REAL NEWS SUMMER 2015
REAL NEWS SUMMER 2015 A NOTE FROM THE EDITOR Welcome to the summer edition of Real News, DLA Piper s quarterly guide to key developments in English and Welsh real estate law. In this edition:- Jon Gaskell looks at recent changes made to the CDM Regulations (page 3); Rob Shaw looks at the law as it currently stands on obtaining guarantees in a group reorganisation and the recent decision in Tindall Cobham -v- Adda Hotels (page 5); Lucy Hopson provides some pointers to commercial and residential landlords on the impact of the Energy Act 2011 (page 7); and Richard Woolich writes about Diverted Profits Tax and its applicability to UK property transactions (page 10). First, from me is a quick note about the recent Court of Appeal decision in ParkingEye Limited -v- Beavis [2015]. This decision is a significant boost for parking operators and a helpful decision for owners of shopping centres and retail parks. It is the first case in which charges for overstaying at car parks have been tested in Court. Here the Court of Appeal found in favour of the landowner and ruled that the charge was proportional, commercially justified and compliant with the Unfair Terms in Consumer Contracts Regulations 1999 ( UTCCR ). It is worth noting that Mr Beavis has been granted permission to appeal and the Supreme Court started to hear the appeal on 21 July. This case is a reminder that UTCCR applies to property contracts. UTCCR outlaws unfair terms in contracts made between businesses and consumers and provides that standard contract terms should be written in plain English, not be contrary to the requirement of good faith and be fair. Any unfair standard term in a contract is not binding on any party that is a consumer. In terms of property contracts please bear this in mind with regard to ASTs, auction sales, student accommodation agreements and plot sales. The Consumer Rights Act 2015 looks set to consolidate UTCCR and much other consumer law later this year, however, of note is that the controls over unfair contract terms will cover not just standard terms but will soon be extended to negotiated terms. We will report more on this later on in the year. Finally, if you have any requests for future content then please do get in touch. Rachael Jones Editor, Senior Associate Liverpool T +44 151 237 4764 rachael.jones@dlapiper.com 02 REAL NEWS Summer 2015
CDM 2015 New Regulations Come into Force The Construction (Design and Management) Regulations 2015 ( CDM 2015 ) came into force in April All real estate development and property lawyers will be familiar with the Construction (Design and Management) Regulations commonly referred to as CDM. Of application across the UK (in Northern Ireland, under a different guise), these regulations were originally introduced back in 1994, under the Health and Safety at Work etc Act 1974, and were then updated in 2007. However, with more than 40 deaths occurring each year on British construction sites, the need for an updated regulatory regime that is directed at managing construction health and safety risks needs no further justification. Why new regulations? CDM concerns and affects not just those who design, build and manage construction work, but also those who procure construction work. That is why developers, landlords and tenants need to know about CDM; the regulations are not solely for contractors and consultants to worry about. In April, a new set of regulations came into force CDM 2015. These replaced the 2007 regulations completely and come accompanied by new guidance from the Health and Safety Executive ( HSE ) which ousts the previous Approved Code of Practice ( ACoP ) and renders it obsolete. In short, a revised and revamped regime. Transitional arrangements run until October this year, covering projects that started before the implementation date but continue into the summer and autumn. Why the change? Twenty years ago, CDM was intended to implement a European Directive: however, the original regulations did not fully reflect the terms of the Directive. The last Government wanted to be seen to be implementing EU Directives into domestic law properly and that meant that re-alignment was necessary. In addition (and as is well known), the Coalition Government had been keen to show its commitment both to cutting red tape and also to facilitating the development of a more business-friendly environment. Finally, two thirds of construction industry deaths now occur on small sites; CDM, therefore, needed to be made more applicable to smaller construction sites and more relevant to their needs. www.dlapiper.com 03
What s new? Layout CDM 2015 is substantially shorter than the previous regulations. The intention was to make them more understandable to duty-holders, particularly smaller businesses. Approved Code of Practice has been replaced with new guidance The ACoP has been replaced with guidance. This, being much shorter and focused, is aimed at encouraging greater compliance with the regulations. Domestic clients are now caught CDM 2015 applies to any person for whom a construction project is carried out. Significantly, this means that domestic clients are now subject to CDM (but, that said, the majority of their duties may be undertaken by a contractor or can be transferred to a principal designer (see below)). Notification The threshold for notifying projects has also changed. The HSE now needs to be notified of projects that exceed 500 person days or last longer than 30 working days with more than 20 workers working simultaneously at any point. This should reduce the number of projects to be notified. Notification no longer triggers additional duties In addition, the requirement to notify the HSE no longer triggers additional duties to appoint health and safety coordinators. Instead, the requirement to appoint health and safety duty-holders now applies whenever there is more than one contractor. By way of example, a principal contractor now needs to be appointed whenever there is more than one contractor on a project, as opposed to when the project has to be notified. Written construction phase plans for all projects Written construction phase plans are now required for all projects instead of just those which are notified. This means additional work on small projects where this level of detail was not been previously required. Replacing the CDM Coordinator with a new Principal Designer The role of the CDM coordinator role has also be removed and replaced by a new principal designer role. This appointment is required on projects where there is more than one contractor. The principal designer must be appointed by the client in writing and is the designer with control over the preconstruction phase of the project; it will be interesting to see how this develops in practice. Building contracts, professional appointments and related contracts must all be updated to reflect the new role and new terminology. A move away from the competence bureaucracy CDM 2015 takes a new approach to competence. It removes the explicit competence requirements in the old regulations and replaces them with a requirement for the appropriate skills, knowledge and experience and, for organisations, a necessary organisational capacity. The HSE guidance recommends the standardised PAS 91 pre-qualification questions as a useful way of assessing organisational capability and suggests that due weight be given to designers and other construction professionals membership of an established professional body or institution. Our CDM toolkit For more information on CDM 2015 please refer to our client guide: https://www.dlapiper.com/insights/publications/2015/04/ construction-and-engineering-toolkit/ Construction clients (developers, landlords, tenants) as well as professionals and contractors and others involved directly or indirectly in construction projects (such as funders) all need to acquaint themselves with the new rules: ignore them at your peril! Jon Gaskell Legal Director, Edinburgh T +44 131 242 5573 jonathan.gaskell@dlapiper.com 04 REAL NEWS Summer 2015
Getting a guarantee on a group re-organisation Last year s appeal court case, Tindall Cobham 1 Limited and others -v- Adda Hotels [2014], outlines the issues posed to landlords by tenants intra-group re-organisations. It also demonstrates the extent to which anti-avoidance provisions in the Landlord and Tenant (Covenants) Act 1995 cut down the extent to which parties to a lease can agree their respective rights and obligations. In particular the 1995 Act interferes with the way in which landlords require the continuing support of a guarantor after an assignment of a lease. Whilst each case depends on its own facts, landlords can draw some comfort from the court s desire here to achieve a commercially sensible outcome. Here, an assignment of some hotel leases did not release the guarantee given to the landlord by the outgoing tenant s parent company as the landlord had not allowed the assignment. There is no sign of the 1995 Act being reformed in a way which would restore parties freedom of contract and so landlords, tenants and tenants guarantors should keep the Adda Hotels case in mind both when negotiating leases and when dealing with assignments. Key points for landlords include: To provide for the provision by an assigning tenant s guarantor of a parallel guarantee or sub-guarantee under which the guarantor supports the assigning tenant s liabilities under an authorised guarantee agreement; and To allow the landlord to stipulate that the incoming tenant provides its own guarantor and/or a rent deposit. Lease assignments and their effect on the liabilities of tenants and their guarantors The 1995 Act governs the liability of tenants and guarantors after the assignment of a new lease (generally speaking that is a lease granted on or after 1 January 1996). The starting point is that, if a tenant assigns a new lease, then it is released from liabilities arising under the lease after that date. Normally, the lease requires the outgoing tenant to guarantee those liabilities by means of an authorised guarantee agreement. However, there is no release where the lease stipulates that the landlord must consent to the assignment but no consent is obtained. There the tenant remains liable under the lease. Such an assignment is referred to in the 1995 Act as an excluded assignment. It is now clear that, where a guarantor has guaranteed a tenant s performance under a new lease, the guarantor s liability will end when the tenant s liability ends, such as on an assignment of the lease. So, if the tenant carries out an excluded assignment, the guarantor s liability will continue along with the tenant s. www.dlapiper.com 05
Anti-avoidance provisions Section 25 of the 1995 Act is an anti-avoidance provision and it applies to covenants in leases that require the giving of consent to an assignment. The courts have stated that it is to be interpreted widely. The intention of section 25 is to render void any agreement relating to a tenancy [that] would have effect to exclude, modify or otherwise frustrate the operation of this Act. In 2011 the appeal court ruled in K/S Victoria Street -v- House of Fraser [2011] that any agreement requiring a tenant s guarantor to also guarantee the obligations of an assignee will be void under section 25 and unenforceable. In so doing, it rendered a number of lease provisions void. Those provisions included a term once commonly agreed in commercial leases allowing a lease to be assigned to group companies of the tenant as long as the group s parent company remained in place as a guarantor. ADDA HOTELS CASE THE FACTS Two Hilton group companies (both referred to here as T ) were tenants under leases of ten hotels owned by a landlord, L. T s parent company, G, had provided a guarantee of T s covenants in the leases. As part of a re-organisation at Hilton T wished to assign the leases to another company within the Hilton group. The assignment clause in the leases prohibited assignments to group companies without L s consent and went on to state that L was entitled to require that G provide a guarantee of the assignee group company s covenants under the leases. T took the view that, as the decision in K/S Victoria Street showed that an agreement requiring a tenant s guarantor to also guarantee the obligations of an assignee was void under section 25, it could assign without L s consent and that both T and G would be released from future liability under the leases. Decision Both the High Court and Court of Appeal ruled that the requirement for G to provide a guarantee of the assignee group company s covenants under the leases was an agreement relating to a tenancy and therefore void under section 25. However, this did not mean that T could assign the leases without L s consent. The court s approach was to preserve as much of the commercial bargain between the parties as possible and they held that L s consent was still required, even if L could not require the continuing guarantee from G. As a result T had assigned the leases in breach of the assignment clause because T had not obtained L s consent. Therefore the assignments were excluded assignments and both T and G were not released from further liability arising under the leases. Rob Shaw Senior Associate, Sheffield T +44 114 283 3312 rob.shaw@dlapiper.com 06 REAL NEWS Summer 2015
Implications of the Energy Act 2011 for Commercial and Residential Landlords The Energy Act 2011 ( Act ) was brought into force to improve the energy efficiency of both residential and commercial property in England and Wales. The ideology behind the legislation is threefold: 1. to reduce the emissions of greenhouse gases; 2. to reduce the demand for energy in England and Wales; and 3. to improve residential living conditions for tenants. Following the Act receiving Royal Assent there was much debate regarding how in practice the Act would affect landlords of both residential and commercial properties. On 26 March 2015 the Government published the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 ( Regulations ) which will come into force in 2016. The Regulations supplement the Act and provide greater clarity to landlords as to their obligations under the Act. The main issue for landlords is that from 1 April 2018 landlords may be required to improve the energy efficiency of buildings caught by the legislation and all buildings (unless exempted) will need to reach a minimum energy performance rating if the landlord intends to grant a new lease or renewal lease of the premises. Energy Performance Certificates Most buildings are required to have an energy efficiency rating. A-rated buildings are the most energy efficient and G-rated buildings are the least energy efficient. The energy efficiency of a building will be shown in the Energy Performance Certificate ( EPC ). Under the Regulations, the statutory minimum energy efficiency which will be required if premises are lawfully to be let to tenants is an E rating. Roughly one-sixth of all commercial properties in England and Wales have F and G ratings, therefore the minimum energy performance standards are likely to have a big impact on investors, occupiers and lenders. Key Dates For lettings of premises which do not fall within any of the exemptions described below, the key dates for compliance with the Regulations are as follows: Domestic Properties: From 1 April 2018 the Regulations will apply only to the grant of new leases (either to a new tenant or on a renewal to an existing tenant), therefore if the landlord of a residential property wishes to let a property, that property must meet the minimum energy efficiency level. If it does www.dlapiper.com 07
not, the landlord will need to carry out the energy efficiency improvement works required by the Regulations (or show that no such improvement works can be made to the building) before it is let to a tenant; and From 1 April 2020 the Regulations will apply to all existing lettings. Commercial Properties: From 1 April 2018 the Regulations will apply only to the grant of new leases (either to a new tenant or on a renewal to an existing tenant). Landlords will need to provide evidence that the premises either meet the minimum energy efficiency levels or carry out the energy efficiency improvement works required by the Regulations (or show that no such improvement works can be made to the building) before they are let; and From 1 April 2023 the Regulations will apply to all existing lettings. In certain circumstances, if a landlord acquires non-compliant property then a temporary exemption may apply in which the new landlord will have six months in which to improve the property or demonstrate that an exemption applies. Landlords therefore need to start considering their property portfolios now in order to establish which properties fall within the Regulations and which properties will require works to bring them up to an energy efficient standard before the relevant deadlines. Are you exempt? The legislation does not cover all let properties. The following table sets out the main exempted properties: Domestic Properties which do not require an EPC (for example protected historic or architectural buildings, residential buildings that are used for less than four months a year). Low cost rental accommodation provided by a registered provider of social housing or property where the landlord is a private registered social landlord. Property which is occupied by a licence. Property which is let under a tenancy which is not an assured tenancy pursuant to the Housing Act 1988 or a regulated tenancy pursuant to the Rent Act 1977. Commercial Properties which do not require an EPC (for example, protected historic or architectural buildings, places of worship or religious activity, temporary buildings (which have a time use of less than two years), various industrial and agricultural buildings, small standalone buildings and buildings which are due to be demolished. Property which is a dwelling. Property which is occupied under a licence. Property which has a very short or very long lease (broadly, less than six months or more than 99 years). In addition, landlords of commercial properties will be eligible for an exemption from reaching the minimum standards if either: 1. after reasonable effort the landlord cannot obtain consent from tenants, lenders or from the superior landlord to install the energy efficient improvement; or 2. a suitably qualified expert provides written confirmation that either the measures will reduce a property s value by five per cent or more, or they would have a potential negative impact on the fabric or structure of the property. If a landlord believes that an exemption applies the landlord will need to notify the Local Authority by making an entry on the Private Rented Sector (PRS) Exemption Register. The exemption will not last forever. Exempted properties will be reviewed on a five yearly basis. What does the legislation mean for landlords? Works Landlords need to consider their property portfolios now in order to establish which properties fall within the Regulations and which properties require works to improve the energy efficiency before the relevant deadlines. 08 REAL NEWS Summer 2015
Finance Lenders could impose conditions on agreements to provide finance to landlords for premises with low energy efficiency ratings. It may be that for properties with an F or G rating no finance will be given as the landlord s income stream will be lost if it is unlawful to let that property. Retentions Loans on low rated properties may come with retentions to be released only when works which improve the energy efficiency of the building have been carried out. Service charge Landlords may be unable to claim the costs of works to improve the energy efficiency of buildings through service charges as the RICS Service Charge Code states that service charges are for recovery of operational management changes only. Rent reviews There is a concern that tenants may try to argue that for F-rated or G-rated properties the hypothetical letting is unlawful. Expiry/break Tenants occupying inefficient energy premises which are facing lease expiry or with a break option may look for alternative premises. Alienation Assignments and underlettings will be difficult on low rated properties as potential tenants would be reluctant to take on such properties. Alterations Landlords will need to consider carefully any tenant applications to carry out alterations and in particular whether these will affect the energy rating of the premises. Enforcement action against landlords Local authorities will be responsible for enforcing compliance with the legislation. The Local Authority will have the power to: 1. Serve a compliance notice this will require a landlord to provide evidence of the property s energy efficiency rating in order to assess if a landlord is in breach of the Regulations; 2. Once a breach is established the Local Authority can serve a penalty notice on the landlord imposing a financial and/ or publication penalty. In respect of domestic property the fine could be up to 4,000. For commercial property a landlord could be fined up to 10,000 or 20 per cent of the rateable value of the property (provided that the penalty must not exceed 150,000). If a landlord has registered false or misleading information a landlord could also be fined 1,000 in respect of domestic property and up to 5,000 in respect of commercial property. Summary Landlords should: 1. consider their property portfolios now in order to establish which properties come within the Regulations those which are not exempted and which therefore require works to improve the energy efficiency before the relevant deadlines; 2. consider whether any funding may be or may become available to carry out the works through the Government s Green Deal; and 3. be aware that tenants may look to renegotiate rents/ break leases which have a low energy rating and that lenders may impose conditions on financing agreements. Lucy Hopson Senior Associate, Leeds T +44 113 369 2509 lucy.hopson@dlapiper.com www.dlapiper.com 09
Beware Diverted Profits Tax When does it apply to UK Property Transactions? Introduction Diverted Profits Tax ( DPT ) (informally known as Google tax ) was first announced on 3 December 2014 as part of the Chancellor s Autumn Statement. In great haste it became law on 26 March 2015, due partly to the desire to rush it through before the UK s General Election. HM Revenue & Customs ( HMRC ) has provided interim guidance which provides some assistance in interpreting the new rules, but there are many aspects of the legislation that remain uncertain. The legislation is not primarily aimed at real estate transactions, although it has now been confirmed by HMRC that DPT does indeed apply to UK property transactions. However, neither the legislation nor the guidance really helps taxpayers understand the full scope of what types of real estate transactions will be caught. We hope in this article to elucidate the position a little. DPT is charged at a rate of 25 per cent, on relevant profits from land transactions after 1 April 2015. It applies to existing and new structures. It is deliberately set at five per cent above the UK corporation tax and income tax rates, currently 20%. Although not explicit in the legislation or guidance, it is considered that DPT is intended to apply to trading transactions (that is, where UK real estate is bought to be sold at a profit, or when UK real estate is developed to be sold), rather than apply to investment transactions, (that is, where UK real estate is acquired with the aim of generating UK rental income and capital growth). However, even this issue may not be beyond doubt. Charging Provisions The legislation targets two situations: First, a non-uk person may have an arrangement with another person which is intended to prevent the non-uk person from having a UK permanent establishment ( PE ). DPT can apply where the arrangement is designed to avoid tax or creates a tax mis-match. Where the tax applies, the non-uk person may be taxed as if it had a UK PE. This will be referred to below as the rules dealing with the avoidance of a UK taxable presence ; and Second, a person that is subject to UK corporation tax (i.e. a UK company or a non-uk company with a UK PE) may have an arrangement with a connected person outside of the UK where that arrangement has the effect of reducing UK taxable profits e.g. by channelling the profit offshore by means of a subcontract that results in a tax deductible payment by the UK taxpayer. The rules apply where there is insufficient economic substance in the arrangements. This will be referred to below as the rules dealing with a lack of economic substance. Exemptions from DPT The new rules are targeted at large groups or companies, and will not apply in a number of situations: If both of the persons involved in the relevant arrangements are SMEs (ie small or medium sized enterprises under EU law) then DPT will not apply to that arrangement; The rules dealing with the avoidance of a UK taxable presence will not apply in any 12 month accounting period during which the non-uk person (and other members of its group) has total sales revenue from UK customers of less than 10m; The rules dealing with the avoidance of a UK taxable presence will also not apply where the person who operates in the UK (and prevents the non-uk person from having a UK PE) is an agent of independent status that is not connected with the non-uk person; and The rules should not apply to any arrangements which solely result in the creation of debts (between the connected entities) which are subject to the UK s loan relationship rules. 10 REAL NEWS Summer 2015
Alarm Bells On the basis of current guidance there may be a particular risk in the following real estate scenarios: An example in the HMRC interim guidance indicates a risk of DPT applying where property is transferred from a UK company to a non-uk vehicle with which the UK company is connected, unless there is significant substance in the offshore vehicle and a good commercial reason for the transfer. This situation may, for example, apply to a sale and leaseback transaction. A non-uk company procures a development on UK land with an intention to sell. The company has an employee based in or who visits the UK and/or appoints a connected UK person to assist with the development. The greater the role of the employee/connected person in the UK, the greater the risk that this creates the avoidance of a UK taxable presence. A non-uk company buys UK real estate to sell on as trading stock, and has an employee based in or who visits the UK and/or a connected UK person that assists with the buying and selling process and negotiations. The greater the role of the employee/connected person in the UK, the greater the risk that there is the avoidance of a UK taxable presence. In addition to the above areas of concern, there is a wider concern within the property industry that standard Propco/ Opco structures that involve a non-uk property owning company and a related UK operator company may also be caught by the DPT rules. The better view may be that this is unlikely but this is an area where further analysis may be appropriate. What to do if you have an Alarm Bell Structure? Please get in touch with your tax advisers as soon as possible. Although there is no formal clearance mechanism there is an informal consultation process. Otherwise formal notification must be made, as discussed below, and there is a tax geared penalty for non-compliance. If it is decided that there is likely to be a DPT liability, notification to HMRC must be made in writing to HMRC within three months of the end of the accounting period (extended to six months in relation to accounting periods ended before 1 April 2016). A notification may lead to HMRC issuing a provisional notice stating that payment of DPT is due on the basis of the best estimate that can reasonably be made at that time. There are very little grounds, other than arithmetical error, to challenge this. HMRC may then issue a charging notice requiring actual payment which must be made within 30 days. No postponement is possible. After payment, the DPT is then reviewed by both sides, leading to possible adjustments, in the light of all the DPT provisions. If a structure is within DPT, it may make sense in certain cases to ensure that the relevant property interest is held by a UK taxpayer. This would make a UK tax charge inevitable but such charge would be at a rate which is five per cent below the DPT rate. In other cases, it may make sense to boost the substance of the offshore structure or ensure that activities within the UK are carried out by independent agents rather than employees or related parties. Challenge to the legislation? The EU Commission is currently considering DPT and its compatibility with EU law, so it is possible some changes may be made. Questions have been raised over DPT s interaction with freedoms of establishment and provision of services granted by Articles 46 and 59 of the Treaty on the Functioning of the European Union, but HMRC would no doubt respond that in the context of anti-avoidance any restriction on freedoms is justifiable and proportionate and that a certain lack of precision is inevitable when drafting anti-avoidance legislation in order to make it wide enough to be effective. However, the UK Government has pre-empted the BEPS process by introducing DPT unilaterally, and there could be an unacceptable level of uncertainty in cross border transactions if other countries followed suit. Australia in particular has rejected introducing its own legislation in relation to this issue. If the BEPS project results in an agreed international solution whereby each jurisdiction would receive its fair share of tax, DPT may be quickly confined to the history books but until that time it is a real and present danger to offshore structures. Richard Woolich Partner, London T +44 207 153 7336 richard.woolich@dlapiper.com www.dlapiper.com 11
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