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Keeping It Real Estate

News and Trends in UK Real Estate, Disputes and Planning Law

Posted in Real Estate News

Removing the limits – a new class of real estate investment vehicle

UK limited partnerships have been go-to investment vehicles for United Kingdom real estate for many years.  Their attraction lies principally in their tax transparency, contractual flexibility and the limited liability protection they are able to offer investors.  They have not been without their issues, however, and, from 6 April 2017, investors and fund managers are able to make use of new legislation that has created a more flexible and simplified class of vehicle – the ‘private fund limited partnership’ (PFLP).

The legislative reform is designed to modernise, simplify and amend the existing legislation on UK limited partnerships in order to ensure that they remain competitive, particularly in light of newer tax efficient vehicles offered by major offshore jurisdictions.

All UK limited partnerships (both existing and new) that meet the PFLP conditions can apply to become PFLPs. The principle changes introduced by the PFLP regime relate to:

(a) The inclusion of a “white list” of activities that a limited partner can undertake without jeopardising its limited liability status.

(b) Increased flexibility in how PFLPs are funded by limited partners and in how limited partner capital is returned.

(c) The removal of other administrative burdens.

A non-exhaustive “white list” of limited partner actions

If a limited partner in a UK limited partnership participates in the management of the partnership’s affairs, it risks losing its limited liability. As a result, the introduction of a “white list” of safe harbours for limited partners in PFLPs provides some welcome clarity.

The white list proposals align PFLPs with a number of offshore jurisdictions regularly used in real estate investment structures (including Jersey, Guernsey and Luxembourg), which already provide safe harbours for limited partner involvement in decision making.

The white list includes: amendments to the PFLP agreement and the PFLP’s business; approving valuations of the PFLP’s assets; approving the PFLP’s accounts; extending the life of the PFLP; and deciding who will run the PFLP’s day-to-day business (all of which are matters that are usual for investors to carry on).  In addition, a limited partner of a PFLP will be allowed to be a director or shareholder of the general partner and to appoint representatives to a limited partner committee.

The white list is not exhaustive nor is it prescriptive; it will be a matter of commercial negotiation and agreement between the partners as to whether limited partners will be entitled to carry on any of the listed activities.

Relaxation of capital requirements

On the administrative side, the requirement to make a capital contribution will be removed for new PFLPs set up after 6 April 2017 and there will be no need to declare capital contributions at Companies House.  If any (optional) capital contributions are made to these new PFLPs, they will be capable of withdrawal. The current law will continue to apply, however, to capital contributions that were made to existing UK limited partnerships before they opted into the PFLP regime.  This means that although such capital contributions can be withdrawn, the limited partners may be required to return them.

The dual approach will ensure that any creditors will not be prejudiced by a UK limited partnership’s subsequent reclassification as a PFLP.

How to qualify as a PFLP

To qualify, the UK limited partnership must satisfy the following conditions:

(a) it is constituted by a written partnership agreement;

(b) it is a “collective investment scheme” for the purposes of the Financial Services and Markets Act 2000, which includes those that would qualify as collective investment schemes were it not for one of the statutory exceptions.


UK limited partnerships that qualify may opt into the PFLP regime:

(a) if registered on or after 6 April 2017, immediately upon registration (or they can opt in at a later date); or

(b) if registered before 6 April 2017, at any time after 6 April 2017.

Once a UK limited partnership becomes a PFLP, however, it will not be able to return to its ordinary limited partnership status.

Going forward

The creation of the PFLP regime is a welcome step and the conditions for qualification as a PFLP are straightforward.  We expect that the PFLP is likely to be the default choice for investors using UK limited partnership structures going forwards.

An earlier, expanded version of this blog appeared in our Real Estate Quarterly Spring 2017 edition.

Posted in Real Estate News

Nationwide announces position on onerous ground rents

Nationwide announced recently that it will not lend on new build residential leasehold properties if the amount of ground rent is more than 0.1% of the purchase price.

This change has been introduced by Nationwide in part to protect the marketability of the property from what Nationwide describes as “unreasonable multipliers”, such as ground rents doubling every five, ten or 15 years.

As many of our readers will be aware, ground rents are annual rental payments made to the freeholder under a long lease of a house or flat.  The amount payable can range from practically nothing (a “peppercorn” rent) to a significantly greater sum.  Last year, we blogged about the dangers of a ground rent which doubled every 10 years in the lease of a flat, which theoretically resulted in the annual ground rent ending up as millions of pounds.

Nationwide’s announcement brings welcome transparency to the type of ground rents that lenders will consider to be onerous.  This is helpful for occupiers, but also for developers, many of whom will factor future ground rent income into their viability assessments when planning developments.

Nationwide’s view is that escalating ground rents should be index linked, such as to the Retail Prices Index (RPI).  Index linked increases are seen as fairer than a doubling or other fixed % uplift ground rent, but they are no less complex, and bring their own issues.

Future rent payable is uncertain (and could end up being more than 0.1% of the value of the property).  Careful attention must be paid to the way in which the provisions are drafted, otherwise the unwary can fall into traps (such as compounding RPI increases).  And of course the provisions must cater for future changes in the way in which the RPI is calculated, or even if it is abolished (less likely for a 10 year lease, much more likely for a 999 year lease!)

Whatever the merits of increasing ground rents, as the doubling ground rent scenario demonstrates, any increase in rent should be drafted in a way that is clear and transparent, so that it can be more easily understood by both leaseholders and landlords.


Posted in Real Estate News

Did WannaCry make you want to cry? Real risks for landlords and tenants

As the extent of the damage caused by the recent WannaCry ransomware virus becomes clearer, businesses across the world have been reminded of the critical importance of cyber security measures, and the potential fall-out should those measures prove insufficient or ineffective.

The virus worked by encrypting the victims’ data and then demanding payment for its release, exploiting a weakness in Microsoft systems relating to file sharing, a facility that is vital to the way modern businesses work. Particularly notable was the range of entities that suffered. Some NHS trusts had to cancel appointments and operations due to their inability to access their computer systems, and the public were encouraged not to use emergency services unless absolutely necessary as a result.  Companies across the globe, from Deutche Bahn to FedEx, were affected.

Late last year, we blogged about the implications that a cybersecurity attack like this might have on landlord and tenant relationships, in particular where multiple tenants occupy a building with a ‘smart’ building management network, controlling everything from online storage to heating and electricity controls. Depending on the nature of the system used, WannaCry could in theory have taken advantage of any interconnectivity or filesharing between the tenant’s system and the building’s system to reach the tenant’s business records.

This begs the question of what landlords can do to protect themselves against these risks, and whether tenants need to be asking more questions regarding their landlord’s cyber security systems, particularly if tenants’ own data can be accessed via their landlord’s system. Such measures might include:

• adding loss caused by a cybersecurity attack as an insured risk (but note below);
• putting each party under an  obligation to take all reasonable precautions against the threat of a cyberattack including an obligation to have sufficiently strong anti-virus software at all potential entry points to the systems;
• ensuring separation of BMS/landlord/tenant networks where appropriate.

Landlords might well resist widening the definition of insured risks depending on their policy coverage because the insurance industry is still struggling to address losses arising out of attacks like these and cover is not widely available.  There is also little understanding as to cost, and as the tenant will ultimately be bearing the cost it needs to know what those costs might be.

Posted in Real Estate News

A new dawn? Revised Telecoms Code receives Royal Asset

In the sweep-up sessions just before Parliament was dissolved earlier this month, the Digital Economy Act 2017 received Royal Assent. The Act, once brought into force, includes a new Electronic Communications Code. What is it and why does it matter?

Property owners are often happy to allow telecoms operators to install equipment on otherwise redundant parts of their properties, such as the roof, and enjoy the revenue stream. But there’s a catch. Once installed, it can be extremely difficult to get rid of the equipment if the owner wants vacant possession in order to redevelop. The existing Electronic Communications Code provides statutory rights for telecoms operators to keep their apparatus on privately owned land. There are ways in the Code to remove operators, but they are contradictory and complex, resulting in landowners often having to resort to paying a cash settlement to the operator for them to go.

The existing Code has also struggled to keep up with advances in technology and is famously quoted by a senior judge as being “one of the least coherent and thought-through pieces of legislation on the statute book”.

So, has that been fixed with the new Code? Leaving aside termination of Code rights and removal of equipment, it is largely based on the existing Code. Operators can enter into an agreement with property owners to install equipment, which now needs to meet certain formalities, or they can apply to court for an order imposing Code rights. The test for whether a court will impose Code rights has now been placed on statutory footing, as has the method of compensating any owner or occupier for the imposition of rights. This removes any ransom value that the owner or occupier previously held, which is particularly important for operators in rural locations where there are limited sites to extend their network and provide the coverage expected by consumers and businesses today. But arguably, it removes much of the incentive for owners or occupiers to grant Code rights voluntarily.

The biggest change, however, is the process for terminating Code rights. The new Code removes the dual protection currently enjoyed by operators under both the Code and the Landlord and Tenant Act 1954. Once the new Code comes into force, an operator can either have Code protection or 1954 Act protection, but not both.

For agreements under the new Code, there will be a two stage process for termination, potentially involving two applications to the court and a timescale of at least 2 years to achieve vacant possession. At first blush, this might horrify landowners as the timescales in the existing Code appear much shorter. In practice, existing timescales tend to be similar where an operator contests the removal of equipment. Once the new Code is in force, it is likely that landowners will continue to negotiate with operators to leave early, but they may have to pay a higher price as operators may leverage the longer notice periods involved.

Another key change is that the new Code enshrines the automatic right for operators to upgrade and share their equipment. Any restrictions on those rights in agreements granted after the new Code comes into force will be void.

There is an intricate set of transitional provisions and any landowner who wishes to obtain possession against an operator under an existing agreement after the new Code comes into force should seek legal advice before acting.

The new Code is not without criticism and a number of areas have already been identified as ripe for dispute. There is no indication at this stage when it will be brought into force, but watch this space.

Posted in Real Estate News

Indecent Proposals: Tenants giving notice of intention to appoint administrators

It has long been a bone of contention for landlords that tenants can simply file a notice of intention to appoint administrators in order to get an automatic moratorium against any enforcement action.  This prevents a landlord from forfeiting, suing or exercising CRAR irrespective of whether the tenant goes into administration and, seemingly, whether it ever really had such an intention.

Not anymore.  On 11 April 2017, the Court of Appeal handed down judgment in JCAM Commercial Real Estate Property XV Limited v Davis Haulage confirming that any notice filed without a settled and unconditional intention to appoint administrators was an abuse of the court’s process, and liable to be struck out.  It is a welcome decision for landlords concerned about tenant companies playing the insolvency process for their own ends.

The case was about warehouse premises in Crewe where the tenant, Davis Haulage, had built up considerable arrears.  By January 2016, the landlord had had enough and issued forfeiture proceedings.  Unknown to the landlord, the tenant had shortly beforehand filed at court a notice of intention to appoint administrators.  The result was that, under paragraph 44 of Schedule B1 to the Insolvency Act 1986, forfeiture was a breach of the statutory moratorium and the landlord could not continue the proceedings without the court’s permission.  This moratorium lasted 10 business days, but the tenant went on to file three further notices giving it a much longer period of protection.

By the time the tenant filed the fourth notice, it had proposed a company voluntary arrangement (CVA) to compromise its debts.  The tenant’s justification was that, if the CVA was not approved by its creditors, then it would have to consider selling the business through a “pre-pack” administration.

The landlord made an application to have the fourth notice struck from the court’s file on the basis that the tenant did not have a fixed or settled intention to appoint administrators.  The decision turned on the wording in paragraph 26(1) of Schedule B1, which requires anyone who “proposes” to appoint an administrator to give notice of intention to certain parties.  At first instance, the judge found for the tenant, saying that someone can propose to do something without having any settled intention.

This has now been overturned on appeal.  The Court of Appeal said that if “propose” did not mean “intend” in this context then it would not be called a “notice of intention”.  The real issue, however, was whether that intention could be conditional, and the court said that it could not.  This followed from the facts that a company proposing to appoint was obliged, not just entitled, to give notice and that the purpose of it was to give qualifying floating charge holders and others a chance to exercise their prior right to appoint.  It was also relevant that a process was available for small companies proposing a CVA to obtain a moratorium; if the tenant was right then this would be redundant and any company, large or small, could file a notice to get a moratorium.

Whilst the court stopped short of saying that the tenant or its advisers had filed notices without believing it was entitled to do so, it made clear for the future that any notice filed with only a conditional intention to appoint administrators would not be validly given.

JCAM Commercial Real Estate Property XV Limited v Davis Haulage [2017] EWCA Civ 267

Posted in Real Estate

Waiving not an option in offer-back case

Offer-back clauses in leases are sometimes used to give the landlord greater control over the identity of the tenant at a property. However, the mechanism of operating an offer-back clause can be problematic as demonstrated by a very recent case: (1) TCG Pubs Limited (in Administration) (“TCG”) and (2) the Administrators of TCG Pubs Limited v The Master and Wardens of the Art or Mystery of the Girdlers of London (“Girdlers”).

The Girdlers were the freehold proprietor of a pub in Hammersmith. TCG held a 40 year lease of the pub, the term of which commenced in June 1987.  TCG, having entered administration, sought to assign its lease to a third party.  Before doing so, TCG were required to “first grant an option” to the Girdlers to buy back the residue of the term at the then current open market value.

The case rested on three points:

• Had TCG granted a valid option by writing to the Girdlers indicating that they were prepared to offer them the ability to purchase the property at a proposed price?

• Had the Girdlers waived the right to rely on the requirement for TCG to grant an option by dealing with the application for consent to assign?

• If the answer to either of the above was “yes”, had the Girdlers unreasonably withheld their consent to the assignment?

Grant of an option
The court decided that words used in the clause such as “grant”, “option” and “exercise” were more consistent with a formal transaction than a simple process of giving a notice. TCG had not done enough, even though the Law of Property (Miscellaneous Provisions) Act 1989 (which provides that an option cannot be granted by a unilateral act of the tenant) was not introduced until after the date of the lease.  Instead, TCG would have had to proffer a formal option with an invitation to the Girdlers to execute it.

The Girdlers’ solicitor had responded to the proposed assignee, dealing with the application for consent to assign.  TCG argued that this waived their option rights but the court found that the letter did not contain a sufficiently unequivocal statement to amount to a waiver of the rights under the option clause. Nor was it addressed to the person affected by the waiver (TCG) but, the court said, that “particular hole would have been filled” once it was clear that the proposed assignee was making the application on behalf of TCG.

Application for consent to assign
The application for consent had initially been sent by the proposed assignee, not the tenant. As such, the court found that the application was not a valid request for consent until the tenant had confirmed that the application was made on its behalf.

The court found that the requirement for a surety in the lease operated as a valid gateway to the right to assign, which the landlord was entitled to insist upon and which was not tested by reasonableness.

Hogan Lovells acted for the Girdlers in the case. A full copy of the judgment can be found here.

Posted in Real Estate News

A move to “glasshouses”: Government announces call for evidence on a register of beneficial owners of property controlled by overseas companies and other legal entities

On 5 April 2017, the government launched a call for evidence on a register showing the beneficial ownership of property controlled by overseas companies and other legal entities.

This isn’t the first time that these proposals have hit the news. Last year, in March 2016, the government consulted on their proposals for such a register; the results of which were published last week.

The reasoning behind the government’s efforts is clear: improving transparency in ownership fosters confidence and trust and plays a key role in deterring cross-border and domestic crime and in particular money laundering for the funding of terrorism. Since 2004 enforcement efforts have stepped up. It is reported that £180m of UK property has been subject to criminal investigation as suspected proceeds of corruption, with 75% of this funded through offshore corporates. HMRC, in turn, have recovered over £2.7 billion from tackling tax avoidance schemes through the courts. The benefits of a register operate at an individual level too. Tenants would be able to look through an overseas landlord to obtain information on those with ultimate control and neighbours could trace the owners of buildings in their community.

Where are we now?

In June 2016, the government introduced a central, publically accessible register of beneficial ownership – the people with significant control (PSC) register, under which all companies incorporated in the UK must give information about people with significant control (those with a 25% share or voting rights or other form of control) of the entity. Before that, at the International Anti-Corruption summit in London in May 2016, the government committed to go further and introduce this new register.

What do the proposals involve?

The proposals call for a register of the beneficial owners of overseas companies owning UK property or engaging in UK government procurement. This will:

• Not be limited to companies limited by shares but will instead be applicable to all legal entities;
• Only apply to leases of over 21 years;
• Require registration of beneficial ownership at Companies House (adopting the existing definition of beneficial ownership that underpins the PSC) where UK property is bought or sold (including the grant of long leases);
• For property already owned by an overseas entity, require that entity to supply the beneficial ownership information over a transitional period, after which they will be prevented from selling, granting a long lease or granting a charge over the property unless the new register requirements have been complied with (as backed up by a note on the registered title).
• Require overseas entities that wish to take part in new central government procurement contracts valued over £10 million to supply beneficial ownership information before the contract is finalised.

The proposals represent a bold step for the government as the new register will be the first of its kind in the world. Margot James, Parliamentary Under Secretary of State for Business, Energy and Industrial Strategy, acknowledges that the government needs to proceed with care so as to ensure that the UK remains an attractive place for foreign investment.

The call for evidence on the new register closes on 15 May 2017; rest assured, as the detail is pored over, it won’t be the last we hear on it.

Posted in Real Estate News

Hogan Lovells wins Real Estate Team of the Year at Legal Business Awards 2017

lba17_real_estate_team_winHogan Lovells is delighted to have won Real Estate Team of the Year, jointly with Gowling WLG, for its work on the £3bn redevelopment of Brent Cross South. The scheme has been described as one of the most ambitious regeneration projects in London in living memory.

Hogan Lovells advised Argent Related on the scheme to deliver nearly 7,000 new homes, 4.2m sq ft of commercial space, a new Thameslink station, three re-built schools and integration with the parallel scheme to redevelop the neighbouring Brent Cross Shopping Centre.

The 40 lawyer team was led by real estate partner Nicholas Roberts, while also bringing leading practitioners from planning, corporate, tax, construction, and real estate finance practices to name a few.

Commenting, Nicholas Roberts said: “This is a major achievement for all of those who have worked on the deal. It’s been a pleasure to work with Argent Related on this high profile, complex and significant project. The wider benefits that this redevelopment will bring to the community are enormous, and we look forward to continuing our work on the scheme for Argent Related.”

Posted in Real Estate News

Squatting in mansions: The risk to residential as well as commercial premises

Since the beginning of this year, the so called Autonomous Nation of Anarchist Libertarians has occupied a number of multimillion pound residential properties in and around Belgravia.  Autonomous Nation’s cause is to highlight the number of properties sitting vacant, whilst the number of homeless people continues to rise. Their occupation of a £14 million mansion at 19 Buckingham Gate was widely publicised  as it posed a potential security risk to Her Majesty the Queen with a direct view into Buckingham Palace gardens and Wellington Barracks.

Squatting in residential properties has been illegal since 2012 but that has not made the issue go away.  Owners often find that the police remain reluctant to act.  The only alternative is to apply to court for an order for possession but this can be costly and time consuming.  It can also give squatters an opportunity to air grievances in a public forum, attracting media attention.  Squatters will look for any procedural irregularities, or try to rely on their inability to obtain legal advice and the importance of their human rights in order to delay eviction.  Frustratingly for owners, this may result in the court giving the squatters more time before their inevitable eviction.

Even a short delay can be problematic, for example where the owner is about to start works at the property, or there is a high risk of costly damage being caused by the squatters whilst they remain in occupation.  The end result is that squatters remain a very real threat to both commercial and residential premises.

The following tips will assist owners faced with the prospect of evicting squatters:

1. Don’t forget section 6 of the Criminal Law Act 1977.  This section makes it a criminal offence to force entry to a property when there is someone present who opposes entry –  even if it’s your own property!  Although this protects squatters once they have taken occupation it will also work to protect a property if a security guard is present when squatters try to enter.   As always, prevention is better than cure so review the security measures at vacant premises on a regular basis.

2. Know who to call and make sure you instruct good enforcement officers to deal with the situation from the outset.  Professional squatters know their rights and even minor technical errors in following procedure can lead to delays down the line. Plus, enforcement officers can provide vital “on the ground” information to the lawyers.

3. Put forward an individual in your organisation who can help the lawyers gather the necessary information in relation to the property and the events that led to it being occupied. This is especially important in time critical cases where an eviction is required urgently.

4. Make your lawyer aware of any sensitive information that you would not want to appear in court papers (such as particularly valuable items remaining in the property, or circumstances making it particularly vulnerable to damage or the threat of further unlawful occupation) and bear in mind that this information will be seen by the squatters and could even find its way into the media.

5. If there is a particular threat posed by the squatters’ occupation, such as health and safety risks,  some feature of the property worthy of greater protection or a risk to the wider community, draw it to your lawyers’ attention as it may warrant an application for expedition.

6. Arrange a proper handover of the security arrangements from the enforcement agents post eviction as re-occupation by the squatters could mean another trip to court.

Professional squatters are always on the look-out for vulnerable properties. The risk should never be under-estimated when any property becomes vacant, whether it is commercial or residential.

Posted in Real Estate News

Tenant insolvency – Is there merit in a further moratorium?

The recent spate of high-profile company voluntary arrangements (CVAs), including those of BHS, Store 21 and more recently Love Coffee, The Food Retailer Group and Blue Inc, has placed this corporate rescue tool back in the spotlight.

CVAs can be a useful mechanism for turning around a failing business, but it is clear that they are no panacea.  First, they don’t always work, and BHS is a striking example of a CVA failing to save a business despite compromising a large number of leasehold liabilities.

Secondly, a CVA needs approval from the requisite majority of creditors in order to take effect.  For landlords, supporting a CVA proposal can prove challenging: they highlight the tension between the protection of businesses and the legal rights of property owners who see their claims compromised in the interests of creditors as a whole.  When landlords voted against The Food Retailer Group’s CVA in February this year, and the company subsequently went into administration, it was seen by some as an indication that landlords’ patience with the process was finally running out.

So is it time for a new process?

Last year the Insolvency Service consulted on proposals for the ‘Review of the Corporate Insolvency Framework‘. The proposals included a new moratorium for struggling businesses. Subject to fulfilling certain criteria, it was proposed that businesses would benefit from a three month moratorium, to “consider the best approach for rescuing the business” during which no enforcement action may be brought by creditors, including forfeiture of leases by landlords.

The justification for changing the rules was to make corporate rescue more business friendly, with more opportunities to restructure companies without a formal insolvency process whilst being protected from creditor claims.  There is, however, concern that this could be open to abuse and unnecessarily delay inevitable insolvencies.

Although the responses received to the consultation broadly favoured a new moratorium, some clarification and amendment was called for to ensure a fair balance between the rescue of insolvent businesses and the rights of creditors, including:

  • Rent: the business will “be obliged to meet on-going trade costs and debt obligations during the moratorium“.  However, the consultation did not clarify how landlords will be safeguarded if a tenant enters into a moratorium having failed to pay a quarter’s rent the previous day.  With an administration, landlords know that their rent will be paid as an expense of the administration, at least for the period that the premises are in use.  Landlords will want to see similar protections clearly codified in the revised proposals.
  • Length: Three months was viewed by many of the respondents to the consultation as excessive, given that the purpose of the moratorium is for the tenant to seek some agreement with creditors.  The most common length of time considered appropriate by respondents for the moratorium was 21 days.
  • Role of the supervisor: During the moratorium, the business’s activities will be overseen by a supervisor who will help safeguard creditors’ interests.  The proposals envisage this being an accountant, solicitor or insolvency practitioner.   Landlords will want to see the supervisor having sufficient control over the business to protect their interests, particularly the payment of rent during the moratorium.

Clearly, rescuing a struggling business can be beneficial for all stakeholders.  However, it is not clear whether this proposal for an additional moratorium strikes the right balance between saving a business and protecting the rights of creditors.  CVAs at least allow creditors some say in whether and how the company is restructured, and require the company to come up with a turnaround plan.  Where the plan does not address the fundamentals of the business, the CVA is ultimately more likely to fail.  A standalone moratorium would, it seems, be even more exposed to this risk.  Whilst there is no automatic moratorium for most CVAs, the company can apply to court for one.  If creditors vote down a CVA because they do not think it is fair or credible then perhaps placing the business into the hands of an administrator through a formal process is the right logical step.

It is hard to see how the purpose of this proposed moratorium cannot be just as well, if not better, served by making full use of the processes that already exist.