Residential Newsletter - Autumn 2021

Residential reflections

Each quarter, we ask our experts in the Residential Conveyancing teams to reflect on an interesting piece of news, work, or a case within their sector. This month we focus on the stamp duty holiday.

As a measure to kick start the housing market during the pandemic, the Government introduced a temporary reduction in stamp duty for residential property buyers in England and Northern Ireland. For purchases made from 8 July 2020 to 30 June 2021, stamp duty was payable on any purchase price paid above £500,000. From 1 July 2021, this threshold was lowered to £250,000 and returned to £125,000 from 1 October 2021. Our experts reflect on what the stamp duty holiday has meant for their workload in 2021 and consider how the return to normal stamp duty thresholds will affect the residential property market in the coming months…

Rebecca Maeers, Director & Head of Residential Property (Nottingham)

The stamp duty holiday coupled with some pent-up demand following the first lockdown meant that we subsequently experienced the busiest time in residential property that I have seen during my 16-year career. The industry as a whole has struggled to keep up with this demand and the Land Registry still has a significant backlog of applications to complete with some of mine not expected back until this time next year.My team managed to get all transactions through by the respective deadlines (that had a realistic prospect of doing so) which is due to phenomenal effort by all including our accounts team. Buyer demand and a decrease in new properties coming to market is continuing to keep us busy and I expect that will last certainly until Christmas and into the first quarter of next year at least.

Caroline Wofinden, Director & Head of New Build and Social Housing (Nottingham)

Development work is high volume, demanding and subject to tight deadlines in normal times, but the SDLT holiday increased the New Build team’s workload substantially in the first nine months of 2021.Since the withdrawal of the SDLT holiday, workloads remain high as buyers take advantage of the new Help to Buy scheme and demand for homes designed with space for home working as well as gardens or outdoor space has increased. Developers are also offering incentives or discounts which can offset the loss of the SDLT savings so it appears that the market is remaining buoyant for now.

Sarah Major, Senior Associate (Manchester)

The stamp duty holiday provided a frantic period for conveyancers across the country with a high increase in instructions and a deadline for completions. The scheme created a boost to the market and we experienced unprecedented workloads at a period of time of uncertainty.From Covid restrictions to furlough concerns, the legal profession found new ways of adapting and were able to respond and meet the needs of the market with outstanding results. Following the end of the holiday we continue to see a high demand and confidence in the market appears stable providing a welcome return to more manageable workloads.

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Oh, I do love to be beside the seaside

In our Summer 2021 Residential Newsletter, Polly Wisner considered how planning permission may apply to short-term holiday lets (a decision of the Planning Inspectorate in October 2021 is also worthy of note). With the upsurge in staycations set to continue in to 2022, in this edition of our Residential Newsletter we consider other matters a buyer, acquiring a property with an eye on holiday lets, needs to consider.

Title Issues

Title issues a buyer should be mindful of include:

Restrictive covenants:

These can affect both freehold and leasehold land.  In a nutshell, they are created in a deed - one party restricts the use of its land in some way for the benefit of another person’s land.

One type of restriction that may well pose a problem is a dwelling-house restriction. There is no standard wording for this type of covenant. Often, they will restrict use to “a private dwelling-house”, “a private dwelling” or “a private dwelling or residence”.  The courts have grappled with the meaning and effect of these covenants on numerous occasions.

In Caradon District Council v Paton and Bussell (2001), the Court of Appeal considered a covenant, “not to use or permit to be used the property for any purpose other than that of a private dwelling house”. The property owners rented the properties to tenants on short term holiday lets in the summer months which the Court of Appeal found to be a breach of covenant.Whether a property is being occupied as a private dwelling is a question of fact. In practice, factors such as the degree of permanence of the occupancy and the relationship between the occupants play a crucial role in making the decision.

Covenants in leases: If title to the property is leasehold, as well as the land potentially being subject to restrictive covenants benefiting nearby land (see above), the terms of the lease itself may throw up an obstacle or two!

• Complying with planning legislation: If the property currently falls within Class C3 (dwelling houses), as Polly mentioned in her article, use as a holiday letting could result in a planning breach which, in turn, would be a breach of a lease covenant to comply with planning legislation!

• Insurance: Many residential leases will see the landlord covenanting to insure the building they own. The lease then obliges each tenant to contribute towards the premium. Tenants will often covenant not to do/omit to do anything that would invalidate the landlord’s policy. Using the property for short term holiday lets may breach that requirement and leave the landlord unable to draw down insurance monies should an insured event occur. This liability may well end up with the tenant!

• Restrictions on sub-letting, etc: In Triplerose Ltd v Beattie (2000), Mr and Mrs Beattie were the tenants of a 125-year lease of a residential flat. One covenant in their lease stated, “Not at any time to carry on or permit to be carried on upon the Property any trade or business whatsoever.” They made the flat available for short-term occupation via the Airbnb and Booking.com websites.

The Tribunal found that they had not breached this covenant because no activity was carried out “upon” the property which, in itself, amounted to a business, rather, the business was being carried on from elsewhere.

Unfortunately, for the Beatties, there was also a covenant not to use or permit the flat to be used “for any purpose other than as a private dwelling house for occupation by one family at any one time”. The Tribunal found that covenant had been breached!

Lender Requirements

If a buyer is taking out a mortgage, a lender’s requirements need to be satisfied. Some lenders offer holiday let mortgages. Specially designed for properties that an owner intends to let out on a short-term basis to tourists as a business, these mortgages tend to be at interest rates that are slightly higher than the rates on an owner occupier mortgage.

Holiday let mortgages should not be confused with holiday home/second home mortgages or buy-to-let mortgages, the latter being relevant where the borrower is intending to let-out the property on a long-term basis.

Choosing the appropriate product is pivotally important. Mortgage conditions regulating use of the property would no doubt be breached if the wrong product was entered into and the borrower then started to permit short term holiday lets.

Tax

From a tax perspective, there are special rules for rental income from properties that qualify as “furnished holiday lettings”. This HMRC guidance provides more information, including what the tax benefits are and the requirements to be satisfied for a property to be classed as a furnished holiday letting.

Other tax considerations include the level of SDLT liability when the property is purchased and a requirement to become VAT registered if a yearly turnover threshold is exceeded.

Business Rates

A property located in England that is available to let for short periods that total 140 days or more per year will be rated as a self-catering property and valued for business rates. Small business rate relief is available if certain criteria are met.

Other Rules and Regulations

There is a raft of these including:

Furniture:

Upholstered furniture in holiday homes must meet the requirements set out in The Furniture and Furnishings (Fire) (Safety) Regulations 1988, so furniture and furnishings manufactured after 1950, must be made of fire-resistant materials.  It is the owner’s responsibility to ensure compliance.

Gas:

Holiday homeowners are legally obliged to ensure all appliances, along with their fittings, flues and chimneys are safely maintained. An annual gas safety check by a registered engineer must be undertaken on each gas appliance. The Gas Safety (Installation and Use) Regulations 1998 provide detailed obligations.

Electricity: For electricity the “go to” regulations are The Electrical Equipment (Safety) Regulations 1994. A person supplying electrical equipment must ensure that it is safe and, in the case of appliances manufactured after 19 January 1997, bears a CE mark. Unlike gas appliances, there are no specific legal requirements as to frequency of inspection, although a five yearly cycle appears common.

This list is by no means exhaustive. What about music licences if guests are provided with a device for playing music, regulations covering the use of those all-important hot tubs, etc!In a nutshell, advising a buyer interested in dipping their toes into the holiday let business is a complicated one and, once they appreciate what’s involved, they may decide to divert their funds to the acquisition of a camper van and embark on their own holiday of a lifetime! Kerrie Deakin, Knowledge Management Lawyer. 

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If you require further advice on this, please contact a member of the Residential Team.