Dominic Morris
Partner
Co-Head of Living and Head of Senior Living (UK)
Article
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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.
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.
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 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.
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.
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.
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.
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).
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.
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.
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:
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.
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.
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.
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:
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.
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:
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:
A new version of the Bill was published in early December covering some additional points.
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.
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