MoFoREAL: European Real Estate Newsletter (Q3 2022)

Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities and other developments in MoFo’s European Real Estate team. In this edition, we consider mandatory biodiversity net gain and its impact on development in England, and we provide an update on the implementation of the new transparency measures affecting overseas entities holding property in the UK, by way of the Economic Crime (Transparency and Enforcement) Act 2022 (“ECA 2022”). 

As always, we hope you enjoy reading MoFoReal and invite your feedback and suggestions for future issues.

Biodiversity Net Gain (“BNG”): What is it and what does it mean for development in England?           

By: Luke Mines, Partner, London and Luisa Farmer, Associate, London

The highly anticipated Environment Bill received royal assent on 9 November 2021, as part of the UK Government’s strategy to protect and improve our environment. The Environment Act 2021 (the “Act”) includes a new and significant requirement that all development schemes in England must deliver a mandatory minimum 10% BNG, which must be maintained for at least 30 years (the “BNG Obligation”). The BNG Obligation will apply to new planning applications submitted pursuant the Town and Country Planning Act 1990 from November 2023. 

This legislative reform will have a profound impact on the process of conducting property development in England. It is therefore critical for developers, investors, lenders and other real estate market participants to understand the impact of these changes and make plans to accommodate them as soon as possible. 

The MoFo Real Estate team is working at the forefront of this reform, providing services pro bono to the Wendling Beck Exemplar Project, a habitat creation, nature recovery and regenerative farming project that is one of Natural England’s BNG Credit Scheme pilots. One of the Project’s aims is to pursue the creation of biodiversity units for sale to developers to meet their BNG Obligation (see below for details). We are working closely with key stakeholders and governmental bodies to understand the practical and legal requirements of the BNG Obligation, giving us a unique perspective as we help our clients prepare for the new development landscape. 

What is BNG and how is it measured?

BNG is an approach to development (and/or land management) that aims to leave the natural environment in a measurably better state than it was in before the development commenced. 

Government guidance highlights the following key components of the BNG Obligation:

• The minimum 10% gain in biodiversity will be calculated using a pre-determined biodiversity metric (anticipated to be a version of Biodiversity Metric 3.0) and, to obtain a planning permission, all developers will be required to submit to (and to have approved by) the local planning authority a biodiversity net gain plan in respect of all proposed developments. 
• The BNG Obligation can be delivered on-site, off-site or via a statutory biodiversity units scheme.
• Enhanced habitat which goes to delivering the BNG Obligation must be secured for at least 30 years via a conservation covenant[1] or other arrangement with a local planning authority.

Providing a standardised method of measuring BNG is crucial to delivering the BNG Obligation, and the current preferred methodology involves determining the baseline value of a habitat prior to development and the ecological impact of a proposed development scheme. The consequent biodiversity gains and losses are then quantified in biodiversity units, which are calculated based on the size of the habitat, its quality and location.[2]

The BNG Obligation and the Biodiversity Units Market

The new regime will automatically impose a general condition to all planning permissions granted in England such that no development can lawfully be commenced before a net gain plan, setting out how the applicant will fulfill the BNG Obligation in respect of the proposed development, is submitted to and approved by the relevant local planning authority. It is worth noting that the BNG Obligation is a mandatory minimum and local planning authorities will have the discretion to require - and indeed some are already requiring - more than 10% BNG.  Developers will need to show in their net gain plan that they have applied each stage of the mitigation hierarchy: avoidance of biodiversity loss, mitigation of such loss and then compensation for biodiversity loss.

To fulfil the BNG Obligation for a specific development, priority will be given to generating biodiversity units on-site as part of the development. But it is acknowledged that this will not always be possible and so developers who cannot deliver sufficient biodiversity units onsite will be encouraged to generate biodiversity units on their own land off-site or by acquiring biodiversity units from local third party landowners. Where sufficient biodiversity units are not available locally, developers may acquire biodiversity units from landowners outside of the locality.

Fundamental to the working of this new regime will be the establishment of a new biodiversity units market and ‘habitats’ bank, from which biodiversity units can be bought and sold, as part of which a BNG site register will be established that will list biodiversity units as they are created. Landowners can create or enhance habitat and sell any biodiversity units they generate to developers in England. Developers who provide on-site habitat enhancements that exceed their statutory requirements could also sell the excess units as off-site gains for another development.

To ensure that the scheme runs smoothly, the UK Government may also (at least in the initial stages of the scheme while the market is being established) sell statutory biodiversity units from a UK Government platform. The pricing will discourage use of the statutory scheme to prioritize the biodiversity unit market as the principal means of achieving off-site BNG. 

Practical implications for developers

Given the BNG Obligation, consideration of the net gain plan should become a fundamental part of the initial appraisal of a possible development. This should include a consideration of:

• the baseline biodiversity value of the property (this may influence which developments developers pursue as property that is of ‘low distinctiveness’ from a biodiversity perspective may be more desirable as it may be easier to deliver the BNG Obligation);
• to what extent it will be possible to avoid or mitigate any biodiversity loss from the proposed development;
• whether it is possible to achieve the BNG Obligation on site; and
• the cost of delivering the net gain plan and the impact on costs and returns of the proposed development.

Given the technical requirements involved, there is some concern that local planning authorities may not be fully prepared (and appropriately staffed) to deal with BNG requirements as they go live.  In order to ensure an efficient process, developers would be advised to provide detailed and fully considered net gain plans with professional input from an ecologist that will add credibility to the application and streamline the process. Failure to do so risks a long and potentially drawn-out process while the planning authority works to understand the requirements, or indeed an outright refusal.

Conclusions

While the detail of the BNG scheme is still being worked through, it is clear that the BNG regime will have a material impact on development activity in England going forward, not just for developers and their future schemes but also for landowners who will have opportunities to profit from enhancing or creating habitats on their land. 

Biodiversity unit trading has the potential to become a lucrative market – current predictions indicate that the mandatory BNG obligations could account for an annual demand for approximately 6,200 off-site biodiversity units per year with a market value of £135,000,000[3] while also helping deliver environmental improvement in England. Landowners who might consider pursuing the opportunity of generating biodiversity units will need to carefully review their ability to claim existing tax reliefs and the continuing obligations they may be under to maintain land to the required standard for at least 30 years.

To find out more, please contact the MoFo Real Estate team.  

Update: Register of Overseas Entities

By: Danielle Hirsch, Partner, London

Following the passing of the Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”) in March of this year, the UK’s register of overseas entities went live on 1 August 2022. Here is a reminder of what you need to know:

• Non-UK entities already owning property in the UK will risk criminal sanctions if they do not apply to the UK’s public registry of companies (known as Companies House) with details of their ownership structure, including the details of their registrable beneficial owners, by 31 January 2023. Further to the implementation of updated land registration provisions on 5 September 2022, the Land Registry has commenced placing restrictions on the titles of freehold and leasehold estates owned by overseas entities.
• If the non-UK entity was registered as the owner of the property before 1 August 2022, the restriction will prevent them from dealing with the property after 1 February 2023 unless they are registered at Companies House by that date. 
• If the non-UK entity is registered as the owner of property after 1 August 2022, the restriction will prevent dealing immediately after the point at which it is entered onto the relevant title by the Land Registry unless and until they are registered at Companies House.
• A non-UK entity intending to purchase, lease or grant security over UK property from now on will need to have registered at Companies House prior to completing its acquisition or financing.  Clearly this demands that submission of applications for registration is prioritised to prevent transactions being delayed. We understand that the existing turnaround time for registration at Companies House is approximately 24 hours, although this may well be because the submission rate thus far has been relatively low.

All applicants should also bear in mind that the information submitted as part of the non-UK entity’s application to register at Companies House must be verified by a “relevant person”.  This process can be undertaken by someone such as a lawyer, accountant or regulated company service provider and is required:

• upon initial registration of the non-UK entity;
• before each required annual update to Companies House; and
• before any application to remove a non-UK entity from the register can be made.

The verification process entails obtaining documents or information from a reliable source independent of the person being verified. Following the publication of Law Society guidance, it appears that not many English-regulated law firms are willing to undertake the verification role, though a number of company secretarial providers are looking to provide this service.

If you require any guidance on any aspects regarding the above, please contact the MoFo Real Estate team. 

Team News

We welcome Thomas Hutchinson to our London team as an Associate. Tom was previously legal counsel at MARK Capital Management and his experience there helps provide us with an invaluable client-side perspective.

[1] A conservation covenant is a private, voluntary agreement between a landowner and a responsible body to do or not do something on their land for a conservation purpose. While conservation covenants do not currently exist under the laws of England and Wales, the Act provides that, from 30 September 2022, landowners will be able to enter into conservation covenants, which will also bind future owners of the land. 

[2] The baseline value of a habitat will be its pre-enhancement state unless activities on the land have reduced its biodiversity value since 30 January 2020, in which case it becomes the pre-reduction biodiversity value. This is to avoid incentivising developers to degrade biodiversity on a site in order to reduce the relative effort/expenditure required to meet the BNG Requirement (also referred to as a ‘licence to trash’). 

[3] According to a Defra Market Analysis Study (Biodiversity Net Gain) published in February 2021.