Loan agreement default interest rates: How much is too much?
31 August 2022
News
It would be a strange loan agreement indeed if there was no provision for the payment of interest by the borrower on the amount outstanding, and this rate of interest will generally increase if the borrower defaults on a payment.
But, can a lender impose any default interest rate they wish? The short answer is no. Although a higher interest rate is acceptable where there has been a default; justified by the increased credit risk taken on by the lender, an unusually high default interest rate could be deemed a penalty and actually be unenforceable by the lender as this recent case shows.
The facts
In brief, the borrower (Ahuja) had bought a property from the lender (Victorygame), which was partly funded by a loan from Victorygame. Ahujua subsequently defaulted on a payment under this loan, alleging misrepresentation.
The loan agreement specified that in the event of default (such as non-payment), the interest rate would be compounded on a monthly basis at a rate of 12% per month, a rate which represented a 400% increase on the pre-default rate.
The law and decision
Case law surrounding default interest rates has established that to avoid the risk of the interest rate being classified as an unenforceable ‘penalty’, the default interest rate should not be too high and should only run while the default continues. But, what is deemed as “too high”?
In the Ahuja case, the High Court undertook the analysis in two stages:
First, it considered whether the clause in question imposed a ‘primary obligation’, which is essentially a requirement for the contracting parties to carry out their contractual promises, as opposed to a ‘secondary obligation’, which is a requirement that arises by operation of law on the breach of a primary obligation. If classed as a primary obligation, the interest rate could not be a penalty. The court found however, that the manner in which the loan agreement was drafted clearly showed that the clause was meant to impose a secondary, rather than a primary, obligation in the event of breach.
The court then considered the ‘legitimate interest’ test, i.e. whether the obligation imposed was out of all proportion to any legitimate interest. The judge accepted that a defaulting borrower comprises an increased credit risk for the lender and as such, a higher default interest rate is more acceptable; in such a situation, the lender has a “legitimate commercial interest in applying a higher rate”. However, even though Ahuja did not provide evidence of market interest rates and Victorygame did not provide evidence to show that the rate imposed reflected a “genuine assessment of Ahuja’s creditworthiness in the event of default”, the High Court found the default interest rate was “so obviously extravagant, exorbitant and oppressive”, that it categorised it as a penalty and was therefore irrecoverable by Victorygame.
The court suggested that had the default interest rate been lower (for example at a rate of 200% or less), then the court might have been prepared to accept, without further evidence, the provision as ‘non-penal’ to reflect the greater credit risk presented by a defaulting borrower. However, any greater increase would require evidential justification.
Tips
As a borrower, ensure that you fully understand the interest rate provisions agreed and the maximum amount of interest that could be payable on any outstanding sum, particularly if an event of default arises.
Lenders should be aware that although higher interest rates are likely to be enforceable in respect of a defaulting borrower, there are limits as to how high such rates should go, particularly if there is no evidence to justify the higher rate. If Victorygame had provided a genuine assessment of Ahuja’s creditworthiness and evidenced particular factors affecting the credit risk posed or market interest rates at the time of entering into the loan agreement, they may just have got away with it.
If you would like further information about anything covered in this article, please contact our Banking team.
Disclaimer
This note reflects the law as at 31 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
Developments in Fiduciaries Powers in Relation to Ethical Investments – Ashleigh Carr and Maryam Oghanna write for ThoughtLeaders4 Private Client Magazine
31 August 2022
Views
Senior Associates, Ashleigh Carr and Maryam Oghanna, have authored an article for Thought Leaders 4 on the topic of developments in fiduciaries powers in relation to ethical investments.
To what extent can fiduciaries take non-financial considerations into account when exercising their investment powers?
It seems like everyone is talking about ‘ethical investing’. In this article, ethical investing can be read to mean “an investment made not, or not entirely, for commercial reasons but in the belief that social, environmental, political or moral considerations make it, or also make it, appropriate”, (per Lord Wilson in R (Palestine Solidarity Campaign Ltd & Anor) v Secretary of State for Communities and Local Government [2020] UKSC 16).
This may inhabit different forms, including ‘ESG’ (measuring the ethical impact of an investment using Environmental, Social and Governance indicators), Socially Responsible Investing or ‘SRI’ (which goes one
step further, by screening and avoiding investments based solely on ethical considerations) and Impact Investing (investments which aim to create financial returns and measurable social or environmental impact).
Whilst the concept of ethical investing dates back many hundreds of years, it is increasingly becoming a hot topic for private wealth advisors, many of whom are reporting a growing demand, particularly amongst ‘next gens’.
This influence affects trustees and other fiduciaries who must consider whether and what weight to give non-financial factors when performing their fiduciary duties. Whilst the law regarding trustee duties in relation to investments is well established, the bedrock cases significantly predate the growing trend in ethical investing. New law is arguably required to reflect social, economic and environmental developments as the climate crisis and sustainability continue to climb the global agenda.
In this article we look briefly at case law which touches on the tension between ethical investing and prioritising financial reward, and the legal guidance and commentary which is emerging on the topic.
Case law
The starting point when considering the case law on non-financial considerations is Cowan v Scargill [1985] Ch 270. In that case, Sir Robert Megarry V-C held that the board of trustees of a mineworkers’ pension scheme were in breach of their fiduciary duties by blocking overseas investments and investments which were in competition with coal.
He reasoned that, where the purpose of the trust is to provide financial benefits for the beneficiaries, the trustees should exercise their power of investment to yield the best return (judged in relation to the risks of the investments in question). Trustees must exercise their powers in the best interests of the beneficiaries and put aside their own personal interests and views.
However, it was noted that financial benefit would not always be the trustees’ sole concern: “benefit” has a very wide meaning and it may be reasonable to prioritise benefits other than financial ones, where all the beneficiaries are adults and support an alternative policy. However, “such cases are likely to be very rare”, and where the trusts are for the provision of financial benefit, there would be a heavy burden on anyone who asserted that it was for the benefit of the beneficiaries to receive less.
Whilst the impact of Cowan has been debated, it is unlikely to offer much comfort to trustees and beneficiaries who wish to prioritise benefits other than financial ones. This is demonstrated by the recent case McGaughey v Universities Superannuation Scheme Ltd [2022] EWHC 1233 (Ch) which concerned two members of a pension scheme who were unhappy with the trustees’ continued investment in fossil fuels. Instead of alleging that the trustees had a duty to sell its fossil fuel investments for ethical reasons, the claimants pursued a claim on the basis that the pension scheme’s continued investment in fossil fuels represented a breach of their directors’ duties pursuant to sections 171 and 172 of the Companies Act 2006. Their claim ultimately failed.
The Court noted that the claimants had not run the ethical argument “no doubt because the Court rejected such an argument in Cowan v Scargill [1985]” and suggested that the more appropriate claim would have been a breach of trust claim against the company, despite the practical difficulties that would have arisen with that claim.
The position is slightly different for charitable trusts. Cowan was distinguished in Harries v The Church Commissioners for England [1992] 1 WLR 1241 (“the Bishop of Oxford case”) which was, until recently, the only reported case dealing with ethical investments by charities. Here, the Bishop of Oxford was concerned that, by permitting investments in South Africa, the Church Commissioners of England failed to sufficiently take into account the underlying purpose for which the assets were held.
Sir Donald Nicholls V-C held that where the trustees held investments, the starting point (similarly to Cowan) is that the trust will be best served by the trustees seeking to obtain the maximum financial return. However, the decision goes further than Cowan in that he recognised that there were certain exceptions to the general rule: (i) where the nature of the investments would directly conflict with the charity’s purposes; (ii) where the investment may indirectly conflict with the charity’s purposes (such as through alienating certain donors or beneficiaries); and (iii) where there is little or no risk of significant financial detriment to the charity.
It was unclear whether the Bishop of Oxford case created an “absolute prohibition” on making investments that directly conflicted with the charity’s purposes or objects. The High Court recently considered that question in Butler-Sloss v The Charity Commission for England and Wales [2022] EWHC 974 (Ch), in which the trustees of two charities sought the court’s blessing of the adoption of new investment policies which would align the charities’ investments with the Paris Agreement (which aims to limit global warming). The judge concluded that there was no absolute prohibition on directly conflicting investments (a view which seems to have been shared by Charity Commission, as expressed in its current guidance on charity’s investments, CC14, and all of the parties in the case). Instead, the trustees have to perform a discretionary exercise, balancing the potentially conflicting investments against the risk of financial detriment from implementation of that policy. He further held that the trustees were permitted to adopt the proposed
investment policy and that in doing so would discharge their duties in respect of the proper exercise of their powers of investment.
Commentary
There are differing views on the impact of Cowan and the scope of trustees’ duties to consider ethical investing. Some of the legal commentary suggests that Cowan is misunderstood and that the nature of trustees’ fiduciary investment duty has always been sufficiently flexible to allow pension schemes to consider ethical investing. Furthermore, guidance in the charity sector provides greater scope for fiduciaries to take a balanced approach to considering investments and what is in the interests of the charity.
Trust law already acknowledges that ‘benefit’ is not limited to financial returns, yet it remains unclear where to draw the line. Cowan still appears to represent a barrier to ethical investing, at least where the only demonstratable benefit is ethical and not financial. The thrust of much of the emerging legal commentary is that this is an unnecessarily restrictive approach, and there is increasing feeling that financial institutions and other organisations should take non-financial risks into account when exercising fiduciary duties.
This may partly be due to the dichotomy between ethical investing and financial reward becoming outdated, as acknowledged by Lord Sales in a recent lecture paper entitled ‘Directors’ duties and climate change: Keeping pace with environmental Challenges’:
“there is much force in the view that directors may and, increasingly, must take into account and accord significant weight to climate change in their decision-making. This is not least because a failure to act sustainably is more and more likely to have adverse financial impacts on companies who are, or are perceived to be, behind the curve on environmental issues”.
As Lord Sales concluded in the context of company law, there appears to be justification for trust law to be modified to enable trustees to accord greater weight to ethical issues than has previously been possible.
Ethical investing is only set to grow in popularity and can be a significant force for change. Market pressures such as changing societal attitudes and reputational risk are bringing ethical investing to the fore at pace. In this brave new world, trustees and beneficiaries alike would benefit from further direction elaborating on, and arguably supporting, a fiduciary’s ability to prioritise ethical investing.
There is an emerging view that judicial re-examination may prove useful, but that the real solution will be legislation. We are already seeing new legislation, policy and guidance being introduced in other areas (for example, by the Companies Act 2006 and Occupational Pension Schemes (Investment) Regulations 2005, the Charities (Projection and Social Investment) Act 2016 and guidance by both the Law Commission and Charity Commission). However, the Trustee Act 2000 fails to deal with non-financial considerations. A statutory update may provide greater clarity and certainty.
In practice, and at least whilst Cowan remains good law, it seems that the identity of the trustees and, possibly more importantly, beneficiaries will have the biggest impact on the uptake of ethical investing in the context of individual trusts. As next gens increasingly populate the beneficial classes of these structures, we could reasonably expect to see an increasing positive trend towards ethical investing. Whilst legal developments are awaited to support ethical investing, there are practical steps which might usefully be taken to support the consideration of non-financial benefit when exercising fiduciary powers, and for mitigating risk.
If settlors want to provide trustees with the freedom or even an incentive to invest ethically, they should adopt a similar stance as the regulatory and legislative approach in England and Wales in the context of company law, namely, to seek to inject ethical considerations into their decision making processes. When settling new structures, settlors should think carefully about the purpose and aims of the fund, and consider utilising charitable trusts, purpose trusts and/or foundations. Where there is a discretionary trust, careful thought should be given to the terms of the trust, which can record the settlor’s expectations as to the extent to which trustees can, or should, take non-financial benefits into consideration.
By taking this approach, settlors can incorporate sustainability and ethical investing into a trustee’s duty, instead of leaving it as an obstacle, whilst we wait for the law to catch up with the shift in approach to investing that many next gens are already demanding.
With rising energy costs and challenging net zero targets, could Stamp Duty Land Tax (SDLT) be a useful tool to help Britain take the next steps towards more energy efficient homes?
We believe that SDLT, as well as Welsh Land Transaction Tax and Scottish Land and Buildings Tax, could be used to assist taxpayers to achieve a greener, more energy efficient future.
Between 2007 and 2012, full relief from SDLT was available on the purchase (for £500,000 or less) of newly constructed properties which met specified standards of energy efficiency, whilst purchasers buying dwellings for more than £500,000 obtained a £15,000 relief from their SDLT liability. To obtain this relief, the seller had to provide a certificate that had been issued by an assessor to demonstrate that the home qualified.
A decade later and SDLT has only increased in complexity and cost, with added surcharges around second home ownership and non-resident purchasers, as well as reliefs targeted at first time buyers and others. Indeed, nowadays the tax on residential properties can be as high as 17%.
Although adding a further relief to an already complicated set of rules may seem counterproductive (especially for busy conveyancers who are not supported by a wealth of tax lawyers), successive governments have been willing to use SDLT to nudge behaviour in certain directions and the changes made have had significant impact on purchasers’ actions. For evidence of this, we only have to cast our minds back a couple of years when SDLT reliefs put in place during the COVID-19 pandemic resulted in an overall increase in transactions, with properties in the price bands that benefitted the most from the increase in the nil rate threshold (such as properties above £500,000) receiving a significant proportion of the upturn. It is not difficult to envisage purchasers turning their focus to a property’s energy efficiency if there is a significant tax saving (for example, on their SDLT bill) to be made.
With ambitious targets for Britain’s reduction in carbon emissions, the Government could look to the reinstatement and beefing up of this “green” SDLT relief. One option would be to tie the level of relief to the Energy Performance Certificate (EPC) ratings which are required to be produced before a property can be marketed for sale, with more energy efficient properties benefitting from a greater relief. Expanding such a relief to all dwellings (not just new builds), would incentivise property owners to invest in improving their property’s energy efficiency; sellers would then be able to market their low carbon properties as more affordable or share in the SDLT savings with the purchaser.
We are not alone in thinking that this could be an effective way forward. The UKGBC made a similar suggestion in their 2021 report with a plan to make the change revenue neutral by also adding SDLT increases to homes with low energy efficiency.
Coupled with other targeted assistance the Government provides for improving energy efficiency, this could be an effective way of encouraging homeowners to take the often-expensive steps to improve the energy efficiency of their homes; surely an appealing prospect on both an environmental and cost of living level?
Disclaimer
This note reflects the law as at 23 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
Powering the UK: Renewables, Peaks and Troughs, and the Retrofit Revolution – Victoria Du Croz, Polly Montoneri (née Reeve) and Laura Haworth write for EG
The UK’s energy supply is headline news on a daily basis. The climate crisis, coupled with a cost-of-living crisis and Russia’s invasion of Ukraine, has put energy cost and energy creation under ever closer scrutiny. While the UK has moved away from coal-generated power over the past 40 years, it continues to rely on oil and gas for a considerable amount of energy creation. Our households are largely run on gas boilers. According to EDF, around 78% of the energy used to heat our buildings comes from gas and, while the government has brought in legislation to ban gas boilers by 2025, this will only apply to new homes. Even our national grid relies on burning gas to generate power and this is likely to continue in the short-to-medium term.
The UK has historically imported a portion of its gas needs from across the sea through several interconnectors that run from the British coast to France, the Netherlands and Ireland. In eight of the past 10 years, the UK has been a net importer of gas, but so far in 2022 the UK has been a net exporter to Europe as our European neighbours look to replace Russian supply.
The challenge is how the UK weans itself off its reliance on gas, meets its net-zero targets and becomes more self-sufficient in the long term, while remaining environmentally sustainable and improving biodiversity.
Renew the call for renewables
Over the past 30 years the percentage of energy generated via renewable sources – wind, solar and tidal – has increased, accounting for 43% of electricity generation in 2020 and making it the main source of the UK’s electricity over the year. While the statistics in 2020 were promising, the UK generated 14% less electricity from wind in 2021. This is a core issue with wind power generation – the amount that will be generated at any time is hard to predict, and our fallback is gas and nuclear. Prime minister Boris Johnson has asserted that all of the UK’s energy will be from “clean sources” by 2035. To meet this goal, offshore and onshore wind capacity would need to quadruple and double respectively.
A similar story stands for solar; the unpredictability of UK weather means energy supply from solar fluctuates year to year. It is, however, growing, with a combination of commercial and residential rooftop and ground mounts accounting for 4-5% of UK energy supply.
The reality is that 2035 isn’t that many years away and, while the government talks a lot about its green agenda, securing a grid connection and planning consent is hard. Even for the successful minority, moving from proposal to working wind farm takes years, not months.
The big question is: how do we go from renewable sources supporting a small percentage of the UK’s energy creation to 100%? There are several significant challenges to overcome to meet net-zero targets and deliver clean energy. The obvious answer is to build more solar farms and more wind farms, but this is no easy feat and, over a series of three articles, we will be exploring tensions within the planning system, conflicts between local and national policymaking, environmental sustainability and the challenging decisions for landowners.
Peaks and troughs
One of the fundamental challenges with increasing our reliance on renewable energy sources is peaks and troughs in supply. How do we capture surplus energy and store it for the future when the sun isn’t shining and the wind has stopped blowing?
In order to ensure sufficient year-round supply, the UK needs to massively increase its ability to store energy. Battery storage is essential to enabling increased reliance on renewable energy and will be pivotal in facilitating a transition to green energy. Whereas currently fossil fuels are used as back-up to provide a reliable, steady supply of energy, this will no longer be possible due to net-zero targets.
While it has been anticipated that battery storage systems could save the UK energy system £40bn by 2050, ultimately reducing energy bills, battery storage facilities can be contentious. During the planning process, resident groups and the local community object to battery facilities for myriad reasons, including wildlife concerns, visual impact and the requirement for supporting infrastructure.
Permission for battery storage used to be granted through the Nationally Significant Infrastructure Project process, but now permission can be granted under the Town and Country Planning Act 1990. While this makes it slightly easier (and quicker) to navigate, it increases the potential to come up against local opposition.
Another common concern associated with battery storage is safety. As the number of battery storage facilities increase, driven by demand for solutions to deal with intermittent energy creation from renewables, fires have broken out across the world. In addition, these batteries have a limited lifespan and the production of them (and processing of them once they have come to the end of their useful lives) will have its own environmental impact. The lithium used in these batteries is, after all, a finite resource and the technology involved in producing batteries for different purposes is still developing.
The other safety concern is disposal, due to the potential for leaks and contamination – if the chemical contents escape from battery casements this can cause damage to the local environment. While there may be concerns about potential liability for contamination under the Environmental Protection Act 1990, action taken by local authorities under this legislation is relatively rare. By far a greater risk is a claim for private and/or public nuisance by neighbouring landowners due to migrating contamination. The damage can be widespread (especially if nearby waterways are affected), expensive to remedy and can also be a criminal offence. Contamination could also affect the landowner’s use of their own remaining land.
Building storage facilities raises the issue of competing pressure on finite land. Locally, communities want new (normally affordable) homes, while nationally there is a drive for renewable energy creation. This tension is something we will explore in more detail over the coming weeks.
Upgrade the grid
The other challenge is the capacity of the national grid. The grid requires significant upgrades and improved infrastructure to cater to the additional demand that will be placed on it due to our move to increased electricity use – especially in rural areas. It also needs to be adapted to cater for the peaks and troughs associated with renewable energy, the required storage and the new ways that electricity will move though the grid.
Electric vehicles are a clear example of increasing our reliance on electricity. As we transition to EVs, the supporting infrastructure is vital; it is anticipated that, unless the national grid is strengthened, the charging needs from millions of new EVs could result in blackouts across the country.
Retrofit revolution
Moving towards a reality where all of the UK’s energy is provided by renewable sources is laudable, and necessary to meet net-zero targets. However, generating clean energy can only take us so far if the commercial and residential buildings using this energy are wasting it through buildings that are not energy efficient.
Eighty percent of the buildings that exist now will be in place in 2050 when the UK has committed to be net zero. To ensure our commercial buildings and housing stock are operating efficiently it requires a retrofit revolution, but the onus has been placed on consumers and landlords. In many cases, the cost to the private sector is not proportionate to the energy efficiency improvements that are achievable. Some incentives have been offered to encourage upgrades, including zero rating certain energy saving materials in domestic buildings, but this incentive is time bound and will only go so far given it isn’t applicable to commercial buildings.
Currently, legislation prohibits the new letting of buildings with an F or G energy performance certificate rating (including renewals of existing tenancies) unless an exemption applies. The continued letting of residential property is also prohibited if such property has an EPC rating below an E. From 1 April 2023, landlords will also no longer be able to continue to let commercial properties with an EPC rating below an E. Proposed legislation was put forward in a 2020 white paper to change the minimum standard for commercial property to a C rating in 2027 and a B rating in 2030. The suitability of the EPC rating system is a topic for another day, but the proposed legislation highlights the impression that a lot of work needs to be done to get the UK’s current building stock up to scratch.
Around 500,000 buildings in England are protected by statutory listing, while hundreds of thousands more are in conservation areas. Without changing the policy guidance to enable energy efficient upgrades to be made more easily to these buildings, it is an incredibly costly and drawn-out process.
This is the issue; policy is inconsistent and inconsistently applied. This means that, while net-zero ambitions are to be commended, we have a long way to go before they are a reality.
This article was originally published in EG (21 June 2022) and is also available to read here behind their paywall.
An NFT is a non-fungible token that can be used to represent ownership of unique items. In the article, in the context of Art, Rory describes it as “a line of code pointing towards an image. It’s a bit like the title deeds to a house. If you’re going to court to prove ownership of a house, you don’t show the judge round your home, you show them the deeds.”
The piece goes on to investigate the attraction of NFTs and their innovative nature, in which Rory explains that “People are now starting to apply the technology to more artistic endeavours.”
You can read the full article here, behind the paywall.
Earlier this month, the British Business Bank outlined the key terms of a new iteration of the Recovery Loan Scheme intended to help smaller UK businesses in their battle against rising costs in the current economic climate.
Previously…
As we explained in our earlier articles (see here and here), the Recovery Loan Scheme was originally launched by the UK government in April 2021 with the aim of supporting UK businesses during the Covid-19 pandemic by enabling access to the finance they needed to continue trading. Initially set to close at the end of 2021, the Recovery Loan Scheme was subsequently extended for an additional period of six months until June 2022 (albeit with a lower maximum loan amount and a reduced government guarantee).
The trailer
In a press release on 20 July 2022, the Department for Business, Energy and Industrial Strategy (“BEIS”) announced that the Recovery Loan Scheme, would be extended for a further two years until the end of June 2024 and will be open for applications from August 2022 (the “Extended Scheme”).
The new series
Key features:
Extended Scheme ends
30 June 2024
Available to
Businesses:
(a) with a turnover of up to £45 million;
(b) carrying on trading activity in the UK; and
(c) which are not “businesses in difficulty”
Loan amount
Asset and invoice finance: Between £1,000 and £2 million
Term loans and overdrafts: Between £25,001 and £2 million
Term lengths
Term loans and asset finance facilities: Between three months and six years
Overdrafts and invoice finance: Between three months and three years
Government-backed guarantee
70% against outstanding balance of the loan following normal recovery processes
Personal guarantee
Lenders may take personal guarantees irrespective of the size of the loan
Pricing
Annual effective rate of interest and upfront and other fees are capped at 14.99%
Aside from the extended end date, a further significant change is that, unlike the original Recovery Loan Scheme, there is now no requirement for a business to confirm that it has been adversely affected by Covid-19. In a similar vein, any business which has previously taken out one of the other government-backed loan schemes during the pandemic (the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme, the Bounce Back Loan or the original Recovery Loan Scheme) will still be able to take advantage of the Extended Scheme.
The cast
As with the original Recovery Loan Scheme, the Extended Scheme will be administered, on behalf of BEIS, by the British Business Bank.
Lenders which are participating in the Extended Scheme will be listed on the British Business Bank’s website once applications are opened. This date is yet to be announced.
Disclaimer
This note reflects the law as at 17 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
In one of the latest FT Adviser publications, Stuart gives advice to anyone involved in the asset and wealth management sector as he establishes that private equity is here to stay.
Whilst including a number of hallmarks and factors that make the sector appear appealing from a private equity perspective the article additionally conveys elements to consider for any advisers who may deciding if a private equity exit is right for them. Moreover, the certainty that market will remain active with a continued focus on private equity is expected, with several speculations as to what is to come in the future.
You can read the article in full here, on the FT website.
Climate rules increase pressure to rethink leases – Victoria Towers and Louise Irvine speak to PlaceTech
15 August 2022
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Commercial Real Estate Partner and Co-Head of Logistics, Victoria Towers, and Commercial Real Estate Senior Knowledge Development Lawyer, Louise Irvine, speak to PlaceTech about how the move to make climate reporting mandatory will obligate landlords to include data sharing clauses in future leases.
Since April 2022, the UK’s largest companies and financial institutions have had to disclose their emissions, ensuring they are in line with TCFD recommendations and, as part of the disclosure, report not only their own emissions but those of their value chain. For real estate, that includes tenants’ emissions.
As such, leases will need to evolve to enable data sharing and, as Towers explains, while we are seeing numerous developers take greater interest in the ‘green’ provisions in their leases, the challenge is including clauses that tenants are happy to agree to.
Irvine goes on to explain that in recognition of the incoming requirement to disclose emission data, landlords and tenants are discussing provisions around the energy providers tenants can use – pushing them towards a greener option.
Irvine comments: “I think [it’s] all very much being driven by knowing that they’re going to have to disclose and work towards targets quite quickly.”
You can read the article in full here, on the PlaceTech website.
Victoria Towers is a Partner in the Commercial Real Estate team and leads Forsters client facing ESG offering. Louise Irvine is a Senior Knowledge Development Lawyer in the Commercial Real Estate team.
Attempts to block probate rose to a record level in England and Wales last year. Challenges to the distribution of inherited estates jumped to 9,926 in England and Wales’s courts and tribunals service centres in 2021, up 37 per cent compared with 2019.
On the rise, Fiona commented: “People are becoming more litigious when it comes to wills. Those who might have accepted being left out of a will 10 years ago may now be more likely to challenge it”.
The full article can be read here, behind the paywall.
With a rise in attempts to block probate, it is imperative to seek robust legal advice to avoid disputes. For more information, please contact Private Client Partner, Fiona Smith, or Head of Contentious Trusts and Estates, Roberta Harvey.
The Register of Overseas Entities is Go! What does this mean for lenders?
12 August 2022
News
The register of overseas entities (the Register) which was created pursuant to the Economic Crime (Transparency and Enforcement) Act 2022 (the ECA) went live on 1 August 2022. As such, overseas entities can now apply to Companies House to register, although property transactions will not actually be affected until 5 September 2022. So, what does this mean for lenders? Here, we provide an update and suggested practical steps.
Who must apply to the Register?
Any body corporate, partnership or other legal entity which is governed by the laws of a country outside of the UK (an overseas entity) that:
owns a UK freehold interest or a lease exceeding seven years (a Qualifying Estate) which was acquired after 1 January 1999; or
intends to acquire a Qualifying Estate,
must apply to the Register.
(Overseas entities that do not own or intend to acquire a Qualifying Estate may choose to be listed on the Register, but this is not a legal requirement.)
In addition, any overseas entity which has disposed of UK property since 28 February 2022, must provide certain details to Companies House. This is the case even where that overseas entity no longer owns any UK property although how this will be monitored and enforced in reality remains to be seen. Given the complexity and size of the exercise in registering overseas entities which currently own UK property, one could be forgiven for thinking that extending the notification obligations to overseas entities which no longer hold any UK property may well be a step too far.
Upon registration, Companies House will confirm due entry in the Register and provide the overseas entity with a registration number.
What information must be submitted to the Register?
An overseas entity is required to provide certain information about itself (including its name, country of incorporation or formation and registered office) and identify its registrable beneficial owners (or confirm that it does not have any) to the Register. Such information must, on an annual basis, be updated or confirmation given that no update is required.
Where the overseas entity does not have any registrable beneficial owners, it must instead give details of its managing officers.
Details of any disposition of UK property made since 28 February 2022 must also be provided.
The information to be submitted in the application for registration must be verified by a UK-regulated agent and their details must also be provided. Various service providers such as accountants and law firms can apply to take on this role but in so doing, will also take on various risks and responsibilities. It remains to be seen how many choose to do so.
Although the Register will be publicly available, certain information, such as the residential address and date of birth of individuals will be kept confidential.
What is a registrable beneficial owner?
Essentially, a beneficial owner is anyone who:
holds, directly or indirectly, more than 25% of the shares or voting rights in the overseas entity
holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity
has the right to exercise, or actually exercises, significant influence or control over the overseas entity
has the right to exercise, or actually exercises, significant influence or control over the activities of a trust, and the trustees of such trust meet any of the conditions specified above in relation to the overseas entity.
There is a specific carve-out in respect of share charges which provides that the rights attaching to the charged shares will be held by the chargor if the rights (other than the right to exercise them for the purpose of preserving the value of the security, or of realising it) are exercisable:
in accordance with the chargor’s instructions; and
(where the shares are held in connection with the granting of loans as part of normal business activities) only in the chargor’s interests.
As such, a lender will not be deemed a beneficial owner solely because a share charge has been granted to it.
Property transactions and legal charges
Much depends on when the overseas entity became the registered proprietor of the Qualifying Estate.
Where an overseas entity acquires a Qualifying Estate on or after 5 September 2022, HM Land Registry will refuse to register title to the property unless the overseas entity is included on the Register. As such, to acquire any UK property on or after 5 September 2022, the overseas entity must be duly registered.
Where an overseas entity acquired a Qualifying Estate on or after 1 August 2022 but before 5 September 2022, HM Land Registry:
will register that overseas entity as the proprietor of the Qualifying Estate without the overseas entity being on the Register; but
will place a restriction on title in the land register, which will prevent the registration of any relevant disposition of that property (i.e. a transfer, grant or assignment of a lease for a term of seven years or more, or the grant of a legal charge) unless the overseas entity is listed on the Register (or an exemption applies).
Where an overseas entity was already the registered proprietor of a Qualifying Estate prior to 1 August 2022, HM Land Registry will place a restriction on title in the land register. Such restriction will take effect from 31 January 2023 (the end of the six-month transitional period) and will prevent the registration of any relevant disposition of the property unless the overseas entity is listed on the Register (or an exemption applies).
From a lender’s point of view, this means that where an overseas entity became the registered proprietor of a Qualifying Estate:
on or after 5 September 2022, the overseas entity will need to be on the Register in order to be able to register a legal charge at HM Land Registry;
between 1 August 2022 and 4 September 2022, the overseas entity will need to be on the Register in order to be able to register a legal charge at HM Land Registry; and
prior to 1 August 2022, a legal charge can be registered at HM Land Registry without the overseas entity being included on the Register until 31 January 2023, although an application to register must have been made by this date and details of the legal charge will need to be disclosed at the time of application.
Enforcing a registered legal charge however, is a different story as it falls within one of the exemptions. Where a secured creditor (or a receiver appointed by the secured creditor) exercises its power of sale under a registered legal charge or a disposition is made by a specified insolvency practitioner in specified circumstances, the lack of registration by the relevant overseas entity will not prevent such sale or disposition.
What is the deadline for registration?
As mentioned, any overseas entity acquiring a Qualifying Estate on or after 5 September 2022 will need to be on the Register before the acquisition can be registered at HM Land Registry.
Although an overseas entity which acquires a Qualifying Estate between 1 August 2022 and 4 September 2022 will not need to be on the Register for the purposes of the acquisition, it will need to be registered if it wishes to make any relevant disposition of the land and it must in any event have applied for registration by 31 January 2023.
Any overseas entity which held a Qualifying Estate prior to 1 August 2022 is required to apply to register by 31 January 2023.
Non-compliance
The penalties for non-compliance can be severe and failure to register or to comply with the annual update requirements will prevent the completion of property-related transactions. In addition, failure to register on time or to comply with the annual update requirements are criminal offences.
For more information about the Register and how it will affect lenders, see our previous articles.
What should lenders be doing now?
The main effect on lenders is the ability to register a legal charge at HM Land Registry
Be aware that overseas borrowers which currently own UK property should now be applying to register and will have until 31 January 2023 to do so, although if they acquired the property between 1 August 2022 and 4 September 2022, they will need to be on the Register to make a relevant disposition of that property. You may want to amend their ongoing obligations in the facility documentation to ensure that they provide you with confirmation that such registration has taken place and evidence that they have complied with their annual update obligations.
Any facility agreements and related security documentation which are currently being negotiated for completion before 5 September 2022 should include an obligation on the overseas entity borrower to apply for registration promptly after completion, to comply with the Register’s annual update requirements and to provide you with evidence that they have done so.
If you are currently dealing with any facility agreements and related security documentation for completion on or after 5 September 2022, you should ensure that the overseas entity borrower is listed on the Register prior to completion. Failure to do so may hold up completion as HM Land Registry will not be able to make the appropriate entries in the land register, including registration of any legal charge over the Qualifying Estate. The documentation should also include undertakings that the borrower will comply with the Register’s annual update requirements and provide you with evidence that they have done so.
Important dates
28 February 2022: details of any relevant disposition of land since this date must be disclosed to Companies House
1 August 2022: Register becomes effective although the property-related provisions are not yet in force
5 September 2022: property-related provisions take effect.
31 January 2023: end of transitional period. Restrictions on title placed on the land register for overseas entities which owned UK property prior to 1 August 2022 take effect
Disclaimer
This note reflects the law as at 11 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
Will ground rent legislation deliver positive change in later living? – Amy France writes for EG
10 August 2022
Views
Commercial Real Estate Partner and Head of Later Living, Amy France, has written for EG, considering how the later living sector may now be viewing the Leasehold Reform (Ground Rent) Act 2022, as an opportunity to deliver positive change.
The article, which was first published on 8 August 2022 on the EG website, is available to read in full here (behind the EG paywall).
Here endeth the wait: Register of overseas entities goes live – an M&A update
10 August 2022
News
The register of overseas entities (the Register) took effect last week with UK property-owning overseas entities now being able to apply to Companies House to be listed on the Register. To do so, various information must be supplied by the overseas entity about itself and its beneficial owners (or, if it doesn’t have any, its managing officers).
We have previously published various articles about the Register, including its effects on corporate transactions (see here) but essentially, overseas entities which own UK property are required to be listed on the Register and will not be able to purchase or dispose of such property unless they are so registered (this is due to the fact that HM Land Registry will not make the appropriate entries on the land register unless the overseas entity is listed on the Register). Overseas entities which owned UK property as at 1 August 2022 will have until 31 January 2023 to apply to the Register.
Register “Live” Date
The Register went live on 1 August 2022 and is now accepting applications, however the land restrictions will not take effect until 5 September 2022. This is to allow overseas entities which intend to complete the acquisition of a UK freehold interest or a lease exceeding seven years on or after this date to apply to the Register in advance so as to prevent registration delaying completion.
UK-Regulated Agent
To apply to the Register, the information about the overseas entity and its beneficial owners (or managing officers) must be verified by a “UK-regulated agent”. This requirement is pursuant to obligations brought in under regulations recently published. Businesses such as law firms and accountancy firms can apply to become a UK-regulated agent but with guidance on the verification requirements having only been made available last week, many will still be researching what the role involves and the potential risks of having agent status.
Effect on M&A Transactions
As discussed previously, the Register will not affect share acquisitions/sales in the same way as it will affect property transactions for the simple reason that share deals do not require amendments to be made at HM Land Registry. But this does not mean that the Register can be ignored completely.
Share purchase agreements will usually include a warranty pursuant to which the seller will confirm that the target company has complied with all applicable laws. Where a buyer intends to acquire the shares in an overseas target company which owns UK property, such a warranty will catch the target company’s registration obligations under the Register. Even without this warranty, a buyer is unlikely to want to purchase the shares in a target company which is in breach of its statutory obligations. Failure to comply with the registration requirements also has severe consequences so should be avoided at all costs.
Where a buyer intends to purchase the shares (or equivalent) in an overseas target company which owns UK property, there are now two options available:
Option 1: the target company applies for registration now with details of its current (i.e. pre-completion) beneficial owners. These details will need to be updated in 12 months’ time under the Register’s annual update requirements and it is at this point that details of the new beneficial owners will be provided. This option is likely to be requested by the buyer if, for example, they want to sell the property post-completion, especially if the property sale is to take place on or shortly after 5 September 2022. The buyer may ask for a specific warranty in the share purchase agreement that the target company is listed on the Register. If exchange and completion is not simultaneous, the buyer may also want to see registration as a completion condition and include an undertaking that the target company will not remove itself from the Register before completion. However, if completion of the transaction is imminent, the parties may not have the time to wait for registration to take effect and so this option may not be viable.
Option 2: no application to register is made until completion has occurred at which point the target company applies for registration with details of its new (i.e. post-completion) beneficial owners. Such application must be made by 31 January 2023 but bear in mind that the property cannot be disposed of on or after 5 September 2022 unless registration has occurred. If this option is followed, the seller should make a disclosure against the compliance with laws warranty to notify the buyer that registration has not yet taken place. Bear in mind that where the target company has disposed of UK property since 28 February 2022, details of the disposition will need to be disclosed as part of the application and so the buyer will need to ensure that it has sufficient detail of any such disposition to comply.
Disclaimer
This note reflects the law as at 10 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
Zahava Rosenthal receives the STEP Excellence Award
9 August 2022
News
We are delighted to announce that Private Client Associate, Zahava Rosenthal, has received the STEP Excellence Award for her Advanced Certificate in the Taxation of Trusts and Estates (England and Wales).
Having achieved distinctions in all four of her Advanced Certificates, Zahava is in the process of applying to become a TEP.
The STEP Excellence Award is given to the top scoring student at distinction level in each of the STEP exams worldwide each year.
The annual EG Awards seeks to showcase the very best across the built environment with 21 awards highlighting the best deals, innovations, businesses and individuals in real estate. The judging of the Legal Team Award will be based on the firms’ track record in delivering outstanding advice on transformative deals, as well as responding proactively to the implications of the pandemic, and demonstrating the championing of core values such as diversity, inclusivity and sustainability.
Over the past two years, Forsters has enjoyed a period of sustained growth and success. Client service is one key driver, and another is our collaborative and collegiate working culture.
Our top ranked Real Estate team has established a strong reputation within the market for delivering high-quality and seamless advice to a broad range of clients; from private and institutional investors to developers and occupiers. We have also positioned ourselves as one of the go-to firms for overseas investors seeking to enter or consolidate their activity in the UK market.
Head of Commercial Real Estate, Andrew Crabbie said, “We are delighted to have been shortlisted for this prestigious award. Forsters is, and will always remain, a firm with real estate at the centre of its practice so it is incredibly pleasing to receive this impartial recognition of the team’s work.”
The winner is set to be announced on 2 November 2022.
Forsters was delighted to host Artistate’s panel discussion on managing NFTs (Non-fungible tokens) on 30th June. Chaired by Pierre Valentin, head of art and cultural property at Constantine Cannon (and co-founder of Artistate), speakers included James Brockhurst, Forsters; NFT artists Ed Fornieles and Misha Milovanovich; Nicola Goldsmith, a tax accountant at Haines Watts; Nick Dunmur, Associate of Photography Business and legal adviser; and Camille Beckmann of Artistate.
The discussion centred on the practical, legal and tax issues that are caused by the creation and collection of NFTs.
NFTs vs Traditional Art Market
Pierre’s first question was directed at the NFT artists and addressed the gulf between NFTs and traditional art market practices. Ed saw NFTs as a novel way for artists to raise funds, as well as outmanoeuvre the art market’s traditional gatekeepers. Misha made it clear that the medium was a natural next step for digital artists to explore with the added benefit that it could monetise an otherwise difficult creative pipeline.
One of Ed’s series of NFTs, Finiliar, was displayed on the screen throughout. These works are ‘live’ in the sense that their moods are tied to the current value of a particular cryptocurrency and aim to reflect the emotional bonds that traders form with commodities.
The Blockchain revolution
James offered the room some wider context, noting that blockchains and decentralised ledger technologies were nothing short of a revolution, akin to the adoption of joint stock companies 400 years previously. Existing legal principles had been adapted to accommodate crypto assets, especially with regards to expanding the definition of “property”. The significant early decision in the Singaporean case of B2C2 Ltd v Quoine Pte Ltd, as well as the recent case of Osbourne v Ozone Networks Inc. trading as Opensea and Persons Unknown confirmed that NFTs could be treated as property under English law.
Tax, Copyright and Intellectual Property Implications
Nicola tackled some of the tax issues arising as a result of creating or owning NFTs, which are both volatile in value and created and sold across jurisdictions.
Camille touched on the intellectual property and copyright concerns that naturally arise in the space due to the fact that the recycling of familiar imagery is a central tenet of NFTs. She noted the controversial incident involving artist-designed Stormtrooper helmets, which were subsequently minted as NFTs by Artwars and listed for a total of £5m, likely without the permission of the artists.
Learn more about our Art and Heritage Property services here.
Revisiting termination: When to stick or twist? – Richard Spring writes for the Property Law Journal
3 August 2022
Views
Construction Senior Associate, Richard Spring, has written for the Property Law Journal, about the options available to those who are not happy with the performance of their contractor.
This article was first published in Property Law Journal 399 (July/August 2022) and is also available on lawjournals.co.uk.
“What of a contractor who, put simply, is just not performing? What options are available to an employer who believes its contractor is not holding up its end of the bargain?”
The article gives consideration to the intricacies of terminating a contract’s engagement and providing practical advice on how to safely exercise this inherently risky enterprise.
Spring describes how “a thorough, detailed analysis of the events surrounding the contractor’s non-performance, possibly with expert opinion, should be undertaken to ascertain whether the contractor has indeed failed to proceed regularly and diligently with the works before any decision to terminate is taken.”
He concludes by offering 10 key considerations to note when considering terminating a contractor’s engagement.
