Stamp Duty Land Tax – New Rules

On 1 December 2003, the Finance Act 2003 replaced Stamp Duty with Stamp Duty Land Tax ("SDLT"), which is now payable in relation to all UK land and building transactions. The impact of this change upon the taxation of both commercial and residential property transactions has been wide-reaching and has implications for all people involved in the property industry.

Under the SDLT provisions there have been a number of changes to the Stamp Duty position, which include:

• Perhaps the change which will have the biggest and most immediate practical impact is the way in which tax payable on leases is calculated. In simple terms the Stamp Duty approach of calculating the average rent has been replaced under SDLT by the calculation of the total rent payable throughout the term, with a discount being applied to reflect the fact that the future rent has a lower value than the present rent. The result is that the tax payable on a lease increases substantially.
• SDLT is charged on transactions rather than documents, and must be paid within 30 days after the "effective date" of a transaction.
• Transactions do not need to complete before SDLT can be charged, as SDLT is chargeable once a transaction is "substantially performed"; for example when the purchaser takes possession of the whole or substantially the whole of the relevant property, or pays 90% of the monies payable.
• Sub-sale relief has been partially abolished, now applying only where the first sale contract has not been effectively completed by the time the sub-sale is effectively completed.
• On exchanges of land, SDLT is chargeable on each leg of the transaction, so exchanges are no longer treated as a single transaction with tax only payable by the party acquiring the more expensive property.
• Taxable consideration is no longer limited to "money or money's worth" but can include the provision of services such as construction works, the value of which is the amount that would have to be paid in the open market to obtain those services.
• SDLT is payable on surrenders by operation of law.
• When the contract price cannot be finalised at the time of the transaction, tax must still be paid at that time, based on a reasonable estimate, or on the assumption that a contingent event will occur. Upwards or downwards adjustments are to be made when the final amount is known.
• In some cases, application can be made for the deferment of SDLT where the consideration is contingent or unascertained.
• SDLT will be payable on the grant of an option or pre-emption right, and will also be payable on the exercise of that right. In effect, the grant and the exercise are two separate land transactions and each will become chargeable.
• The disadvantaged areas exemption from SDLT for acquisitions of land in disadvantaged areas applies to all acquisitions of commercial property and to acquisitions of residential property up to £150,000.
• There are specific provisions under SDLT for land transactions involving partnerships; partners at the effective date of the transaction will be jointly and severally liable for the SDLT although they can nominate representative partners to deal with the tax compliance. Inland Revenue have advised that it will expand SDLT provisions relating to partnerships in the near future; particularly in relation to the transfer of an interest in land to a partnership by one of the partners, the acquisition of an interest in a partnership and the transfer of an interest in land out of a partnership.

This is a very brief summary of some of the changes which have been introduced and which now govern the taxation of all property transactions. If you wish to discuss any of the changes, whether in general terms or in connection with a particular transaction, contact one of the Commercial Property team.

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Land Registration Act 2002

On 13 October 2003, the Land Registration Act 2002 ("LRA") came into force. The LRA is the most wide reaching single development in land registration law and procedure for over 75 years and is designed to:

• Improve and modernise land registration law and procedures
• Make the Land Register more comprehensive
• Produce greater transparency
• Pave the way for electronic conveyancing

The LRA will have a direct impact on landowners, developers, lenders, landlords and tenants in a number ways, the most significant of which are briefly outlined below:

• Any leases for a term of over seven years; and
• Any transfer or assignment of a lease with a term of more than seven years unexpired.

The requirement to register more leases will increase costs as well as the amount of paperwork involved in the grant, transfer and assignment of certain leases.

2. Transparency and Confidentiality
Any document submitted to the Land Registry on or since 13 October 2003 is now available for inspection and copying by any member of the general public. From 13 October 2005, this right will be extended to cover any documents submitted to the Land Registry at any time, whether or not referred to on the Register, including leases and charges.

It is possible to exempt certain prejudicial commercial information or personally sensitive information by applying to the Registrar; such information might include, for example, information about rent levels and concessionary terms offered to tenants, or mortgage details. Exempted material will be blocked out on the document held by the Land Registry. As yet however, it is not clear in what circumstances the Registrar will deem information to be suitable for exemption.

3. Adverse Possession of Registered Land – Squatters
If squatters wish to acquire title to registered land they must now make an application to the Registrar stating they have been in possession of the land for 10 years or more. On receipt of such an application, the Registrar will notify the registered proprietor and if the registered proprietor does not oppose the application, the squatter will be registered as the proprietor.

If the registered proprietor does oppose the squatter's application, the application will be rejected unless the squatter can demonstrate that it satisfies one of three limited grounds, namely:

• That it would be unconscionable to reject the squatter's application because it would not be fair for the registered proprietor to seek to dispossess the squatter, and the squatter ought to be the registered proprietor; for example where the registered proprietor encouraged or allowed the squatter to believe he owned the land in question, and that the squatter acted to his detriment to the knowledge of the registered proprietor; or
• The squatter is for some other reason entitled to be the registered proprietor; for example under the will or intestacy of the deceased proprietor; or
• The squatter has been in adverse possession of land adjacent to his own under the reasonable but mistaken belief that he is the owner of it, the exact boundary with this adjacent land having not been determined (this ground is only applicable after 13 October 2004).

If, however, the landlord successfully opposes the application, but the squatter remains in possession of the property unchallenged for a further two years, the squatter will become the registered proprietor.

This new system makes it virtually impossible for squatters to become proprietors of registered land, however for unregistered land the old system of 12 years adverse possession with no notice required to be given to the registered proprietor will continue to apply.

4. Land and Charge Certificates
Land and charge certificates are no longer issued by the Land Registry, and existing certificates have ceased to have any legal effect. When an application to the Land Registry is complete, the Land Registry now issues a Title Information Document, which is for information only and has no legal effect.

Since 13 October 2003 if an existing land or charge certificate is lodged with the Land Registry in relation to any application, it will be destroyed, as may any document bound within it. Where copy documents are bound into a certificate, it is advisable to take copies before submitting the certificate to the Land Registry. A request should also be made for the copy document to be returned by the Land Registry.

5. Making the Register More Comprehensive
In an attempt to make the register more comprehensive, there is a new duty to disclose overriding interests which are in the applicant’s actual knowledge, including:

• the interests of a person in actual occupation
• easements and profits a prendre
• mines and minerals
• franchises
• squatters rights acquired under the Limitation Act 1980.

In addition to this, any easement (e.g. a right of way) granted on or after 13 October 2003 will only bind successors in title if it is registered. One of the effects of this is that rights granted or reserved in a lease which is not itself registrable (i.e. it is for a term of less than seven years) will need to be protected by separate registration of a notice.

This is a very brief summary of some of the changes which have been introduced in relation to land registration law and procedure under the LRA. If you wish to discuss any of the changes, whether in general terms or in connection with a particular transaction, contact one of the Commercial Property team.

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Corporate Insolvency

The Enterprise Act 2002 received Royal Assent on 7 November 2002. Among its many provisions the Act makes important changes to corporate and personal insolvency law in the UK, including the abolition of preferential status for crown debts in all insolvencies. The provisions relating to corporate insolvency and the abolition of crown preference come into force on 15 September 2003. The Act brings wide-ranging changes to corporate insolvency laws, which have important implications for businesses in financial difficulty, banks and financial institutions who lend to them and unpaid creditors generally. Other main changes are:

• The right of floating charge holders to appoint administrative receivers is abolished except in relation to existing floating charges and certain other restricted circumstances.
• There is a new streamlined appointment procedure for Administrators that does not involve the courts. This is capable of being used by floating charge holders and also by the company or its directors subject to the right of floating charge holders to appoint their own nominee.

Administration will, therefore, replace Administrative Receivership as the primary form of corporate insolvency procedure.

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Landlord’s Consent to Sublet and Collateral Agreements

The Court of Appeal has ruled in Allied Dunbar Assurance plc v Homebase Ltd [2002] EWCA Civ 666 that it is not possible for a tenant and sub-tenant to come to a collateral or side agreement to vary the terms of a sub-lease in an attempt to avoid restrictive pre-conditions to the grant of landlord’s consent.

It makes no difference that the collateral or side agreement is expressed to be personal to the tenant and the sub-tenant.

The decision represents a significant obstacle to tenants seeking to dispose of surplus space that is subject to a lease which cannot be assigned due, for example, to overrenting or onerous repairing obligations.

In cases where there are restrictive pre-conditions to the grant of landlord’s consent, it effectively renders the interest inalienable. This may also be indirectly disadvantageous to landlords in the context of rent reviews.

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Enforcement of Restrictive Covenants by Adjoining Tenants

The Court of Appeal decision in Williams v CK Supermarkets [2002] 49 EGCS 122 introduces what appears to be a new remedy for tenants.

It was held that a tenant of a shop subject to a covenant restricting its use to specific trades could directly enforce a covenant in the lease of an adjoining shop preventing the use of that adjoining property for those specific trades. It was held that the structuring of the leases in the parade of five shops involved was such that there was a clear intention to create “reciprocity of obligation” between the various tenants.

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Allocation of Risk, Building Contracts

In Scottish & Newcastle plc v G D Construction Ltd [2003] NPC 8 the Court of Appeal considered the allocation of risk for damage by fire assumed to be caused by the contractor’s negligence under the provisions of the JCT standard intermediate form of building contract. The contract obliged the employer to insure against this risk but it did not do so. The contractor agreed to indemnify the employer for all types of failure to take care except in relation to loss or damage to property to be insured under the contract caused by, amongst other matters, the contractor’s negligence. It was held that the risk lay with the employer if it failed to take out the required insurance.

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Section 146 Notices and Mortgages

In Smith v Spaul [2002] EWCA Civ 1830 the Court of Appeal held that a mortgagee was not “ a lessee” for the purposes of a section 146 notice or for the purposes of the Leasehold Property (Repairs) Act 1938. The consequence of this is that a mortgagee (even if it has entered into possession) has no entitlement to be served with a section 146 notice as a preliminary to forfeiture of charged leasehold property. Nor does a mortgagee have any standing to serve a counter-notice claiming the protection of the 1938 Act. In this particular case, it was held that a counter-notice served by a mortgagee was invalid and the landlord did not require the leave of the court to proceed with possession proceedings.

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