These legal forces will shape the UK’s real estate landscape in 2025

Alison:

Morning, everyone. I am Alison Murrin, counsel in the real estate department at Ashurst, and I'm joined today by Richard Vernon, who is a senior consultant in our real estate department, having been a partner at Ashurst for many years. Morning, Richard.

Richard:

Morning.

Alison:

It seems that it's a good time to be thinking about the legal landscape in 2025, as the prime minister delivered his Plan for Change speech just a few days ago. One of the six milestones he mentioned is Rebuilding Britain, with 1.5 million homes in England and fast-tracking planning decisions on at least 150 major economic infrastructure projects. So high ambition, and certainly some of the topics that we are going to discuss today will have a bearing on achieving that milestone. But before we look more closely at some of the key legal developments for 2025, shall we just touch on current market sentiment for some of the key real estate asset classes and how these might fare in 2025? So if we can, could we start with the logistics sector, which continues to outperform despite macroeconomic and political headwinds?

Richard:

Thanks, Ali. Yes. Starting with logistics sector, yes, it remains strong, and that's driven by the permanent shift to online retailing coupled with the drive to shorten supply chains and to onshore production centres. But investors are going to need to focus on the availability of suitable sites for the medium to long-term development pipeline. For example, repurposing redundant industrial facilities in urban locations could provide a solution but that's going to be challenging considered against the pressure for more housing on brownfield sites.

Alison:

Yes, I think you're right. And talking of housing, Richard, what are the challenges for the living sector going forward?

Richard:

Well, if you take the living sector in its broadest sense, that's always done well and remains resilient. Demographic and social change have driven investment into this sector for many years, and that shows no sign of abating. However, we do need to tackle the chronic under-supply of housing. And the government has set out how it will support build-to-rent with guarantees that were announced in the budget. And firstly, the government has doubled the ENABLE Build scheme to 2 billion pounds, which will support smaller developers to deliver housing, which will include student housing and also housing for older people.

Secondly, BTR developers will see the private rented sector guarantee scheme open with almost 2 billion pounds available. One disappointment is that the chancellor chose not to reverse her predecessor's decision to abolish SDLT multiple dwellings relief, but also, there's a cash injection for the affordable homes programme, and confirmation of a new five-year social housing rent settlement, which is really good news, but the government clearly needs to go further.

Alison:

Yes, I think that's the case indeed, and clearly there's a long way to go to deliver the government's commitment to build 1.5 million homes. More on that later, but let's look at another asset class where demand is outstripping supply, and I am of course referring to data centres.

Richard:

Yes, data centres continue to experience exponential growth due to that ever-increasing demand for digital services. The issues are, or continue to be, the lack of available land and also a lack of power in the network to supply these buildings. Separately, sustainability will be a key theme for data centres. And interestingly, earlier this year the European Union introduced a mandatory requirement for data centre operators to report on energy performance and sustainability. Reporting will be supported by a rating scheme designed to increase transparency and support new technology to reduce energy and water consumption, promote the use of renewable energy, increased grid efficiency, and the reuse of waste heat. This will not directly impact on the U.K., but clearly an indication of the direction of travel.

Alison:

Thanks, Richard. Very interesting to see the direction of travel for data centres.

Richard:

Absolutely.

Alison:

But last but not least, we probably do need to cover offices.

Richard:

Yes, of course. And there's obviously no denying the office sector has had its challenges with investment values and pricing down, and as you and I have discussed over the last few years, there's a clear divide and becoming more apparent between ESG-compliant grade-A offices on the one hand, and secondary office buildings, which require significant capital expenditure to bring them up to standard. It's interesting that U.K. GBC's own whole life carbon roadmap suggests that an overall 59% reduction in energy consumption in the office sector will be required by 2050, and that report also states that commercial buildings are not currently being retrofitted at the pace or scale required to meet that target. And it's important to avoid the risk of being left with stranded assets, as minimum energy efficiency standards significantly impact on how the real estate market values buildings.

Alison:

Yes, I agree. Sustainability is a key theme for real estate across the board, and [inaudible 00:05:45] did take the opportunity to attend COP29 to reaffirm Britain's commitment to the international climate agenda by pledging to reduce carbon emissions by 81% by 2030 compared to 1990 levels. So the government is clearly hoping to drive the climate agenda forward, attract further investment and jobs in low carbon technology. But I'm really interested to hear your views on what this means for real estate going forward.

Richard:

Well, it's clear that we will not meet our net zero ambitions unless we decarbonize our homes and buildings. So improving the performance of existing stock through energy efficiency upgrades and retrofit projects is absolutely critical. The investment of an initial 3.4 billion pounds over the next three years in the Warm Homes plan to transform 350,000 homes is obviously a positive step, but arguably does not go far enough to achieve the energy efficiency improvements that are required in existing stock in the medium to longer term. The government still intends to publish a consultation on new minimum energy efficiency standards, MEES, for the domestic private rented sector. Ministers have stated previously that they want private and social rented homes to achieve at least an EPC C rating by 2030. However, the fundamental issue is the challenge of retrofitting homes, many of which are currently below that SEA rating.

The energy demands for heating, cooling and lighting mean that commercial and industrial buildings contribute significantly to greenhouse gas emissions and are some of the hardest assets to decarbonize. As a result, they represent one of the biggest challenges to reach net zero. The continuing uncertainty over the MEES trajectory in the commercial sector remains a real issue. The government needs to take decisive action in setting clear and achievable MEES standards and provide much needed clarity around the stages for transition.

Of course we know that MEES is based on the EPC regime, and the government has just published a consultation on the reform of energy performance of buildings regime, the proposals including updating EPC metrics, reducing the validity period for EPCs, and required a valid EPC during the whole contractual term of a tenancy. Of course, currently when an EPC expires, a new EPC is only required when a property is re-let and not when the same tenant renews or extends their lease. Properties which do not have a valid EPC are not caught by MEES. Therefore, one of the proposal is to have a new trigger point where an EPC is required for when the current one expires.

However, the fundamental issue remains. An EPC is an asset rating which demonstrates theoretical energy efficiency. And if we're going to decarbonize the built environment, we need to concentrate on the actual in-use energy consumption of a building, and focus on reducing actual consumption and associated CO2 emissions. As you and I have discussed before, this requires an active collaboration between owners and occupiers. Bringing clauses in leases provide a framework for this, but the success of these provisions is dependent on the effective monitoring and measuring of energy use. Without the data, these contractual arrangements will not achieve their goal.

Alison:

There's a lot to unpack there, Richard. It sounds like there's work still to be done, and certainly we do need clarity around MEES, but just staying on the sustainability topic for a moment, and in particular, the difficulty around quantifying net zero without a common form of methodology, has there been any progress in this area?

Richard:

Well, yes there has. It's great news. The pilot version of the UK net zero carbon building standard was launched in September this year, and that's a cross-industry initiative, and the aim of the standard is to provide a new single and clear definition of net zero carbon for all building types against which buildings can be verified. The pilot testing scheme will cover buildings from different sectors at different stages of design, construction, and occupation, and in both new build and retrofit, and we would expect the parties may refer to that standard in their project as a goal or as a requirement. Ashurst is part of the legal working group which is working how the standard could be incorporated into our legal documents such as agreements for lease, leases, development agreements, and funding arrangements.

Alison:

That sounds like a very positive step in the right direction. And I think, moving on to some different topics, I'm keen to pick your brains on some other legal developments on the horizon. I know this time last year we discussed the previous government's Renters (Reform) Bill, which of course was never brought into force on the basis that significant reform of the court system was required to handle the potential increase in claims for possession due to the abolition of the section 21 no-fault eviction. And now we know that the new government has brought forward its own Renters' Rights Bill, which largely replicates the previous bill, abolishing no-fault evictions and fixed term tenancies in favour of periodic tenancies that can be terminated by the tenant on two months notice. But I'm interested to hear your take on this shakeup of the rental market, and in particular, this new bill.

Richard:

Well, I think the impact of the new bill means that landlords are going to be exposed to new risks, and in particular, thinking about it, there'll be a potential for very short tenancies lasting only two months, as there's no prescribed period at the start of the tenancy during which the tenants cannot serve a notice to quit that two month notice to quit, but also, a prolonged process via the first tier tribunal, because of tenants challenging rent increases they consider too high or challenging rents agreed at the outset of the tenancy.

And whilst there are no proposals for rent controls, landlords will still need to proceed with care and ensure that their management systems are geared up to administer the formal annual rent increase notices known as Section 13 notices, which under the new legislation will be the only way of increasing rent during a tenancy. The temptation for tenants to challenge the proposed rent increase will likely grow as the applicable rents will always be the lower of the landlord's proposed rent and the market rent as determined by the tribunal. BTR landlords, who are subject to Section 106 obligations to provide tenancies for a minimum fixed term will also need to consider whether such obligations will conflict with that new regime.

This point needs clarifying, but arguably, if the tenant can control the duration of the term under the new regime, there may be scope conflicts between new periodic tenancies and the BTR Section 106 obligations. Local authorities will also need to consider existing BTR planning policies to ensure that the proposed reforms will not prevent new developments satisfying the BTR criteria for a viable scheme. Now the government has put tenancy reform centre stage, so we can expect this new bill to make quick progress through parliament, and it is likely to hit the statute books before the end of next year. As a result, we may see more landlords electing to serve Section 21 notices now before the new bill becomes law, which could also lead to a surge in possession proceedings.

Once the bill is enforced, claims will inevitably increase as landlords try to recover properties when they need to. The court system is already struggling, and significant improvements are needed quickly for it to cope with the inevitable increase in claims, and we also need to see how local authorities use their new enforcement powers. Local authorities are already overstretched, and there is a real danger that in trying to meet tenant expectations, local authorities will open investigations into landlords with little scrutiny of a complaint, and that the investigations will then take a long time to resolve, and it's in no one's interest for the private rental sector to be weighed down with lengthy investigations.

Alison:

Thanks, Richard, for that insight, and I think we need to stay with leaseholders for the moment to touch on remediation and building safety. Obviously the Building Safety Act 2022 is no longer new, but how do you think the legislation has settled down, and has it achieved its objectives?

Richard:

Well, obviously it remains a very hot topic and it's a topic that's in the press a lot, and the government is obviously very keen to speed up the remediation of buildings, and this is evident from the recent publication of its Remediation Action Plan, aimed at speeding up the identification and remediation of unsafe cladding on residential buildings of 11 metres or more in England. The plan aims to identify all buildings with unsafe cladding, ensure that they are fixed faster, and support residents through the remediation process. The plan outlines a range of measures including new legislation to ensure that defects are remedied within certain timescales, a new joint plan to which developers are invited to sign up containing a range of commitments relating to those remediation works, and also promises of funding and other resources to ensure adequate enforcement and the continuation of measures such as the Waking Watch Replacement Fund.

The plan also confirms the government's intention to bring the building safety levy into force in the autumn of 2025. At present, we don't have any information as to how the levy will operate in practise. The levy would apply to all new residential developments in England that require building control approval irrespective of their height, and this differs from the initial suggestion that it would only apply to high-risk buildings. Of course, the government's full response to the Grenfell Inquiry Phase 2 report is set to be published in the new year, and I think it's fair to say that efforts between the government and the industry remain ongoing, focusing on developing the response and sharing progress reforms to date. The building safety regulator is actively investigating several building safety and health and safety issues relating to the construction of high-risk buildings, and we're probably going to see the first enforcement activity from the regulator next year.

Alison:

Thanks again, Richard. Building safety is obviously a clear priority for the government and the real estate industry at large, but we also have news that the government intends to implement further provisions in the Leasehold and Freehold Reform Act during 2025. And so what can we expect in that regard?

Richard:

Well, the ministerial statement indicated that we can expect a white paper on commonhold reforms in early 2025, and then that will be followed by a new draught leasehold and commonhold reform legislation, which is to be published in the second half of 2025. What we understand is this would effectively ban new leasehold flats and convert existing leasehold flats to commonholds. However, this would be a significant legislative change, and would have implications for lenders, insurers and property managers. And as it stands, commonhold would be difficult to implement for large mixed-use developments, and there remains concerns should the Commonholds Association become unsolvent. There will need to be a comprehensive overhaul of commonhold if it's to become the default tenure. We can also expect a consultation in relation to the rates used to calculate premiums on both enfranchisements and also lease extensions to deal with the apparent flaws in the act.

We're also promised a consultation on service charges and legal costs, as well as estate management charges. There's also reference to measures to tackle unaffordable ground rents, banning forfeiture, regulating the property agent sector, and a consultation on the current consultation procedure in respect of major works under section 20 of the Landlord and Tenant Act 1985. So there is a great deal of uncertainty in this area, and that will only begin to be resolved next year. This uncertainty of course makes it difficult for the industry, as we have no clear indication of where the law will end up or how long the changes might take to implement.

Alison:

Thanks, Richard. Of course, one area of uncertainty that has been cleared up since this time last year comes with the publication of the regulations governing high street rental auction implemented to address retail vacancy rates. But what I'm questioning is whether you think local authorities are actually going to use these powers.

Richard:

Once you say the Levelling-up and Regeneration Act 2023 does give local authorities new powers to designate a street as a high street or an area as a town centre. And once that designation is in place, the local authority has the power to auction off premises that have been empty for a year or more, or at least 366 days in the preceding two year period. Regulations are now in force which set out how the process works, and we also have additional non statutory guidance. So if premises have been vacant some time, a landlord might need to take significant steps to get the premises ready for letting, particularly if the property doesn't meet minimum energy efficiency standards.

But during the consultation, 74% of local authorities said the process was too burdensome. It has been suggested that the government expect that these powers might be used to encourage greater engagement between local authorities and local landlords, but I really question whether these new powers will achieve their aim of revitalising the high street. Shops are often empty simply because of changing consumer shopping habits and high business rates, so I doubt this will be the quick fix the government is hoping for.

Alison:

Yes, I totally agree. There doesn't really appear to be an easy solution here. It's one that we've been grappling with for a long time, and I don't think this is going to be the magic wand. But let's move on. At this point, I just wanted to catch up on a couple of other policies which impact on the government's ambition to get brick and building, and which we discussed last year. The first is biodiversity net gain. Obviously, BNG has now been mandatory for major developments for over nine months, and developments for seven months. How do you think this has been working so far?

Richard:

Well, as we know, BNG requires developers to deliver a minimum 10% biodiversity net gain, and that BNG can be delivered either fully or in part via on-site habitat, off-site habitat, or as a last resort through the purchase of statutory biodiversity credits. I think it's inevitable that the biodiversity gain hierarchy will alter the way developers choose sites, how they're designed, but also, at the same time, landowners have been able to consider that a new approach to land management. I have no doubt that we expect to see a rise in the use of conservation covenants to secure BNG, and I'm sure the market for BNG unit sales will pick up next year.

Alison:

And I suppose we should also touch briefly on the government announcement in November this year to provide 47 million pounds to local authorities to deliver housing projects which were delayed by the nutrient neutrality laws.

Richard:

Yes. Interesting situation, because as we know, Labour blocked the last government's attempts to abolish nutrient neutrality. However, we're now hearing that the Labour government has indicated a change in approach to nutrient neutrality in a joint letter to nature conservation organisations from both the housing secretary Angela Rayner and the environment secretary Steve Reid. There's not much detail, but it seems that the existing system of requiring developers to prove nutrient neutrality before getting planning [inaudible 00:22:26] will be altered to them only having to do so before the houses are actually occupied.

Alison:

Definitely an about turn, isn't it? I think it's watch this space. Well, we've got a few minutes left before we wrap up, and I'm going to open it up to you, Richard, to discuss anything else that you'd like to cover before we close.

Richard:

Thanks, Ali. Well, I think just probably a couple of items on the watch list and have been on the watch list for some time, but we now have the Law Commission's consultation on the reform of the security of tenure regime under the Landlord and Tenant Act 1954. Now, there are various proposals for reform, but the driver underpinning the consultation is to simplify the system, and I think we would all welcome that. One option is to reverse the existing position, meaning that business tenancies would not have security of tenure by default, but would be able to opt into the system of statutory protection. This does retain flexibility, but the question is would the opt-in be taken up by many tenants in practise, or would they just accept the default position?

I think finally, I just wanted to mention the Terrorism Protection of Premises Bill, which places a new duty on those responsible for premises and public events, requires them to take appropriate action to strengthen public safety, with the requirements reflecting the size of the venue and the activity taking place. It's thought that the bill will be implemented in phases starting next year, and this is largely going to affect the hospitality and retail sectors, and will involve significant regulatory changes in 2025, and it's likely to involve important changes to the existing regulatory landscape, and may involve making physical changes to the venues to meet those new requirements.

Alison:

Thanks very much, Richard. As always, a very interesting discussion, and 2025 is certainly going to keep us busy. I would like to say many thanks to those of you listening. We hope you found this informative, and if you'd like further information on any of the topics raised, please do reach out to your usual Ashurst contact, and of course, please do visit the Ashhurst website for more insights on a whole host of legal issues affecting the real estate industry. All it leaves me to say now is thank you very much and have a good day.