Key developments for real estate in 2018 and beyond

Posted: 02/02/2018

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The Christmas decorations have been packed up. New Year’s resolutions have been made (and broken). Now it is time to turn our attention to the issues facing real estate practitioners in 2018. A number of changes lay ahead for those letting commercial and residential property. Below are five key developments that will impact landlords and tenants.

Minimum Energy Efficiency standards (MEES)

As of 1 April 2018, properties (both commercial and residential) with an EPC rating of F or G cannot be re-let until relevant energy efficiency improvements are made. A property’s rating must be brought up to at least an E, unless an exemption applies and is validly registered. This is not the end of the story. The Clean Growth Strategy illustrates the Government’s renewed focus on the energy efficiency of both commercial and domestic properties. 2018 will see further consultations on:

• raising MEES for rented commercial buildings;
• improving MEES for residential and commercial properties;
• "a long-term trajectory" for residential MEES to achieve the Government’s aspiration of upgrading as many homes as possible to a C rating by 2035; and
• the introduction of similar energy performance standards across the social housing sector.

The Government issued the first of these consultations on 19 December 2017. The consultation, Domestic Private Rented Sector minimum level of energy efficiency, which closes on 13 March 2018, seeks views on the government’s proposal to amend the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962). The Government intends to remove the "no cost to the landlord" principle in achieving MEES for domestic properties and replace it with a capped landlord financial contribution element. The Government proposes to set the cap at £2,500 for each property. At present improvements to domestic properties are not compulsory where cost neutral green funding is unavailable. If the Government gets its way, landlords will need to use their own funds (subject to the cap) to bring properties up to standard.

GDPR (General Data Protection Regulations)

Tougher data protection regulations come into force on 25 May 2018, replacing the current UK Data Protection Act 1998. All organisations that collect, store and use personal data which could identify a living individual need to comply. Businesses operating in the real estate sector are no exception. For example, letting businesses are likely to:

• hold data about living individuals such as contact and financial details on tenants (individuals, sole traders and partnerships);
• collect data via building management systems such as CCTV and security systems;
• pass data on to third parties such as managing agents, property maintenance firms, referencing agencies, debt collection agencies and other property advisors.

With significantly increased fines for non-compliance (up to 4% of global turnover or €20m, whichever is greater), it is essential that steps are taken to:

• review how personal data is collected, stored and used;
• identify risks; and
• put in place policies and procedures to ensure compliance.

Further information can be found on the GDPR page of the Information Commissioner’s Office website.

New edition of RICS Service Charge Code

RICS will launch the 4th edition of the RICS Code of Practice: Service Charges in Commercial Property on 1 April 2018. For the first time, the code will be published as a professional statement with eight new mandatory requirements. The mandatory requirements include:

• owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services, unless the lease of the property gives them the explicit right to do so;
• all expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease; and
• where acting on behalf of a tenant, RICS members must advise their clients that if a dispute exists any service charge payment withheld by the tenant should reflect only the actual sums in dispute.

It is expected that this elevated status will lead to greater levels of compliance by landlords and their managing agents.

Ban on letting fees and unfair leasehold practices

A draft Tenant Fees Bill 2017 was introduced in Parliament on 1 November 2017. According to the Secretary of State for Communities and Local Government, it aims to deliver "a fairer, more competitive, and more affordable lettings market where tenants have greater clarity and control over what they will pay". The Bill seeks to ban landlords and their letting agents from requiring any payments (on top of the rent) from tenants as a condition of granting, renewing or continuing a tenancy with the exception of:

• a refundable security deposit that will be capped at no more than six weeks’ rent;
• a capped refundable holding deposit (no more than one week’s rent); and
• tenant default fees (such as replacing a lost key).

Trading Standards will enforce the ban and can impose fines of up to £5,000 on landlords or their letting agent. There is no clear date yet on when the ban will come into force, but legislation is likely to be made in 2018.

We will also see a number of other changes to residential leasehold legislation. On 21 December 2017, Sajid Javid, the Secretary of State for the Department for Communities and Local Government, announced a crackdown on unfair leasehold practices which will include new measures to:

• ban new residential long leases from being granted on houses, whether new build or existing freehold houses;
• ban ground rents on all new long leases, for both houses and flats; and
• close the loophole under Ground 8 of the Housing Act 1988 to prevent long leaseholders having their home repossessed unfairly.

The Government also announced that they would:

• work with the Law Commission to support existing leaseholders and make the process of purchasing a freehold or extending a lease much easier, faster and cheaper;
• provide leaseholders with "comprehensive information" on redress, including where their conveyancer has acted negligently;
• make sure freeholders have equivalent rights to leaseholders to challenge unfair service charges; and
• introduce new ways for developers to create long term arrangements for the maintenance of shared facilities and open spaces on freehold developments. A review of commonhold is identified as a project and the Government will be responding to the Law Commission’s report Making Land Work.

There is much more detail in the Government’s response to the consultation Tackling unfair practices in the leasehold market. It is worth a read to appreciate the scope of the changes that lie ahead.

Unopposed lease renewals under the Landlord and Tenant Act 1954

A pilot scheme, aimed at processing unopposed business lease renewal claims as smoothly and as quickly as possible, is due to start early in 2018. Where an unopposed business lease renewal claim is issued at the Central London County Court, it will be transferred to the First-tier Tribunal (Property Chamber) for determination. The parties will need to progress the proceedings at a quicker pace and adhere to a much tighter timetable, the aim being to progress the matter from the issue of the claim to trial within 20 weeks. For example, the draft directions only allow for one round of tenant’s amendments to the draft lease and expert valuers must prepare valuation evidence while the lease terms are being negotiated. Clients need to be made aware of the tighter timescales.

Wider trends affecting real estate

Whilst it is essential to be alert to legal developments, it is also important to understand the wider trends affecting real estate. The real estate industry as a whole is becoming more complex as it responds society’s changing needs brought about by the Fourth Industrial Revolution. That is the digital revolution that is "fusing the physical, digital and biological worlds". Think artificial intelligence, robotics, the internet of things, autonomous vehicles, 3D printing, blockchain, smart contracts and big data. A joint publication from PwC and the Urban Land Institute, Emerging Trends in Real Estate, makes an interesting read. It comments that "real estate is being reshaped by social, demographic and technological change".

The modern workplace is evolving rapidly as a result of people’s changing expectations on how they want to live, work and travel. Occupiers continue to demand flexibility. Average office lease lengths in London are now just over six years. According to recent data, WeWork is set to become London’s largest private user of office space. We are seeing much more mixed-use development "driven by urbanisation and the blurring of boundaries between people’s professional and personal lives". One respondent to the Emerging Trends report has commented that: "… as landlords we have to be more flexible … tenants are asking for shorter leases and break options. It requires a change in mindset and a willingness to take more risk." This inevitably impacts the way legal documentation is drafted and negotiated.

Technology companies are entering the market. Google plans to build a city "from the internet up". Sidewalk Labs, the urban innovation start-up owned by Google’s parent company Alphabet, is working with the city of Toronto to develop Sidewalk Toronto. The vision is "a new type of place that combines the best in urban design with the latest in digital technology to address some of the biggest challenges facing cities, including energy use, housing affordability, and transportation".

Blockchain, the technology used to underpin the use of the digital currency Bitcoin, could also be a game changer for the real estate market. Landlords, and their agents could manage property portfolios using Blockchain ledgers. In its 2017 annual reports and accounts, HM Land Registry set out its priorities for digital transformation which include exploring the use of new technologies such as blockchain and artificial intelligence.

AI, machine learning and intelligent buildings will also have a wide-reaching impact on real estate over the coming years. Two-thirds of respondents to the Emerging Trends survey believe that real estate business models and valuations are changing as a result of technology. Players in the real estate industry should not ignore these wider trends. As Bill Gates said: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction".

This article was published in Landlord & Tenant Review in February 2018.

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