UK Real Estate Update – August 2020

3 recent updates from the UK commercial real estate market including the rise of turnover rent, the introduction of a new use class and the acceptance of e-signatures on the HR land registry. These are all positive changes, which sometimes require major events (such as Covid-19) to be pushed through.



The Future of UK Commercial Leases - Increase in Turnover Rents?

Prior to the recent pandemic, the retail industry was suffering. The pandemic has only made things worse for the industry. This has lead to an increasing amount of tenants not willing or not able to pay their quarterly rents. There is now a growing argument that landlords should introduce turnover rent into lease agreements.

Currently, rents in the UK are paid at a fixed price on a quarterly payment. The suggestion of adding the turnover rent element, is a practice common in the US and Europe, albeit less so in the UK. This would mean landlords sharing some of the burdens of tenants when they take on a new lease. This would be a shift for landlords, as traditionally, once a lease is signed, all the risk goes to the tenant including repairs and insurance.

This system will benefit tenants as they would pay less rent in difficult times (as is the current situation), although the downside would be paying more rent in good times. Adding turnover rent to a lease will inevitably lead to further negotiations; how much should be based on turnover, are online sales incorporated, what about unpaid accounts & bad debts, etc. Landlords will also want to get more inside information on their tenants as they will receive more rents the better their tenants perform. This does provide more incentive for landlords and tenants to collaborate, as a better performing tenant means more income for the landlord.

This would also change things from an investors perspective. Investors often invest in real estate as it is known to provide a stable income stream and dividends. If rents become more volatile, investors will incorporate this in the risk factor of investing in the asset class.

3

see article on how e-commerce is changing the dynamics of the retail sector


Planning Use Class changes - Introducing Class E

As from the 1st September 2020, there will be a new Use Class E. This class will compromise of the current User Classes:


A1 – retail shops and financial services

A3 – cafes and restaurants

B1 – offices

D1 – health centres, clinics and day centres (excluding educational and public uses)

D2 – recreation centres and gym (excluding cinemas and concert venues)

The aim is to provide greater flexibility to businesses, in particular in response to the economic impact and changing business environment due to Covid-19. There will also be two further new classes:


F1 (schools, libraries and galleries), formally D1

F2 (community uses such as pools, skating rings and outdoor sports) formally D2


Hot food takeaways, pubs and cinemas have been excluded and classed as sui generis which will require specific planning consent to be granted.

Advantage include changes of use from their current use to another within the new Class E will not require formal consent increasing flexibility and filling in voids for landlords. On the other hand, unintended uses might be used by tenants which could lead to landlords and councils using statutory powers to impose limitations.


HM Land E-signature accepts E-signatures

The land registry has confirmed that from Monday 27 July 2020, electronic signatures will be allowed for certain registrable deeds although witnesses will still need to be present. In order for the transaction to complete, certain steps will need to be followed

  • the land registry will only accept signatures created on certain platforms

  • all parties must be represented by a conveyancer

  • the conveyancer must upload the documents and control the signing process

  • subject to a two-factor authentication

If this proves to be successful, the land registry will look to continue this practice for more documents which will inevitably ease the process of real estate transactions. Some have argued that they will not accept this practice is at might be difficult later down the line to prove the document has been validly executed.


https://hmlandregistry.blog.gov.uk/2020/07/09/electronic-signatures-in-conveyancing/



The March 2020 Update focused on

  • New laws on eviction

  • Rent holidays for retail & leisure tenants

  • Business Rates relieve within the hospitality, retail & leisure sector

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