At our real estate conference in January 2025, I outlined the main legal changes affecting the property market last year. As 2024 recedes in the rear-view mirror, this is my summary of some of 2024's key statutory changes and legal initiatives in UK commercial real estate.
High Street Rental Auctions
High street rental auctions were introduced under the Levelling-up and Regeneration Act 2023 to address the issue of long-term vacant commercial properties in town centres. They were made effective on 2 December 2024, and they empower local authorities to auction leases of empty premises to businesses and community groups, the intention being to reduce high street vacancy rates and revitalise local economies.
Eligibility Criteria:
- Designation: The property must be located within an area designated by the local authority as a high street or town centre because of the concentration of high street users. The property in question must be in a designated high street – it can include shops, offices, restaurants, pubs, meeting places, community halls and light industrial units, but not warehouses.
- Vacancy condition: The premises must have been unoccupied for the entire previous year or for at least 366 days within the last two years. “Occupation” requires substantive occupation by people within that period.
- Suitability and Benefit: It is up to the local authority to decide if the proposed tenant of the premises is suitable for a high street setting and that it would benefit the local economy, society, or environment.
For more background on the future of our high streets, you can read our High Street Report 2024.
Process:
The process is a little complex but basically:
Letting Notice: The local authority serves a letting notice on the landlord, requiring it to let the vacant premises for a high street use for a minimum of one year.
- Landlord’s Response Period: The landlord has eight weeks to secure a tenant independently.
- Auction Initiation: If the landlord fails to let the property within this period, the local authority can proceed to arrange a rental auction to grant a lease lasting between one and five years. The landlord can counter-notice on the final letting notice being served. The counter-notice may include the fact that the landlord intends to carry out substantial works of construction, demolition or reconstruction affecting the premises, or it intends to occupy for its own business or residential purpose.
Lease Terms:
- Any lease granted pursuant to the auction will be outside the LTA 1954
- There will be an agreement for lease during which time the landlord must bring the premises up to a minimum standard, for instance in relation to water ingress, mould and damp, fire, gas and electrical safety.
- There will be no requirement to bring the premises up to Minimum Energy Efficiency Standards but the landlord may face enforcement action for non-compliance.
- The tenant must yield up at the end of the lease term in the same condition and there must be a schedule of condition.
- A mortgagee and superior landlord will be deemed to have given consent to any lease.
Early adopters: Darlington, Mansfield and Bassetlaw Councils.
Consultation on the Landlord & Tenant Act 1954
The Law Commission has initiated the first stage of an intended two part consultation on Part 2 of the Landlord and Tenant Act 1954, focusing on the concept of security of tenure - the right for tenants occupying premises for the purposes of their business to a renewal tenancy on expiry of the contractual term.
The fundamental question for the first stage of the consultation is whether business tenants should have security of tenure and, if so, how it should operate. The Commission has presented four models for consideration:
- No security of tenure: Abolishing the Act (a return to the pre-1954 position), leaving tenancy renewals to market forces, and thus leaving renewal negotiation to the parties (suggesting tenants might seek options to renew in their leases).
- Contracting in: No automatic statutory security of tenure but tenants can negotiate inclusion with their landlords.
- Contracting out: A continuation of the current regime; tenants have statutory security of tenure unless they agree to opt out.
- Mandatory security of tenure: All business tenancies have compulsory security of tenure without the option to opt out (a return to the 1954-1969 position).
The consultation seeks to determine which model best serves the current market, balancing flexibility and protection for both landlords and tenants.
As a secondary issue, responders are asked to consider whether the scope of the Act should change. Currently certain types of tenancies are excluded automatically from the security of tenure regime, such as:
- Agricultural tenancies.
- Tenancies granted for a term of six months or less.
The first consultation will consider whether tenancies should be automatically excluded from the Act based a widening of that existing criteria (such as a term of more than six months) or other factors such as use, floor space, location, and level of rent.
Responses to the consultation had to be submitted by 19 February and the Law Commission’s recommendations following the initial responses will guide the questions to be asked during the planned second stage of the consultation.
It is hard to envisage a return to mandatory security of tenure or indeed the abolition of security of tenure and the suspicion is that landlords – naturally being property people - will engage more with the consultation than tenants and therefore that optional security of tenure will be retained under either the second or third model on the slide. Our view is that the current system of contracting out - notices and declarations or statutory declarations - generally works well.
Autumn Budget Changes 2024
Obviously, the notorious changes were to the thresholds for agricultural property relief and business property relief. In relation to those taxes that regularly land on a commercial real estate lawyer’s desk, the following applied:
- No changes to VAT
- All stamp duty land tax changes were to residential property – none to commercial - but will affect corporate developers buying existing residential houses for whatever reason.
Where you or your clients are corporate buyers acquiring residential property, for instance as part of a land assembly, you must pay higher SDLT rates for additional dwellings when you buy a residential property below £500,000, if it will not be the only residential property that you own anywhere in the world. The higher rates were raised in the budget – a series of rates in place until 31 March, a higher rate for the second £125,000 within the first tranche from 1 April 2025:
| 31 October 2024 to 31 March 2025 | |
| Property or lease premium or transfer value | SDLT rate |
| Up to £250,000 | 5% |
| £250,001 - £500,000 | 10% |
| The higher rates from 1 April 2025 | SDLT rate |
| Property or lease premium or transfer value | SDLT rate |
| Up to £125,000 | 5% |
| £125,001 - £250,000 | 7% |
| £250,001 - £500,000 | 10% |
- For corporate buyers acquiring houses above £500,000 there is a punitive rate of SDLT –a flat charge, applied to the whole purchase price, with none of the phasing for properties worth less than £500,000, which was increased in the budget from 15% of the purchase price to 17%.
- For those holding commercial property as individuals, the main rates of capital gains tax on sale of commercial property increased from 10% for lower rate tax payers to 18%, 20% for higher rate tax payers to 24% - bringing the rates into line with those for residential.
Biodiversity Net Gain (BNG)
BNG requires developments to leave the natural environment in a measurably better condition by insisting that all sites give back a 10% biodiversity uplift.
From 12 February 2024 every grant of planning permission for major development (subject to some exemptions) will be deemed to be granted subject to a general BNG condition. For small developments the key date was 2 April 2024.
Developers are now required to deliver at least 10% BNG, either on-site (the first resort) or off-site (the second resort), or by buying what are known as statutory biodiversity credits, as a last resort (or a mixture of all three resorts).
The general BNG condition requires that development may not be begun unless a biodiversity gain plan has been submitted to the planning authority, and the planning authority has approved the plan. It is therefore imperative that you engage your ecologist early in the process to ensure that the BNG condition can be discharged and also to avoid any delays following the grant of permission. Developers are required to provide detailed metric calculations on how much biodiversity is on the site before and after development
Major development affected by the BNG condition includes:
- Residential developments with 10 or more dwellings or other residential development where the site area is 0.5 hectares or more and the number of dwellings isn’t known.
- The provision of buildings (residential or otherwise) where the floor space to be created is 1000 square metres or more.
- Any development carried out on a site having an area of 1 hectare or more.
Smaller developments affected after 2 April 2024 cover pretty much everything else within the ambit of BHG. They include:
- Developments between 1 – 9 dwellings
- A residential site smaller than 0.5 hectares
- Buildings with less than 1,000 sqm of floorspace or development carried out on a site having an area of less than 1 hectare.
It's fair to say then, that pretty much most future development will be subject to the BNG condition. Exemptions include:
- Development to an existing house, but not including a change of use or a change to the number of dwellings.
- Small scale self-build and custom-build housebuilding of no more than 9 dwellings, on an area no larger than 0.5 hectares and exclusively consisting of self-build and custom-build housebuilding dwellings.
Landowners will need to manage and maintain the habitats in order to achieve the 10% BNG for at least 30 years after the development is completed. That will be an obligation binding on the land in the same way as a section 106 obligation runs with the land; indeed, the BNG requirement will often be embodied in a section 106 agreement.
PDR changes
A number of changes to existing Permitted Development Rights – changes of use or development not requiring a planning consent - applied from 21 May 2024.
Class MA permits the change of use of Class E commercial, business and service buildings to dwellings. Before the changes it was the case that the commercial building had to have been vacant for three months before applying and there was a 1,500 sq m limit on the floor space to be converted. Those were both removed, so now there is no required period of vacancy and no floor limit restriction. You do require prior approval from the local planning authority on a limited scope of issues to benefit from Class MA permitted development rights.
Class R is the PD right which allows landowners to convert buildings from agricultural to flexible commercial use – any Class E use, also storage, distribution, hotel and commercial use - now also general industrial use (subject to some limitations), sport and recreational uses. The building needs to have been in solely agricultural use for at least the last 10 years. There is a maximum floor space for the conversion – but this was increased in 2024, from 500 sq m to 1,000 sq m.
Class Q allows for agricultural buildings to be changed to residential. The 2024 changes now allow the creation of up to ten dwellings with a maximum cumulative floor space of 1,000 sq m (previously the number of dwellings was limited to five with a maximum floor space of 865 sq m). However, a maximum limit of 150 sq m has been introduced for any of the houses created.
For more information on any of the aspects outlined above, please get in touch with a member of our commercial real estate team and we would be delighted to help.
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