviewed – once the Bill becomes law, the only way for a landlord to increase its rent to an existing tenant will be by serving a statutory notice with the tenant being able to challenge what it perceives are above-market increases.
  • Abolishing fixed-term tenancies and replacing them with periodic ones - this will lead to the abolition of assured shorthold tenancies (ASTs), a cornerstone of the current residential property market (although this will take some years to come into force as explained below).
  • Ending "no fault" evictions – although this is slightly misleading. Once ASTs are abolished, the existing section 21 mechanism for bringing a tenancy to an end will end and landlords will need to serve a notice specifying a permitted ground for possession e.g. the landlord is selling the property or wants to occupy it, the tenant has serious repeated arrears, the tenant's behaviour is causing a nuisance etc.
  • A new ombudsman will be created – all private landlords will be required to join this scheme which will be capable of delivering binding decisions in landlord/tenant disputes.

The King's Speech confirmed that the Bill will continue its way through Parliament and indicated that a number of amendments will be made to the Bill. In particular:

  • The abolition of fixed term tenancies and the removal of the existing procedure for landlords to recover possession under section 21 will not take place until both stronger possession grounds and a new court process to deal with the expected higher volume of claims are in place. This is likely to take a number of years so it seems that fixed term residential tenancies will be around for some time yet.
  • As introduced, the Bill contained provisions which appeared to be designed to mitigate the impact of the abolition of fixed term ASTs on the student lettings market. However, these provisions as drafted didn't appear to quite reflect what the Government had suggested it was looking to achieve, and in addition were quite restrictive in only applying to lettings by specified exempted educational establishments, and so caused concern in the student lettings and PBSA market. The King's Speech promised "to protect the student market", recognising that this market is largely cyclical and that landlords must be able to guarantee possession each year for a new set of tenants. A new ground of possession to facilitate this is promised – we will wait for a revised version of the Bill to see the extent of this and whether it does the job.
  • While the existing Bill includes provisions allowing tenants to keep a pet with landlord's consent, it did not contain any provisions preventing discrimination by landlords against renting to families with children. The King's Speech confirmed that amendments would make it illegal to have a blanket ban on renting to tenants in receipt of benefits or with children.

A new version of the Bill was published in early December covering some additional points.

CMA investigation into PRs and event fees

The Competition and Markets Authority (CMA) is investigating alleged shortcomings in the private rental sector, concentrating on the safeguarding of consumers. Following an initial assessment, the CMA will be focusing resources on zero deposit schemes, 'sham licences', onerous guarantee clauses, unlawful discrimination.

The investigation also extends to certain retirement housing fees known as "event fees". This announcement has taken many in the senior living sector by surprise and the sector remains hopeful that legislation around event fees can be introduced off the back of the Law Commission's 2017 report on event fees to give greater re-assurance to investors and consumers around this issue.

We will issue an update on this topic when the CMA issues its findings in due course.

This 'living wrap' highlights just some of the important emerging legal issues we have been helping our clients with across the living asset classes in 2023. 2024 promises to be another year of change, so please look out for further updates and commentary from the Gowling WLG Living team.

Please contact Dominic Morris or Daniel Leather if you would like to explore any of the issues in this update or discuss with our living sector experts.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.