The future of the Levelling Up and Regeneration Bill
The Government views the Bill as putting onto a statutory footing its plans to revitalise town centres and high streets and to exercise greater control over new developments in terms of provision of facilities, infrastructure and affordable housing, with the intention to reduce geographical, economic, social and health inequalities.
As part of the recent cabinet changes, Michael Gove was appointed as Secretary of State for Levelling Up, Housing and Communities and Minister for Intergovernmental Relations on 25 October 2022, after previously holding the same position between 15 September 2021 and 6 July 2022. So what does Gove’s return mean for the future of the Bill?
As set out in the Government’s policy paper on the Bill, there will likely be actions alongside the Bill to assist with the “levelling up” agenda, including more devolved powers, changes to the National Planning Policy Framework and additional housebuilding schemes. Gove has also reiterated the Government’s extremely ambitious 2019 manifesto pledge of building 300,000 new homes each year by the mid-2020s, although the market reaction to this news suggests that most consider this unfeasible.
The current version of the Bill is split into 11 parts. All of these are relevant to real estate although some are more local authority or planning focussed.
This note focusses on three key parts of the Bill which are important for real estate participants to note:
Back in December 2020 we published this article which discussed the potential impacts of transitioning from the community infrastructure levy (CIL) to a new consolidated infrastructure levy. That levy had been proposed in the White Paper and has now received its legislative debut in this draft Bill.
It appears that Section 106 agreements will not be discarded or replaced as previously thought. Instead, such agreements will be more targeted, although it is currently unclear how limited these agreements will become in practice.
The main change is to CIL: under the Bill, CIL will be limited to Greater London and Wales, and a new infrastructure levy will be introduced in a staggered “test and learn” approach until it applies to all other local planning authorities.
The new levy is currently intended to be calculated with reference to the final gross development value (GDV) of the development (unlike CIL which is charged based on the floor area). Although logical, in practice this may pose a challenge for authorities and developers alike. If the amount payable is determined alongside grant of planning, a lot of pressure is placed on valuers and the GDV may be incorrect (in either the developer’s or authority’s favour) when the development later completes. If the amount payable is only determined when the GDV is crystallised (such as on sale of all of the residential units in a housing development), then this results in lack of certainty for an extended period. This would not be ideal for the developer or authority alike: for example, the authority cannot then rely on a specified income from a site for the purpose of commencing its levelling up projects in the area early, resulting in community projects lagging behind private developments.
The relevant authorities will be obliged to charge the new levy on development (compared with CIL which is discretionary), but authorities will have some flexibility on the quantum, through local benchmarking. The rate of the new levy will be area-wide, and not specific to each development site. The Government appears to have intended such rates to be set by the authorities to reflect the cost of infrastructure and environmental improvements in the area, so the imposition of the levy becomes results-driven. However, we expect that, in practice, local housing requirements may drive down such rates to ensure viability of residential development schemes, especially given the Government’s target to build 300,000 homes a year.
In their response to the Bill, the British Property Federation (BPF) have noted: “Getting the different rates and thresholds right at a local level is, however, perhaps the most important aspect of the whole system. Getting the wrong rates and thresholds could significantly impinge on development activity and harm the Government’s levelling-up agenda. It appears from the Bill that the Infrastructure Levy will follow much the same process as existing CIL charging thresholds, which makes some sense. Nevertheless, the IL will not be as sensitive to specific site economics as the existing dual system, and outcomes should be closely monitored.”
Any concerns regarding how to keep developments viable despite a blanket infrastructure levy at a flat rate may result in a squeeze on any remaining discretionary items, such as Section 106 obligations or other conditions to planning permissions.
Overall, the Government’s proposed one-size-fits-all approach from its White Paper may have been watered down slightly in the Bill, but developers and authorities will only understand the full implications of the changes when the new levy starts being applied in practice.
This part of the Bill introduces a compulsory rental auction regime, which applies to commercial premises that are determined by the local authority to be:
- located in designated high streets or town centres;
- suitable for “high street” use; and
- beneficial to the local economy, society or environment if occupied for high-street use,
if such premises were vacant for the whole of the previous year or for at least 366 days within the previous two years. The Bill will be retrospective: if the Bill is enacted, this will immediately apply to any premises that were vacant for the preceding year (or for the requisite number of days in the previous two years). However, the Bill notes that secondary legislation may amend the vacancy condition, so this could change.
The definition of “qualifying high-street premises” under the Bill specifically excludes premises that are, or when last used were, used wholly or mainly as a warehouse. This appears to be a sensible carve-out given the nature of such premises, but it probably has limited effect given that warehousing premises have been in high demand in the last couple of years and are therefore unlikely to fall within the remit of the Bill in any event.
If the premises satisfy the designation and vacancy criteria, the local authority may serve an initial letting notice on the landlord of the premises. The landlord is the person entitled to possession of the premises and who can grant a tenancy of the premises of one year or more. The form and content of the notice will be determined by secondary legislation, so is currently unknown.
If the landlord secures a potential tenant within the initial notice period, then consent must be sought from the local authority before the letting is granted. If a letting is granted without consent, then it will be void, unless the local authority does not serve a final letting notice (see below) and the parties to the lease have treated it as being in place.
The local authority must consent to the landlord’s request if the letting (by licence or lease) is to be granted for a term of one year or more (a landlord break right within the first year will cause the letting to fail this test, unless due to tenant breach) commencing within eight weeks of the initial letting notice and which is likely to lead to the regular presence of people at the premises. Although the local authority is obliged to respond within a reasonable period, what is deemed a “reasonable” response time is not defined and in practice is likely to differ between authorities.
If no letting has been agreed and approved under the initial notice process, then the local authority may serve a final letting notice on the landlord (subject to a landlord right to appeal). Once the notice is served the landlord again cannot let the premises without the consent of the local authority. The authority is obliged to respond within a “reasonable” period, but unlike with the initial notice there is no obligation on the authority to give consent if certain conditions are met. The landlord will also be prohibited from carrying out works to the premises without the local authority’s reasonable consent, unless works are urgently necessary for repair or preservation or are necessary to fulfil a prior obligation. The landlord will commit a criminal offence if works are carried out which require consent but without such permission being obtained, and will be liable on summary conviction to a fine.
If a final letting notice has been served and a letting is not secured and approved, the local authority can trigger a rental auction for the premises. The detail of this auction process will be detailed in secondary legislation, but it is intended to provide small businesses and community groups the opportunity to use empty retail units. The local authority will contract with the successful bidder (as if it were the landlord) for a short-term tenancy of between one and five years, without statutory security of tenure, for wholly or mainly high-street use. Tenant fit-out works can be permitted by the local authority, which can include external and structural alterations. The contract may even require the landlord to carry out pre-tenancy works at the landlord’s cost, with remedies for the successful bidder if the landlord fails to do so.
The local authority must have regard to typical terms for short-term commercial tenancies and representations made by the landlord as to the terms of the tenancy, but ultimately they will not be bound by the landlord’s representations: the Bill creates unprecedented interference with the proprietary agency that a landlord has over its property and its investment, by allowing the local authority to act as if it owns the building and giving the landlord no control over letting terms.
If mortgagee or superior landlord consent would be needed for any letting by the landlord, any tenancy granted by the local authority as part of this process will be deemed to have been granted with their express consent. The authority is obliged to provide the landlord with a copy of the documents as soon as possible after execution, but there is no obligation to notify any mortgagee or superior landlord. Lenders may therefore become more hesitant to provide funding secured against retail premises, especially those in existing designated high streets. Where security over retail premises is accepted, lenders may include early triggers into facility agreements, for example so that there is an event of default if borrowers allow the vacancy condition to be satisfied in respect of any charged property (well in advance of any auction process by an authority). For existing facilities, borrowers should consider the ongoing property covenants carefully, as a local authority entering into a letting without lender consent pursuant to the Bill may trigger a default scenario, irrespective of the deemed consent process under the legislation.
The draconian impact of rental auctions would clearly act as a strong incentive to retail landlords not to let the vacancy condition be satisfied, such that this section of the Bill would never be triggered, and the UK think tank Onward have published a report supporting compulsory rental auction as a potential cure for the continued empty high-streets: “There are currently around 58,000 vacant high street units nationally. This report estimates that compulsory rent auctions could bring as many as 13,200 back into use in Northern England and nearly 9,000 in the Midlands, if all empty units were leased at auction or sold to someone would could [sic] bring them into use.”
However, the Bill ignores the issue of business rates, which is widely considered to be the largest barrier to entry for retail businesses rather than rental costs, and fails to differentiate between landlords who are actively seeking lettings and those who are unwilling to do so. Compulsory rental auctions may also incentivise landlords to repurpose commercial units into residential premises, in order to avoid the remit of this part of the Bill, which could accelerate the decline of the high-street: entirely the opposite of the Government’s intention. Even where the auction process could be triggered, the Bill requires a potentially onerous outlay of time and cost on the local authority side (particularly if the landlord counters the process), so it is unclear how often this right would be exercised in practice.
BPF have as a result branded compulsory rental auctions as a “political gimmick”, which will deter investment into areas where it is most needed. Instead, BPF consider “Town Centre Investment Zones”, with tax and community incentives, planning freedoms and public-private partnerships, more appropriate and supportive of growth.
In August 2020, we published an article which addressed the (then active) government consultation into transparency in land ownership – specifically with regards to land contracts (including options and conditional contracts).
The Bill now seeks to put this on a statutory footing, by allowing the Secretary of State to require HM Land Registry (or another authority) to collect information about transactions relating to land. This reflects the general direction of travel towards more transparency, alongside other legislation such as the Economic Crime (Transparency and Enforcement) Act 2022 (as discussed in this article from earlier this year).
The information needing to be disclosed is extensive, including: the parties to a transaction; the beneficiaries of a transaction; the source of funds for a transaction; the terms of a transaction; and copies of the transactional documents (with the Bill being silent regarding any potential for redaction of commercially sensitive information).
The regulations implementing this legislation are allowed to provide for publication of information.
The consultation on the Bill suggested that certain data would only remain available for official purposes such as law enforcement and financial stability. Also, the Government is currently running a pilot in Devon, the West Midlands and Northern Ireland, to collect information about land use (being The National Land Data Programme), which may indicate how additional property information from the Bill may end up being analysed and disclosed.
However, the level of public disclosure will only become clear through the regulations implementing the Bill, so until there is more certainty parties are likely to be concerned about detailed commercially sensitive information in their property contracts, options and pre-emptions becoming public. Where a transaction involves a property element (such as buying a business that has a head office), parties may decide to split out the property elements from the wider transaction, in order to allow for the rest of the contract to remain confidential.
It will be interesting to see whether or not the anticipated funding cuts will form part of the announcements included in the budget on Thursday (17 November 2022) and how this will impact on the proposals within and progress of the Bill.