Gowling WLG's Living team brings together specialist expertise from across the Living asset classes. In this article, we 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.
The world changed in 2022 just as our economy and society began to emerge from the impacts of the COVID pandemic. Unpredictability of Government policy, ongoing supply chain issues, economic instability and inflation all impacting the cost of living, borrowing and building. It has not been easy to be a developer, operator, investor or funder in the Living sectors. Is the UK still an attractive place to do business now in the Living sectors? In our view the answer is – yes. Notwithstanding short-term economic uncertainty, the strong underlying fundamentals across the Living asset classes remain.
Our Living team advises clients from across the general housing, affordable housing, Build to Rent (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 law and regulation across the sectors.
Building Safety in 2023
Over the last few months of 2022 the focus has been around the implementation of the new building safety regime in the Building Safety Act 2022.
Our podcast – How We Live… Safely – Building Safety Autumn Update covers the latest position. This recent update on the new building safety levy and our article on the proposed gateway regime and overhaul of building control (which will be set out in detailed secondary legislation in 2023) demonstrate the pace and scope of changes. The Government's intention is that building control becomes more outcome focussed rather than a 'tick box' exercise. We hope to see the detail of the regulations in the first few months of the New Year.
During the Autumn, RICS consulted on valuing flats with dangerous cladding and Government consulted on the Decent Homes Standard for the private rented sector (which is broadly consistent with the existing standard in the social rented sector). Government also launched the pilot of the Medium-Rise Scheme funded by the building safety levy. This scheme aims to fund remediation of cladding in buildings between 11 and 18 metres where the developer cannot be traced or identified. The pilot scheme is aimed at specific buildings but plans to open up to applications from other buildings in 2023.
Energy efficiency
The impact of the increased cost of energy has direct and indirect consequences. Operators faced with increasing energy costs associated with shared facilities are looking to pass those on, but often find themselves having to balance these increased costs with pressure on pricing for their residents in order to attract and keep them.
There has also been a renewed focus on energy efficiency. The minimum energy efficiency standards (MEES) have prohibited new leases of sub-standard rated individual dwellings since 2018 – and all individual dwelling leases since April 2020. On 1 April 2023, non-domestic property will be brought within the prohibition on continuing to let (subject to exemptions). "Continue to let" means simply being a landlord – either freeholder or a tenant/landlord where there are subleases (although some very short and very long leases are excluded). "Sub-standard" means property with an energy performance certificate (EPC) rating of F or G (although between now and 2030, that is expected to change so that the minimum is C in 2027 and B in 2030 for non-domestic property).
Non-domestic property will potentially catch Living assets that are not individual dwellings (or a collection of individual dwellings) including hotels, some student accommodation and some retirement properties. The regulations are very specific in their application depending on the nature of the particular properties. Some common parts in buildings that are otherwise only dwellings may also be non-domestic property and will be caught if let on certain leases (whether to management companies or as part of ownership structures).
We also expect to see changes to the EPC regime in 2023 (or at least a timescale for them) as Government plans to enable changes – which could include increased triggers for EPCs, shorter validity periods and even alternative rating methods.
Biodiversity Net Gain
The Environment Act 2021 (EA 2021) contains provisions aimed at improving habitats and restoring our natural world.
In order to ensure that habitats for wildlife are left in a better state than they were in before the development, all planning permissions will provide for a mandatory increase of 10% bio diversity net gain (BNG). Although EA 2021 has received Royal Assent, details of how this will work are only expected to be published in the first few months of 2023 with the rules anticipated to come into force in November 2023.
The implications of BNG will need to be considered early on in any transaction. A number of options are available to a developer in order to satisfy its BNG obligations – works could be on site (if feasible) or off site (although the closer to the site the better). It will also be possible to buy units from a third party or credits from the Secretary of State in order to offset any adverse impact on habitats. All options will have pricing and timing implications. Details of the BNG solution will ideally be provided to the local planning authority at application stage. BNG will directly impact contractual documents (for example, option price mechanics reflecting the BNG cost and the ability to treat requirements as onerous in planning conditionality).
In order to secure the benefits of BNG for at least 30 years, conservation covenants are agreements between a landowner and responsible body put in place to protect the BNG. Conservation covenants will contain a mixture of potentially onerous positive and restrictive obligations on the part of both the landowner and the responsible body. The likely obligations in any conservation covenant may inform any developer's decision about whether it chooses to do on or off site works or whether it goes down the route of purchasing units or credits to discharge its BNG obligations.
Living developers and operators will be actively considering BNG in the context of their organisations' own Environmental, Social and Governance (ESG) agendas and how it can be incorporated into assets and landholdings. New city centre hotels and student accommodation may have limited options beyond the external fabric of the building for on-site solutions but retirement living and general housing developers with larger land holdings potentially have greater scope to incorporate BNG into scheme design, meeting BNG requirements and providing quality of life benefits to occupiers.
You can read more about these issues in our earlier articles on the conservation covenant regime (May 2022) and the case for biodiversity (February 2021).
Levelling-up
The Levelling-up and Regeneration Bill has been completing the first phase of its journey through Parliament in recent weeks. It has been widely followed by mainstream media due to public political disagreement about the extent of planning reform and Government's retreat from centrally set housing targets.
Government has introduced new proposals to allow Councils to block planning applications by developers who have not implemented previous planning permissions and introduce an annual reporting requirement for developers on the rate of build out of sites. Both proposals have been challenged by the housebuilding sector before so it remains to be seen how they manifest in the final legislation.
The Bill also contains new duties to disclose land interests - a proposal that has been around for some time but now seems likely to be implemented. Although many landowners are already under obligations to disclose beneficial ownership (via the UK PSC (persons with significant control) regime or the register of overseas entities (referred to below)), the proposal looks at provision of information about specific rights and interests in land. This may include disclosure requirements affecting land under contract or option – meaning that many transaction details which can currently be kept confidential may have to be made public.
As the legislation progresses through Parliament, our Living sector team will be analysing the impact as a clearer picture of the final form of the legislation emerges – look out for further briefings around this in 2023.
Wales
Welsh law continues to develop separately from English law in relation to various devolved matters that affect Living, including housing, planning, building safety, energy efficiency and tax. In some cases English and Welsh law is aligned but the implementation dates may be different (e.g. various provisions of the Environment Act 2021) – but in other cases the divergence is more extreme.
In particular, the Renting Homes (Wales) Act 2016 (RHWA 2016) substantially changed the regime for both social housing and private sector tenants in Wales. This included the introduction of a new compulsory form of rental agreement known as an occupation contract (and conversion of existing residential leases and licences to occupation contracts) on 1 December 2022. RHWA 2022 overrides some fundamental principles of property and leasehold law (e.g. it has its own regime in relation to landlord consents). Extra care is needed over the coming months in dealing with Welsh property while owners and occupiers get to grips with the new regime.
Wales has also introduced two new residential use classes targeting beds that are not being used as primary residence – Class C5 (used otherwise than as sole or main residences) and Class C6 (short term commercial letting dwelling house) to address concerns over use of housing stock. (Wales did not update its use classes last year when England adjusted classes and introduced new Class E).
Overseas entities – where are we now?
The popularity of Living assets with overseas investors, particularly hotels and premium apartments, has meant the Living sector has been impacted by the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA 2022) as much as any other part of the real estate market. Essentially overseas entities (companies, partnerships – but not individuals) need to be registered on the new Register of Overseas Entities (ROE) at Companies House in order to acquire and dispose of a registered land interest. HM Land Registry has been adding restrictions to titles over recent weeks and transactions involving an overseas entity are likely to be caught by the restrictions in some way (although the exact requirements will depend on the circumstances).
There are criminal penalties for non-compliance with ECTEA 2022 – the next key date being that any overseas entities that currently own registered land must be registered on the ROE by 31 January 2023. More details on ECTEA 2022 implications for landowners are set out in our article here.
What the courts have been looking at in 2022?
It's not just Government developing the law affecting Living asset classes this year. The courts have continued to deliver some notable judgments:
- Inconsistent planning permissions – In the Hillside Parks case, the Supreme Court considered the implications of development on sites with multiple planning permissions that may not be consistent. This scenario is not uncommon on large development sites. The decision from the highest court confirmed that where subsequent permissions made implementation of the original permission in full impossible – that original permission would no longer be valid. In particular, where planning permission granted consent for the development of a site comprising multiple units, it should not be considered severable. Although it is a matter of fact and degree, integrated schemes cannot be separated if part of it is subject of a materially different permission granted subsequently.
- Damp and Mould is a significant threat to residents, and enforcement will be strong – A tragic case from the coroner's court which captured national attention. In short, a family who lived in a property managed by a housing association had made repeated complaints about widespread damp and mould. Tragically a two-year old boy living at the property passed away in 2020 and the coroner decided the death was a result of the prolonged exposure to mould. High profile coverage and swift Government intervention means we expect a particular focus by housing associations (and operators of all Living assets) to tackle this and similar issues – whether by property management measures (such as increased inspections and mitigation measures), enforcement (where the issue is the occupier's responsibility) and proactive prevention.
- Right to Manage ("RTM") Companies Do Not Acquire The Right To Manage Common Facilities Shared With Other Blocks – In January 2022, the Supreme Court gave its decision in the case of Settlers Port v First Port Property Services case and overturned established authority (the 'Gaia case') by deciding that an RTM company does not acquire the right to manage shared common facilities. There was an estate of several residential blocks. The RTM company was formed in respect of one block only. The company sought to take over management of services relating to the shared facilities enjoyed by the leaseholders of other blocks in the estate too. The other leaseholders objected to this, arguing that the RTM company could only exercise management functions in respect of the premises for which the RTM was formed.
The Supreme Court agreed that this was what was intended by the Commonhold and Leasehold Reform Act 2002, and decided that the RTM company only acquired the right to manage over the building where occupants had exclusive rights, so did not extend to shared estate facilities. Given that the leading case previously had found the opposite, there will currently be many RTM companies who are in fact managing shared facilities. Going forward it poses greater potential for management of different facilities within the same estate by different managers, which will have practical implications.
- Refuse consent to your neighbours (objectively) ugly build? – This concerns a situation where a party with the benefit of a restrictive covenant is asked to consent to development of the land subject to that covenant. In a 2020 case the Court of Appeal found that, "a neighbour has a legitimate interest in the appearance of what is built next door to him". However a neighbour could not refuse consent to a development merely because it is not to their taste; that would be entirely subjective. Taste must be measured according to something more objective.
This decision was recently applied by the High Court in Davies-Gilbert v Goacher & others. The construction of two detached residential properties on land subject to a restrictive covenant "not to erect upon any part of the property… any … erection building or wall whatsoever without such previous written licence [not to be unreasonably withheld]". The relevant consent was that of an adjoining owner who refused on the basis the building would have a detrimental impact on the amenity value of the estate and could threaten the future use and commercial value of the neighbouring land. The Court upheld the refusal of consent. Although irrelevant factors were taken into account when refusing consent, bad reason does not vitiate a good one provided that the reasons are freestanding and that the good reason is not merely a makeweight. The proposals meant there was a risk of the new development overlooking adjoining land which would have had a detrimental impact on its value. This decision was therefore reasonable. Provided a preference for a particular aesthetic can be measured against some objective criteria, it can potentially be relied upon in refusing consent to development works that are constrained by restrictive covenants.
We also anticipate a decision on a key Supreme Court case heard in December 2021 relating to whether private nuisance provides a remedy against 'viewing' from neighbouring land – essentially can a neighbour enforce a right to privacy? This is the Supreme Court case of Fearn & Ors v The Board of Trustees of the Tate Gallery. In short, the Tate Gallery on the South Bank in London built a 10-storey extension – the Blavatnik Building – which provided a 360-degree viewing platform. From this platform, visitors to the Tate could look into neighbouring flats, which were largely constructed of glass; many posted images of the flats on social media, made gestures and took pictures.
The flat owners argued that use of Tate's viewing platform unreasonably interfered with their enjoyment of their flats so as to be a nuisance (either as the law presently stood or as it needed to be developed taking into account the Human Rights Act 1998). Therefore they brought proceedings for an injunction from viewing from part of the viewing gallery. The Court of Appeal dismissed this claim – see our insight from the time here. We now await the view of the Supreme Court who were asked to consider the further appeal on the basis of article 8 of the ECHR and in common law nuisance.
New Year – new rules
Immediately in the New Year, certain Living assets will have to deal with:
- Additional rights for telecoms operators to install equipment in residential buildings – new regulations coming into force in England and Wales on 26 December 2022 will allow code operators to apply to court for interim code rights in multiple dwelling buildings where an occupier requires service but the landlord has repeatedly failed to respond to operator notices. This will give code operators slightly more leverage in terms of acquiring code rights but is intended to deal with unresponsive landlords – and will encourage others with multi-dwelling Living assets to ensure that telecoms operator notices are dealt with promptly!
- New Homes Quality Code (NHQC) – All developers of private for-sale new homes should register with the New Homes Quality Board by 31 December 2022 (although the consequences of not doing so are not clear!) Registered developers will then be covered by the New Homes Quality Code – see our article on the NHQC from earlier this year here.
Government plans with unknown timings
The Social Housing (Regulation) Bill continues through Parliament. It is intended to put into place many of the reforms set out in The Charter for Social Housing Residents. The Charter was a government white paper intended to deliver "transformational change" for social housing residents in England and will involve comprehensive and wide-ranging changes including greater regulator intervention with poor performing landlords, greater transparency and the addition of safety to regulator objectives.
Various Government proposals are still floating around with potential to be brought forward. The abolition of no fault evictions (s21 notices) is the most likely to be realised in 2023. Other proposals that are still being talked about but seem further off include:
- A possible ban on new leasehold houses.
- Increased regulation of residential estate agents (possibly a qualification) and other interventions aimed at enhancing the conveyancing process for consumers. Suggestions have included caps on fees, incentives to use technology solutions and fixed timetables. We assume that any consumer focussed reform would apply equally to new build and private sales of homes.
- Commonhold – since the Government launched the Commonhold Council (an advisory panel of leasehold groups and industry experts to inform the government on the better implementation of commonhold) in May 2021, very little has moved forward publicly. The Law Commission report on "Reinvigorating Commonhold" does not yet have a government response – presumably on the basis that the Commonhold Council will advise government first. Any material progress in advance of the next general election seems unlikely.
No doubt political parties will begin to test the water with policy ideas in 2023 and we will get an idea of which developments might be pursued before or after the next general election.
What else will we be talking about in 2023?
Construction cost fluctuation
This well-documented 'perfect storm' of economic pressures – including inflation, energy prices, investor uncertainty and shortages of goods, materials and labour – is presenting issues for parties entering into construction and engineering contracts. Understanding and providing for these economic pressures has become a key contractual consideration.
We are seeing a number of measures being adopted to tackle the issue of rising and unpredictable construction costs, including:
- Advance payments for the purchase of materials up-front – with vesting provisions to ensure title to those materials passes to the employer;
- Increased use of Guaranteed Maximum Price (GMP), or "not-to-exceed price" contracts, under which contractors are reimbursed for materials, labour and a fee to cover their profit – but subject to a maximum price, which is the most that the contractor is entitled to bill for the project;
- Provisional sums which are included within the contract price for items of work that cannot be sufficiently defined or detailed to allow for an accurate determination of cost at the date of entry into the contract.
Fluctuation provisions – which for many years were typically deleted from construction contracts – are also making a comeback. These are a contractual mechanism that allows contractors to pass on increased costs to employers, by adjusting the contract price in line with the fluctuating cost of certain specified materials. Fluctuation provisions can be of mutual benefit to both employers and contractors since they provide for a "rise and fall" mechanism to account for both increases and decreases. They may also result in lower bids being tendered at the outset of a project since they mitigate some of the fluctuation risk contractors may otherwise have to absorb. Further, they may also mitigate the risk of disputes later down the line and thus help to preserve amicable commercial relationships.
Energy costs and Living assets
Rising and unpredictable energy costs are presenting issues for operators of Living assets. Those that haven't already will be exploring ways to manage the energy elements of operational expenditure – and how this might manifest in occupational contracts or property ownership structuring. Outside of contractual options and energy efficiency measures (discussed above) Living operators are working to influence occupier energy behaviour through education and incentives.
Housing market difficulties – and opportunities for shared ownership?
With a general election in 2024 (at the latest), will Government incentivise shared ownership in some way? Or will there be another intervention to support home ownership? Help to Buy hasn't been replaced and shared ownership is a route to housing affordability for those priced out of the market due to mortgage affordability – even with the anticipated house price correction in 2023. We are watching how this might impact transactions, particularly commercial opportunities between house builders and registered providers.
ESG is high on the agenda and finding its way into transactions
Beyond the major economic pressures resulting from the cost of living crisis, energy and interest rates, we anticipate continued growing interest in ESG driven by regulatory, investor and occupier requirements. Implementable strategies that have a measurable impact (which can be reported objectively) will be at the forefront of the conversation – and those will largely be asset and organisation specific.
We have already mentioned energy efficiency in this article and there is no doubt environmental gains can be made through improving the energy efficiency of buildings. However, there appears to be a growing desire within across Living sectors to go further and embed a wider range of net zero objectives in construction and supply chain management, design principles and asset management and an acknowledgment of medium to long term strategy by putting in place the framework and processes now, despite current cost pressures. Developers, operators, investors, funders and building contractors with the most ambitious net zero agendas are seeking to include net zero objectives in contractual documents. For example, use of sustainable materials, supply chain restrictions and accredited schemes in development agreements and property management agreements. The Chancery Lane Project (a collaborative initiative of international legal and industry professionals whose vision is a world where every contract enables solutions to climate change) has published an ambitious and thought provoking net zero land promotion agreement clause.
As ESG strategy matures, more organisations in the real estate sector are looking beyond "E" to "S" – the social agenda. Living assets have a unique role to play in generating social value since where people live is key to identifying where meaningful interventions can benefit local communities and promote wellbeing and quality of life. Property generally can contribute social value through employment programmes, use of space (and many other ways – some of which are captured in the social value section of the Better Building Partnership's Responsible Property Management Toolkit) but Living assets have a unique opportunity to generate social value through design and management – creating communities and influencing how they operate. We wrote about this earlier this year in our How we live… Well article. We anticipate that next year will begin to see social value increasingly given equal place with the environmental agenda in both the design, construction and management phases of Living schemes. We are in the early days of how that will manifest in transactions but anticipate this will be a growing talking point next year.
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.