The Lifecycle of a Business – How can a company reduce its share capital?

29 February 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

How can a company reduce its share capital?

Every company limited by shares has a share capital. This is the amount of money paid to the company by its shareholders when they subscribe for their shares and consists of the nominal value of the share plus any share premium. It might total pennies or hundreds of millions of pounds.

In theory, because the shareholders of a company have the protection of limited liability and so cannot be liable for the company’s debts, a company’s share capital is the fund of last resort for its creditors. The company may make distributions of its realised profits to shareholders, but they cannot get their capital back. However, companies have many reasons for wanting to reduce their share capital. These might include:

having too much share capital;
having lost capital, so the share capital no longer represents the company’s assets;
cancelling liabilities on partly paid shares;
creating distributable reserves; or
simplifying corporate structures.

For example, a company might have a substantial share premium account. It might also have significant cash, but also accumulated losses that prevent it from paying a dividend. If the share premium account is reduced, it could increase its reserves, so enabling a dividend to be paid, while not affecting the number of shares in issue.

Company law therefore allows reductions of capital subject to strict limitations. A company can reduce its share capital by a special resolution confirmed by the court (as has long been the case), but the Companies Act 2006 gave private companies access to a quicker and easier method, where the special resolution is supported by a solvency statement by the directors and the court is not involved.

A reduction of capital supported by a solvency statement is conducted as follows:

The directors meet to approve the reduction and sign the solvency statement. All the directors must sign the solvency statement to confirm that:
1. they have taken into account the company’s liabilities; and
2. there is no grounds on which the company could be found to be unable to pay its debts and that it will continue to be able to do so for the next 12 months (or, if the company is to be wound up, that it will continue to be able to do so within 12 months of the commencement of the winding up).
The shareholders approve any amendment required to the company’s articles of association (for example, because they prohibit a reduction of capital) and the reduction of capital, each by special resolution, either at a general meeting or by written resolution. The solvency statement must be signed by the directors not more than 15 days before the resolution is passed and be made available at the general meeting or circulated with the written resolution.
The directors all sign a statement of compliance confirming that:
1. the solvency statement was provided to all the shareholders; and
2. the resolution was passed within 15 days of the solvency statement being made.
Within 15 days of the special resolution being passed, the signed solvency statement, a copy of the special resolution(s), the compliance statement, Companies House form SH19 and a copy of any amended articles of association are delivered to Companies House with the necessary fee (currently £10 or £50 for same day processing, although Companies House fees are to increase from 1 May 2024 with the revised fee for registering a reduction of capital being £33 or £136 for same day processing). The reduction of capital takes effect only when the registrar has accepted and registered the filing.

Once registered, the company can then take the steps approved by the resolution, usually either by repaying the shareholders directly or crediting the amount reduced to a reserve, and making any necessary changes in its registers. The company is permitted to reduce its share capital “in any way” as long as there is at least one non-redeemable share remaining, so it has a great deal of scope to reorganise its capital under this section.

The above assumes that all shareholders are being treated in the same way. If it is intended to treat shareholders differently (perhaps to pay one shareholder out or to return capital relating to a certain class of shares) it may be necessary to consider obtaining class consents and take into account the risk of a shareholder bringing a claim for unfair prejudice.

Reductions of capital: a tax perspective

Repayment of share capital

When capital is returned to an individual shareholder without first passing through the company reserves, the repayment of capital (i.e. the amount paid for the shares, which will be the sum of the nominal value and the share premium (if any)), is treated by HMRC as a capital distribution and so within the capital gains tax (CGT) / corporation tax on chargeable gains rules. There is a part disposal of the underlying shares (some small part disposals may be ignored at the time of the repayment and, instead, the consideration in question is deducted from the allowable deductions on the subsequent disposal of the shares). Where the repayment is not “small” then it may be possible to claim Business Asset Disposal Relief (BADR) but HMRC are alive to possible abuse and may recharacterise as income under the transactions in securities (TIS) rules (and it is often prudent to seek a clearance from HMRC before undertaking the transaction where the reduction of capital is in respect of a “close” company).

If the payment goes beyond the amount paid for the shares there is an income distribution.

Distribution from reserves

If a company decides to transfer the funds from the capital reduction to its reserves, generally this is treated as a realised profit. The company can then decide to make a dividend payment to its shareholders from that profit or leave it in its reserves.

If it decides to pay a dividend to its shareholders then an individual recipient will be subject to income tax, but a corporate shareholder will generally be able to rely on an exemption from corporation tax.

Conclusion

Undertaking a capital reduction within your company can be a complex process and the best method of doing so will vary greatly depending on the circumstances of your company and your shareholders. Please contact the Forsters’ Corporate team if you would like tailored advice for your company.

Disclaimer

This note reflects the law as at 29 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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Elizabeth Small

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Drone technology in real estate: the future or pie in the sky? – Louise Irvine writes for PBC Today

28 February 2024
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Louise Irvine, Senior Knowledge Development Lawyer, has written a piece for PBC Today (Planning, Building and Construction) on the expanding use of drones in the world of real estate and examines the legal considerations.

Drone technology in real estate: The future or pie in the sky?

Drone technology might be hitting the headlines due to their vital usage by the armed forces in global conflicts, but its potential is also fast expanding in the world of real estate. Louise Irvine, senior knowledge development lawyer at Forsters, takes a look.

New developments are continuously emerging but current uses of drone technology include bird’s eye and panoramic surveys, which are particularly useful for large agricultural sites or greenfield development, carrying out inspections in hard-to-reach areas and investigating breaches of planning regulations.

Drone technology can also access areas that might be hazardous or not otherwise accessible at all, such as dilapidated buildings with structural issues (such as unstable roof spaces) or where there is known contamination. They can also provide footage for 3D surface models and imagery overlapping.

Real estate businesses are starting to ready themselves for more extensive uses of drones. Clients such as Cubex Land are incorporating drone landing pads into their new schemes, such as with the Halo Building in Bristol.

What is the current legal framework – who owns the sky?

The common legal position in England and Wales is that a landowner owns the air immediately above their land up to the height that would be reasonably necessary for the ordinary use and enjoyment of the land and the structures upon it.

This does infer a vertical limit on a landlord’s ownership and in terms of the usage of the sky above their properties.

There are also various rules that apply in different scenarios around when and where drones may be flown but as a general principle, it’s worth noting that commercial drones may not be flown within 50m of people, vehicles, vessels, buildings or other structures which the drone operator doesn’t control and must be further away still from large crowds.

At present, the regulation of drones is restrictive, particularly in busy metropolitan areas. So, the Civil Aviation Authority has not yet had to worry about managing airspace for drones. It will be a huge amount of work to ensure that drones are integrated into the existing air traffic control system, which represents a major regulatory hurdle.

Planning drone landing spots or vertiports on new build and refurbishment schemes

As business start to futureproof their buildings ready for widespread drone usage, we expect to see more landing spots or vertiports on new build and refurbishment schemes.

Roofspace on commercial buildings, such as office blocks and car parks, are largely underutilised, presenting a commercial opportunity for landlords to add value.

Landlords and developers will need to consider planning permission, firstly in relation to the use of the property as a whole and whether use as a vertiport is either permitted under the existing permitted use of the building or whether it is ancillary to the existing permitted use.

Secondly, in terms of whether the installation of external infrastructure to support a vertiport on a building will constitute development for planning permission purposes.

Planners may also need to consider the ecological impact of drone flight on animals, particularly birds. This is from the obvious risk of collision but also with disturbances and stress caused by noise, lights and the presence of drones in their natural habitat.

Nuisance, privacy and GDPR considerations

It is important to bear in mind privacy, as drones have increasingly sophisticated long-range cameras and recording devices. Using drones over private areas could constitute an invasion of privacy.

GDPR must also be factored in, as those who collate and control data from drones will need to ensure that it is being managed in accordance with regulation.

Most leases will also have restrictions against doing or permitting anything on the premises which may cause nuisance, annoyance or disturbance to the landlord, any other occupiers of the building or estate, and occupiers of any premises in the neighbourhood.

If such a clause is in the lease then the drone operator will have to consider the hours during which the drones can take off and land, and any ways in which noise can be restricted.

Future uses of drone technology

Companies such as Skyports are exploring air taxi services and have been acquiring sites for this purpose. Around 50 different countries are reportedly looking into the viability of unmanned flights forming part of their transport network, driven by often congested and ageing road networks, but it’s unlikely we’ll see any unmanned drone taxi flights before the 2030s at the earliest.

In 2016, Amazon completed its first commercial delivery using a drone in the UK as part of its Amazon Air trial using a GPS-guided drone to deliver its cargo to a home in Cambridge. But progress has since been slow.

However, in Australia, Wing (which is part of the Alphabet group) has been regularly delivering cups of coffee and other groceries by drone, apparently without any safety issues thus far.

In London, the Lyons Place residential development is the first residential development to incorporate a drone port to accommodate drone deliveries to the residents of the building. Meanwhile, Royal Mail has partnered with a few UK drone companies to start transporting parcels using drones to remote rural areas.

Skyports has also been exploring medical uses. Drones delivered Coronavirus testing kits and medical supplies to the remote region of Argyll & Bute in Scotland during the pandemic.

It remains to be seen whether drone technology will rapidly rise or if progress will be slow. Either way, there will need to be more legislation and regulation to protect privacy, flight paths and areas of national security. But the potential for drone usage to expand is clear, and it is definitely an area to keep a close eye on.

This article was originally published by PBC Today on 29 Jan 2024 and can be read here in full.

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Louise Irvine

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Anson Revisited: What does HMRC’s updated guidance mean for UK resident members of US LLCs?

27 February 2024
News

The US and the UK are separated by the vast and tumultuous waters of the Atlantic Ocean. Those with connections to both countries will often find themselves rowing against the tide between two very different and complex regimes. With the right specialist advice, they can navigate the cross-border challenges safely and make the best use of planning opportunities.

Understand the issues, avoid the traps, and discover ways to plan ahead in our Navigating the Atlantic series for US-connected clients.

UK Tax Treatment for Members of US LLCS

In this instalment, we explore the impact of HMRC’s recently updated guidance on the UK tax treatment of US LLCs and why planning ahead is more important than ever to avoid double taxation.

Introduction

On 12 December 2023 HMRC published updated guidance (issued in International Manual 180050, see also 161040) on the UK tax treatment of profits arising within a limited liability company (an “LLC”) incorporated in the US. The guidance indicates that taxpayers will face an uphill struggle if they now wish to claim double tax relief on the basis of the decision of the United Kingdom’s Supreme Court in Anson v HMRC [2015] UKSC 44 (“Anson”).

Background

In Anson, the taxpayer (Mr Anson), who was UK resident, was a member of a Delaware incorporated LLC. The profits of the LLC were apportioned between and distributed each quarter to its members. The LLC was classified as a partnership for US tax purposes and was, therefore, transparent for US federal and state tax purposes: Mr Anson (and not the LLC) was liable to US tax on his share of the profits as they arose.

HMRC sought to charge Mr Anson to UK income tax on the profits he received from the LLC (i.e. on the distributions) and argued that the profits that had been taxed in the US were the profits of the LLC and not of Mr Anson. On that basis, they argued that Mr Anson was not entitled to the benefit of the US/UK double tax treaty because the US tax and the UK tax were not payable on the same profits.

The First-tier tribunal (“the FTT”) found in Mr Anson’s favour, finding as fact that under Delaware law the profits of the LLC belonged to the members and not to the LLC. The case ultimately reached the Supreme Court, which also found in favour of Mr Anson by virtue of the FTT’s finding of fact: if Mr Anson’s share of the profits belonged to him under Delaware law, the distribution of his profits to him represented the mechanics by which he received the profits to which he was entitled and did not represent a separate profit source. As both US and UK tax arose on the same profits, Mr Anson was able to benefit from relief under the US/UK double tax treaty.

HMRC’s Initial Guidance Relating to Anson Published On 25 September 2015

Shortly after the Supreme Court’s decision in Anson, HMRC published guidance in which they stated that “HMRC has after careful consideration concluded that the decision is specific to the facts found in the case…Individuals claiming double tax relief and relying on the Anson v HMRC decision will be considered on a case by case basis.”

Perhaps tellingly HMRC also said that “where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business”. HMRC’s guidance reassured the corporate community that group relief would continue to be available where US LLCs were part of the group structure.

Although not particularly helpful, this guidance suggested that HMRC conceded that where the facts of a case and those found in Anson were alike, the profits of an LLC should be treated as belonging to its members such that double taxation relief would be available.

HMRC’s Guidance Published in December 2023

However, it appears from the latest guidance that HMRC has decided to take a more robust approach. In INTM180050 HMRC now state: “Based on HMRC’s understanding of Delaware LLC law (as at 06 December 2023), and contrary to the conclusion reached by the FTT in HMRC v Anson…HMRC continue to believe that the profits of an LLC will generally belong to the LLC in the first instance and that members will generally not be treated as “receiving or entitled to the profits”of an LLC.”

HMRC go on to say that it understands that the LLC law of the other US states is largely the same as that of Delaware so that it would generally not regard the profits of other US LLCs as belonging as they arise to the members.

From HMRC’s perspective it follows that individual members will only be chargeable to UK tax on any dividends or other distributions that they receive from the LLC (a consequence of HMRC continuing to regard LLCs as being ‘opaque’ for UK tax purposes), and that such receipts will be taxed at the dividend rate of income tax (currently up to 39.35%). If the LLC is taxed as a partnership in the US, HMRC warns that in its view no relief is available under the treaty because it believes the same income is not being taxed in both jurisdictions.

Based on HMRC’s 2015 guidance taxpayers with similar facts to Anson were claiming treaty relief but in its new guidance HMRC say that where a taxpayer has claimed such relief, “HMRC will consider opening an enquiry or making a discovery assessment in accordance with its normal riskbased approach.”

Implications of HMRC’s Updated Guidance

For UK resident individuals who are members of US LLCs, the significance of the latest guidance is that HMRC is putting the taxpayer on notice that it disagrees with the FTT’s finding of fact in respect of Delaware law; as this finding underpinned the Supreme Court’s decision that Mr Anson could claim double tax relief, HMRC are now asserting that taxpayers with similar facts to Anson cannot rely on that decision to claim such relief.

Whilst the FTT’s finding in relation to Delaware law is treated as a finding of fact and therefore does not set a binding precedent for future cases, the Supreme Court considered that the FTT was entitled to make its findings about the interaction between Delaware legislation and the LLC’s operating agreement (it is generally understood that the LLC in Anson was not unusual). Further, as HMRC’s revised position is not based on new law but merely disagreement with the decision in Anson, it remains open for taxpayers to continue to file on the basis of Anson (with appropriate disclosure in the tax return).

What Planning Options are there Beyond Relying on Anson?

The latest guidance indicates that HMRC are likely to push back on any attempt by a taxpayer simply to rely on Anson and may intend to re-litigate the point (albeit largely running the same arguments). HMRC may or may not win on any re-run of the Anson litigation. However, unless a taxpayer is determined to fight the point, if possible, we would suggest that it would be more time and cost effective for a taxpayer to structure their affairs so as to avoid the risk of double taxation. For example, to the extent possible, taxpayers could:

structure their investments/ business interests through an entity that is treated as being either transparent or opaque in both the US and the UK; or
if they are able to do so, claim the remittance basis of taxation and not remit any income from the LLC.

Conclusion

There is a certain policy logic for HMRC’s revised guidance which doubles down on its view that US LLCs should generally be treated as ‘opaque’ (often the desired treatment from a UK corporation tax perspective); HMRC’s position enables it to adopt a more uniform approach that, in practice, does not require it to review the relevant state legislation and an LLC’s operating agreement in every case.

However, it is an unsatisfactory outcome for individual taxpayers, particularly for those who want to receive their distributions in the UK and who justifiably wish to rely on the Supreme Court decision to benefit from treaty relief but do not want to incur the expense of challenging HMRC’s updated view. Taxpayers who want certainty of treatment may have to either accept an unpalatable double tax cost or see if they can structure or restructure their affairs accordingly.

Disclaimer

The members of our US/UK team are admitted to practise in England and Wales and cannot advise on foreign law. Comments made in this article relating to US tax and legal matters reflect the authors’ understanding of the US position, based on experience of advising on US-connected matters. The circumstances of each case vary, and this article should not be relied upon in place of specific legal advice.

This article has also been published in ePrivateClient, which can be found here.

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George Mitchell

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John FitzGerald

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Rosie Schumm to speak at Private Client Forum Americas 2024

26 February 2024
News

Family Partner, Rosie Schumm, has been invited to speak at the Private Client Forum Americas 2024.

The Private Client Forum Americas is a prestigious forum that brings together the most elite advisors to ultra-high net worth individuals, to discuss issues across the Americas, with an outlook on the rest of the world.

The 2024 conference will take place in Mexico, from February 28 until March 1.

Rosie will be co-presenting a session on Wednesday 28 February entitled, ‘Private Affairs, Public Interest: Family and Divorce’, alongside Gretchen Schumann of Rabin, Schumann and Partners, Nancy Murphy, of Teitler and Teitler and Santiago Garcia Luque of Garcia Alocer.

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Rosie Schumm

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The Lifecycle of a Business – General meetings – a step by step guide

23 February 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

General meetings – a step by step guide

While the board of directors of a company is responsible for the day-to-day, operating decisions of the company, there are various issues which, under the Companies Act 2006 (the Act), require shareholder approval. (A company’s articles of association (the articles) and any shareholders’ agreement which is in place may also set out matters which require shareholder consent.) For private limited companies incorporated in England and Wales, such approval is usually obtained by the passing of shareholder resolutions, either in an actual meeting of the shareholders or by written resolution.

Shareholder meetings

Meetings of shareholders are referred to as general meetings and any number of general meetings can be held throughout the year. Private companies may also hold an annual general meeting (AGM) once a year, at which, for example, directors may be elected, dividends declared and the annual accounts approved. Private companies are not required to hold an AGM under the Act, although their articles may provide otherwise.

Until recently, general meetings were usually held in-person but as technology has improved and become more widespread, there’s now the option to hold virtual or hybrid general meetings as well. There are pros and cons to such meetings, which pose additional factors to consider and as such, they fall outside the scope of this article.

Step 1: Calling the general meeting

General meetings are usually called by the board of directors and the calling of the general meeting, together with the form of the notice of the general meeting, should be approved by the directors.

Shareholders representing at least 5% of the paid-up voting shares in the company may also request the directors to call a general meeting. (The process for calling such a general meeting is a little different and is outside the scope of this article.)

Notice of the general meeting must be sent to all shareholders who are entitled to receive notice (plus the directors and company’s auditors (if any)) and the notice must include certain information. As a minimum, the notice must set out the date, time and location of the general meeting and the general nature of the business to be conducted. If any special resolutions are to be tabled at the meeting, the wording of the special resolutions must be included in the notice. Other, administrative information must also be provided, such as how a member can appoint a proxy to attend the meeting and vote on their behalf. In addition, the articles and any shareholders’ agreement must be reviewed to ensure that any provisions dealing with notice entitlement are complied with; this may be particularly relevant where, for example, there are different classes of shares in issue. Failure to send due notice will result in the meeting not having been validly convened.

It’s also important to consider what supporting information (if any) is required to be provided to the shareholders ahead of the meeting. For example, when an AGM is being called, a copy of the company’s annual report and accounts will need to be provided; these usually accompany the AGM notice.

Notice of the general meeting can be sent in hard copy form or, subject to certain requirements, in electronic form. Notice may also be placed on a website (again, subject to certain requirements).

Step 2: Ensure that the correct notice period is given

Under the Act, the length of notice required to be given for a general meeting called by the directors is generally a minimum of 14 clear days, although the articles may set out a longer period. (A longer period is also required where certain resolutions are being proposed.) Reference to “clear days” means that the day that the notice is given and the day of the meeting are not to be taken into account. When calculating the notice period, don’t forget about delivery. Under the Act, delivery by post or e-mail is deemed to occur 48 hours after posting or sending (non-working days shouldn’t be taken into account), although the articles may provide for a shorter deemed delivery period. So, for example, assuming that the articles are silent about deemed delivery, if notice is sent on Monday 25th March 2024, the earliest date that the general meeting can be held will be 11th April 2024.

A shorter notice period may be given if a majority in number of shareholders who, together hold at least 90% of the nominal value of the voting shares, agree. This percentage can be increased in the articles to a maximum of 95%.

Step 3: Is the meeting quorate?

The day of the meeting has arrived but in order to be valid, the meeting must be quorate. Generally, there must be two people present (and those people must represent different shareholders) for quorum to be achieved, unless the company only has one shareholder or the articles provide otherwise.

If the meeting isn’t quorate, the chair may choose to adjourn the meeting. Adjournment provisions are usually included in the articles.

Step 4: Running the general meeting

A chair will need to be appointed to facilitate and lead the meeting. This will usually be the chair of the board or another director, but a shareholder or a proxy can also take on this role. Depending on the size of the company and the nature of the business of the meeting, it may be advisable for the chair to use a pre-prepared script.

Shareholders, proxies and, usually, directors, as well as certain other persons, are able to speak at a general meeting and it’s advisable for the chair to let them do so. The chair can, however, take certain steps to stop obstructive behaviour, including adjourning the meeting and even removing the person(s) in question from the meeting, although removal should only be used as a last resort.

Step 4: Passing the resolutions

How the proposed resolutions are passed will depend on how the vote is taken and the type of resolution.

Votes can be taken on a simple show of hands (where each shareholder has one vote) or on a poll (where each shareholder has one vote for every ordinary share held). Votes will be taken on a show of hands unless a poll is specifically requested.

An ordinary resolution will be passed:

on a show of hands if it’s passed by a simple majority of the votes cast by the shareholders entitled to vote; or
on a poll if it’s passed by shareholders representing a simple majority of the total votes of the shareholders who vote on the resolution.

A special resolution will be passed:

on a show of hands if it’s passed by a majority of not less than 75% of the votes cast by the shareholders entitled to vote; or
on a poll if it’s passed by shareholders representing at least 75% of the total voting rights of the shareholders who vote on the resolution.

Step 5: Post-meeting matters

The end of the meeting doesn’t necessarily mean that the process is complete. Various formalities will need to be dealt with, for example, writing up the minutes of the meeting, making any requisite filings at Companies House and updating any registers of the company.

Written resolutions

Instead of holding a general meeting, the shareholders of private companies can also pass written resolutions for the majority of actions which require their approval. This is helpful for companies who have only a small number of shareholders and can be a much quicker way of obtaining shareholder approval. The procedure is set out in the Act and failure to follow this correctly can constitute a criminal offence.

The procedural specifics will depend on whether the directors or shareholders propose the written resolution but broadly, a written resolution must:

be sent to all shareholders entitled to vote on the date that the resolution is circulated (the circulation date);
state whether any proposed resolutions are special resolutions;
include directions as to how to approve the resolution; and
set out the deadline for when the resolution must be passed (28 days after the circulation date unless the articles say otherwise). If the resolution isn’t passed by the deadline date, it will lapse.

A copy must also be sent to the company’s auditors (if any).

If the shareholder agrees to the resolution, they must signify as such on the document and return it to the company. A written ordinary resolution will pass if shareholders representing over 50% of the total voting rights of the shareholders entitled to vote approve it. A written special resolution will pass if shareholders representing at least 75% of the total voting rights of the shareholders entitled to vote approve it.

Practical points

The steps to be taken to call and hold a general meeting are fairly formulaic, especially for companies with a smaller shareholder base. However, don’t forget to consider whether a written resolution may be a more practical option.

Thinking ahead, where possible, is advisable. Preparing the documentation required well in advance and being clear on the resolutions to be proposed and the voting process, will minimise the risk of errors and omissions.

Whether you choose to call a general meeting or circulate a written resolution, it’s important that the statutory procedure is followed correctly and that the articles and any shareholders’ agreement are checked to ensure that they are complied with. Getting this wrong could invalidate the meeting or even be a criminal offence. Your legal advisors will be able to assist if you’re unsure.

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Lianne Baker

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Paper trials – Conveyancing and the Building Safety Act: Charles Miéville quoted in the Law Society Gazette

23 February 2024
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Residential Property Partner, Charles Miéville, has been quoted in the Law Society Gazette in an article on conveyancing and the Building Safety Act.

The article draws on opinions from industry experts and touches on the issues surrounding the Building Safety Act 2022 and the subsequent slowing of leasehold transactions. The article elaborates on recent guidance published to try to provide conveyancers with some clarity.

Charles highlights issues when selling a property and the difficulties of navigating the legislation when dealing with property transactions. He comments: ‘There’s a bit of a learning curve, and some of the legislation hasn’t been tested in the courts.’

As a solution to these issues Charles suggests that there is a ‘need to advise landlord clients where they sit in terms of remediation costs. If one deadline is missed, costs cannot be recouped from the tenant.’

The full article can be read here.

Please contact Charles to discuss any of the topics raised in this article.

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Charles Miéville

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Victoria Salter-Galbraith is named Fellow of the Agricultural Law Association

23 February 2024
News

We are delighted to announce that Rural Land and Business Senior Associate, Victoria Salter-Galbraith, has been made a Fellow of the Agricultural Law Association (ALA).

The ALA is the UK’s most esteemed organisation on matters related to law and business of the countryside. The association focuses on the law in an apolitical way to promote its knowledge and understanding among those who advise rural business.

To achieve the status of Fellow, Victoria sat an in-depth examination for which she received the joint highest mark in the country.

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Victoria Salter-Galbraith

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Biodiversity Net Gain obligations

16 February 2024
News

BNG planning obligations came into effect on 12 February 2024. This means that for most developments, any planning application submitted from this date will be subject to the BNG requirements. Any existing permissions, or applications pending at this date, are not affected.

The obligations are onerous and developers will need specific guidance. Forsters’ planning experts can offer guidance and practical advice on how to navigate the BNG requirements.

Read our introductory briefing note

Read our follow-up briefing note from February 2024

Further guidance and practical examples will be circulated when available.

For more information, get in touch with our Planning team to discuss how we can help.

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Matthew Evans

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Sophie Smith

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The Lifecycle of a Business – Dividends

15 February 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

Dividends

Our recent articles have referred to the payment of dividends to shareholders . In this article, we delve into how profits and retained earnings of a private company can be distributed among its shareholders by way of dividend. We discuss when and how much may be distributed and also look at restrictions that might apply to private companies (the additional restrictions placed on public companies with respect to dividends are out of scope of this particular article).

What are dividends?

Dividends are a type of distribution made by a company to its shareholders and are a way of returning some of the profits of a company directly to its shareholders. They’re generally paid in cash, but might also be non-monetary payments such as shares in the company (scrip dividends) or physical assets (dividends in specie).

Where a company declares a dividend, and that company has only one class of share in issue, it must declare and pay dividends equally on each share. Companies with more than one class of share in issue may wish to allocate different dividend rights to each class.

When can dividends be paid?

A company may only distribute dividends out of the profits available to it for any such distribution, that is, the company’s accumulated, realised profits, less its accumulated, realised losses, as they are stated in the company’s annual, interim, or initial accounts (as the case requires). In other words, the company must have sufficient distributable profits to pay the dividend.

As to timing, a dividend can be paid at any point in time but will generally be paid:

as a final dividend once the company’s end of year financial statements have been prepared. This usually requires shareholder approval, often at the company’s annual general meeting; or
as an interim dividend at any time during the financial year before the company determines its annual profits. This does not usually require shareholder approval.

Special or “one-off” dividends can also be paid as and when appropriate.

Amount of any dividend

Provided there are sufficient distributable profits available to the company to cover any payment of any declared dividend, and its constitutional documents allow it, there is no restriction as to the amount of dividend that may be declared and distributed to a company’s shareholders.

Declaring a dividend

The manner in which a company may declare a dividend (if at all) will usually be set out in its articles of association or in a shareholders’ agreement in relation to that company and these should always be checked before declaring any dividend.

There is no legal obligation on the company or its directors to declare a dividend. As such, a company may decide to use its profits for other purposes, for example, as working capital, to invest, to pay dividends at a later date (retained earnings), to cover any unexpected circumstances that might arise, to reinvest in its business for growth and expansion, or to pay down debt.

Final dividends

A final dividend usually requires the approval by ordinary resolution of the company’s shareholders (where the directors have resolved to recommend the amount of any such dividend). This approval is usually obtained at the company’s annual general meeting at which the annual accounts are also approved.

Once a final dividend has been declared by its shareholders, it becomes a debt due and payable by the company on the date of the resolution, unless some future date for payment is specified.

Interim dividends

Provided that the company’s articles of association or any shareholders’ agreement allows, the directors may decide to pay interim dividends at any time, provided that the company has sufficient distributable profits. (It should be noted that the model articles of association permit the payment of interim dividends by default.) The company’s annual and interim accounts will likely be produced at the board meeting at which the interim dividend is to be approved.

An interim dividend may be varied or rescinded at any time after it is declared and before payment is actually made and may, therefore, only be regarded as due and payable when it is actually paid.

Tax implications

The payment of a dividend by a UK company is not deductible when the company’s taxable profits are computed.

Generally, there is no withholding tax when a UK company pays a dividend (although there are exceptions for some types of investment funds).

When a company may not pay a dividend

A company’s articles of association or any shareholders’ agreement in force in relation to a company might place certain restrictions on the directors’ and/or shareholders’ ability to make dividends.

In addition, dividends which contravene certain sections of the Companies Act 2006 (the Act) (for example, one declared where a company does not have sufficient distributable profits) or common law (for example, a distribution out of capital) are classed as unlawful dividends and should not be paid.

Consequences of making an unlawful dividend

Where the directors declare and distribute a dividend in circumstances where there are insufficient profits available to distribute, they will likely be in breach of their statutory duties contained in the Act, such as their duty to promote the success of the company for the beneﬁt of its shareholders as a whole, or their common law duty to consider the interests of the company’s creditors (rather than the shareholders) in circumstances where the company is facing insolvency (our article, “A Balancing Act – when do directors owe a duty to creditors?“, considers the circumstances when a director owes a duty to creditors following the Supreme Court judgment in BTI v Sequana). This could have various adverse consequences, including disqualification as a director.

No criminal penalties attach to the payment of unlawful dividends, but a director could be held personally liable to repay the company. For further information about this, please see here.

Paying a dividend when the company is insolvent or subsequently becomes insolvent could also have consequences under insolvency law.

Takeaways

Paying dividends can send a positive message about a company’s current financial strength and future prospects. Many investors like the income associated with dividends and so may be more likely to invest in a company that pays regular dividends.

On the other hand, a company that is still growing should carefully consider whether paying a dividend is advisable; it may be preferable to instead reinvest any profits into its future growth, pay off some debt or use the profits for working capital purposes, for example. And, as discussed above, a company that doesn’t have sufficient profits shouldn’t declare a dividend in the first place; doing so could result in the directors being held personally liable to repay the company.

The decision whether to pay a dividend or not may not be clear-cut. Directors must consider their statutory duties, as well as the financial situation of the company, its constitutional documents, and any tax implications. Speaking to your legal advisor or accountant (or both) is advisable in this situation.

Disclaimer

This note reflects the law as at 14 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Author

Heather Corben

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Making your gift go further – Elizabeth Small and Oliver Claridge write for Taxation

14 February 2024
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Gift aid exists to encourage individuals (which includes partnerships and sole traders) to make charitable donations.

Many taxpayers give to charity (or community amateur sports clubs, which also qualify for gift aid) from a purely altruistic perspective, but by properly utilising gift aid they can make their gift go further…

Elizabeth Small and Oliver Claridge consider how gift aid can make a charitable gift go further while also providing an element of relief to the giver – and even potentially restoring a higher-rate taxpayer’s personal allowance.

Read the full article here.

Author

Oliver Claridge

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Forsters’ lawyers recognised in the Spear’s 500 Directory 2024

12 February 2024
News

We are delighted to see 33 of our lawyers recognised in the Spears 500 Directory 2024:

Property Lawyers:

Lucy Barber – Top Flight
Helen Marsh – Top Flight
Robert Barham – Top Recommended
Chares Miéville – Top Recommended
Anna Jassani – Recommended
Gethen Sasanow – Rising Star
Adam Whitefield Jones – Rising Star

Corporate Lawyers:

Craig Thompson – Top Recommended
Christine Dubignon – Top Recommended
Alastair Laing – Top Recommended
Naomi Trinh – Top Recommended
Dearbhla Quigley – Top Recommended
Stuart Hatcher – Top Recommended

Landed Estates Lawyers:

Christopher Findley – Top Recommended
Polly Montoneri – Top Recommended
Rupert Mead – Top Recommended
Henry Cecil – Top Recommended
Andrew Lane – Top Recommended
Penny Elliot – Top Recommended

Family Lawyers:

Rosie Schumm – Top Recommended
Joanne Edwards – Top Recommended
Simon Blain – Recommended
Amanda Sandys – Recommended
Dickon Ceadel – Recommended
Guy Mawson – Rising Star

Tax and Trusts:

Catherine Hil l- Top Recommended
Xavier Nicholas – Top Recommended
Roberta Harvey – Top Recommended
Emma Gillies – Top Recommended
Kelly Noel-Smith – Recommended
George Mitchell – Recommended
Daniel Ugur – Recommended

Cryptocurrency:

James Brockhurst – Top Recommended

Spears 500 is a highly regarded guide, showcasing the best private client advisors in the industry for HNW and UHNW clients.

Author

Emily Exton

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Kelly Noel-Smith shortlisted in The Legal500 ESG UK Awards – Environmental/Sustainable Champion Award

12 February 2024
News

We are delighted to share that CSR Partner, Kelly Noel-Smith, has been shortlisted in The Legal500 ESG UK Awards – Environmental/Sustainability Champion.

The award acknowledges truly exceptional individual contributions to improving sustainability in private practice over the last year, with a focus on internal initiatives at law firms.

Since joining the firm as a Partner in 2009, Kelly Noel-Smith has pioneered our approach to sustainability, developing and leading our best practice programme. Kelly spearheaded Forsters’ 2021 commitment to a science-based emission reduction target to halve our greenhouse gas emissions by 2030. We were one of the first firms of our size to make this pledge. In Autumn 2023 our reduction target was approved by the Science Based Target initiative.

The winner of the award will be announced on 24 April.

We are also delighted that Forsters has been shortlisted for the Lexis Nexis Legal Awards 2024 – Award for Sustainability. Winners will be announced on 14 March.

Author

Kelly Noel-Smith

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Natalie Carter shortlisted in Totum’s BD and Marketing Rising Star Award

9 February 2024
News

We are delighted to share that BD and Marketing Executive Natalie Carter, has been shortlisted in Totum’s Rising Star Award.

The award celebrates the rising stars of the next generation of talented business service professionals and Natalie has been nominated in the BD and Marketing category.

Natalie joined Forsters in 2019 and has supported a wide range of practice areas throughout her time at Forsters. Her current role includes developing and executing BD and Marketing plans for the Private Wealth practice with a focus on our residential and rural property teams. Natalie was instrumental in the development and launch of our cross-practice Vineyards campaign.

The winner of the award will be announced on 13 February.

Testing the limits of transparency: Guy Abrahams is quoted in Property Week on land ownership

7 February 2024
Views

Private Client Partner, Guy Abrahams, has been quoted in the Property Week article ‘Testing the limits of transparency’.

The article seeks the opinion of industry experts on the transparency of Britain’s property market regarding land ownership. The push for greater transparency is to help target illicit finance and corruption in the property sector.

Guy explains a key issue in identifying property owners is balancing the need for transparency with the right to privacy. On whether the government should enforce the publicity of property-owning trusts, he comments that it would not go far enough to minimise the chance of illicit funds infiltrating the property market.

The full article can be read here.

Please contact Guy to discuss any of the topics raised in this article.

Author

Guy Abrahams

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Lifecycle of a Business – Protections for Minority Shareholders

7 February 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

Protections for Minority Shareholders

Minority shareholders are those who cannot, by themselves, control the direction a company will take and, as a result, may be adversely affected by decisions made by the majority shareholder(s). This article sets out some of the rights a minority shareholder may seek in a private limited company in England and Wales and those provisions that majority shareholders can expect their minority shareholders to raise.

Legislation

Legislation offers certain limited protections for minority shareholders, some of which were mentioned in our last article, ‘What are your rights as a shareholder?’. In addition to the points mentioned in that article:

a shareholder can block special resolutions where they, either by themselves or with other shareholders, hold more than 25% of the voting shares in the company. This can stop key matters passing, such as changing the company’s articles of association;
a shareholder can cause a general meeting of the shareholders to be called where they, either by themselves or with other shareholders, hold at least 5% of the paid-up shares that have the right to vote. Alternatively, those shareholders with 5% of the voting rights can arrange for a written resolution to be circulated. Either action will enable the shareholder(s) to put matters in front of the other shareholders for them to vote on;
any shareholder can bring a claim for unfair prejudice against the company (where actions have been, or are being, taken that are, or would be, unfairly prejudicial to the shareholders, or some of them), although it should be noted that a common outcome of this process is that the court orders the majority shareholder to buy out the minority shareholder;
any shareholder can bring a derivative action against a director for actions such as negligence, default, breach of duty or a breach of trust. However, bear in mind that this is an action brought in the name of the company and so any damages recovered would not go to the shareholder; and
in certain qualifying cases, where a shareholder has held their shares for at least six of the preceding 18 months, they can apply to the court for the winding-up of the company, although it should be noted that the bar for success with this route is high.

Given the limited nature of the statutory protections on offer, minority shareholders often seek to negotiate contractual minority protections at the outset of their investment.

Contractual Protections

Contractual protections are usually found in the company’s articles of association and any shareholders’ agreement or investment agreement (which governs the relationship between the shareholders of a company) that is in place. They can include the following (subject to the specific requirements of the transaction and negotiations):

Reserved Matters: A majority shareholder may agree a list of matters which the company cannot carry out without the consent of the minority shareholder(s). These are usually the most important matters relating to the company which would affect a minority shareholder’s position, such as changes being made to the company’s articles of association, the taking out of a substantial loan by the company, the entry into significant contracts by it or the winding-up of the company.
Pre-Emption (Share Issue): Pre-emption rights on an issue of shares by the company enable a minority shareholder to avoid their shareholding being diluted by the future issue of new shares to third parties (or other shareholders), by giving the minority shareholder a right of first refusal to take up any of the new shares, usually in proportion to their shareholding at the time of issue. If a contractual protection is not included, and reliance is instead placed on the statutory pre-emption right, those holding 75% of the voting shares in the company can disapply the provision. That said, the purchase price for a minority stake can be substantial.
Pre-Emption (Share Transfer): Similarly, pre-emption rights can be included in respect of a transfer of shares, giving the minority shareholder a right to purchase certain of the shares of an outgoing shareholder, usually in proportion to the shares the minority shareholder already holds in the company. However, this can again be a costly process and the minority shareholder will need to ensure they have the funds to purchase the shares.
Board of Directors: A minority shareholder can, if its minority shareholding is appropriately significant (usually by reference to a percentage shareholding), request the right to appoint a director to the board and for that person to be present in order for any meeting to be quorate. If they are not able to obtain this right, they may be able to appoint an observer at board meetings so that they are aware of matters discussed by the board, albeit without having the voting rights that come with being a director.
Exit Right: Tag-along rights provide an exit route for minority shareholders where there will be a change of control of the company. Here, they are able to sell their shares to the same purchaser of the majority shareholder’s shares and on the same terms. This ensures that a consistent value is paid for the shares in the company and avoids the minority shareholder(s) being left in the business with a new party. Additionally, a minority shareholder may seek to include a put option, to ensure that if a dispute arises between the shareholders, for example, they will receive an agreed value for their shares or have a mechanism in place for an independent third party to confirm the value.
Information Rights: In addition to the statutory right to see certain company information, such as the company’s annual accounts and directors’ report, a minority shareholder may be able to obtain management reports throughout the year as a means of monitoring their investment in, and the performance of, the company.
Dividend Policy: Having a clear dividend policy in place will help to give certainty to a minority shareholder as to when they are likely to receive a dividend from the company in respect of their investment. Without this, minority shareholders are unable to pass or block an ordinary resolution to declare dividends.
Business Plan: In a joint venture scenario, a minority shareholder is likely to want to have a say in the signing-off of the annual business plan of the company, to ensure that the commercial objectives of the parties are clearly aligned.

Protections of this nature have been in the news recently with Sir Jim Ratcliffe’s investment into Manchester United. It is reported that he will have a right of first refusal for a year if the Glazer family sell their shares, but the Glazer family will be able to drag-along Sir Jim Ratcliffe if there is a full sale of the club after 18 months of the completion of his investment and provided that he receives at least $33 per share.

Conclusion

If you are a minority shareholder investing in a company, or a majority shareholder who has received a request for protections from an incoming investor, please do not hesitate to get in touch with a member of our Corporate team, who will be happy to assist you.

Disclaimer

This note reflects the law as at 2 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Author

Aaron Morris

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Forsters Announces Exciting Partnership with Local Charity the Marylebone Project

7 February 2024
News

Forsters are delighted to be partnering with the Marylebone Project as part of the firm’s commitment to supporting charities and community groups. The relationship forms part of our wider CSR strategy, and our focus will be supporting the Marylebone Project’s various initiatives and services designed to protect vulnerable women facing homelessness. Our recent move to our new office in Marylebone provides a great opportunity for us to support our local community, with the Marylebone Project on our doorstep.

The Marylebone Project provides a life-changing service for women facing homelessness, empowering them towards independent living. It is the largest and longest-running centre of its kind in London and the UK with over 90 years’ experience and 112 residential beds across two buildings. It is the only women’s-only homelessness centre that is open 24/7, 365 days a year.

Marylebone Project.

As a firm we are proud of our values; being driven by what really matters and supporting everyone to achieve. We are also a firm with strong female leadership (as of February 2024, 53% of our partners were women, including our Senior Partner and Managing Partner) which actively supports women with their professional development. The Marylebone Project aims to do the same with one of its main values being empowerment, equipping women to make informed choices and to have a voice. We look forward to working together in partnership to enrich the lives of women supported by the Marylebone Project.

We will directly support the Marylebone Project’s services and women through fundraising, material donations, social activities and volunteering. Longer term, we hope our partnership will raise awareness of the Marylebone Project’s vital services, the experience of women who are experiencing homelessness in London and also provide skills-based support, empowering women to live fulfilling independent lives.

Towards the end of 2023, Miriam Kennedy (Centre Manager), Evie Oglethorpe (Fundraising Officer) and Ruhamah Sonson (Operations Manager) from the Marylebone Project came to speak to the team at Forsters and to launch our partnership. The session provided an opportunity for the firm to find out more about the Marylebone Project’s vital services and hear to the stories of the women who have benefitted from its support. Evie also shared details of the ways in which Forsters’ employees can get involved and provide support throughout the course of the partnership.

Marylebone Project.

During the event, attendees enjoyed a delicious lunch provided by Munch, the Marylebone Project’s social enterprise catering business. Munch food is prepared by a team of women from the Marylebone Project, providing opportunities for them to improve their wellbeing, whilst gaining catering skills and qualifications.

Marylebone Project.

We look forward to kickstarting this partnership by supporting the London Homeless Collective’s London Walk in March, raising funds for the Marylebone Project. The London Homeless Collective is a movement of more than 25 charities that help people experiencing homelessness in London.

“Forsters’ recent move to Marylebone provides a perfect opportunity for us to support our local community and we are thrilled to announce the Marylebone Project as our next charitable partner. As a firm we are proud of our values which include being driven by what really matters and supporting everyone to achieve. We are committed to supporting the Marylebone Project as they continue to empower women to lead independent and fulfilling lives.” – Emily Exton, Managing Partner

“We look forward to working with the Marylebone Project to deliver a meaningful partnership, enriching the lives of vulnerable women affected by homelessness. Together, our partners and employees will participate in a range of fundraising and volunteering activities that will benefit the women supported by the Marylebone Project.” – Jeremy Roberston and Michael Armstrong, Co-leads of the Forsters’ Charity and Community Committee

“We are so pleased Forsters has chosen to partner with the Marylebone Project, coinciding with their recent move to the area. We are grateful that Forsters feel inspired by our mission to support women in overcoming homelessness and living full, independent lives, and we’re excited for the expertise, committed volunteers and community spirit they will bring to the project.” – Miriam Kennedy, Centre Manager at the Marylebone Project

Marylebone Project.

Author

Jeremy Roberston

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Author

Michael Armstrong

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Private Water Supplies

5 February 2024
News

About one percent of the population rely on a private water supply, where water is drawn from a borehole, well, spring, lake, stream or river to service their properties. A borehole is likely the most common method for domestic properties.

There are extensive regulations surrounding a private water supply, these are contained in the Private Water Supplies Regulations 2016, which focus on the quality of water, and the Water Resources Act 1991, which focusses quantity and supply. Local authorities have wide powers to enforce these regulations, and breaching them, or abstracting water without a licence can be a criminal offence.

Relevant persons:

Responsibility for the quality and quantity of private water supplies lies with the owners/occupiers of the property serviced by the water supply, the owners/occupiers of the property where the water supply is sourced, or any other person who has management or control of the water supply. The law identifies these people as ‘relevant persons’.

Understandably, there is a requirement for a water supply to meet basic regulatory standards, ensuring that it is safe for use and consumption at all times. This is measured by testing the number of contaminants in the water and depends on the size and nature of the supply.

1. Commercial supplies (including supplies to a number of dwellings):

These are defined as supplies of a daily average of over 10m3 or to either public or commercial premises. Properties let to third parties also fall under this category. Risk assessments must be carried out at least every 5 years and a water test must be carried out at least annually. If it is determined that a supply is a danger to human health, a local authority has a duty to warn the occupants of the property and advise how to minimise the danger.

2. Standard private supplies:

This is a supply to any premises, other than a single dwelling, not used for commercial purposes. Again, these are subject to 5-yearly risk assessments and an annual test, however, a narrower number of contaminants are tested.

3. Single dwelling supplies:

Single dwellings that are not used for any commercial activity. In this case, a risk assessment is required only, and the supply is monitored, if requested by the owner or occupier of the property.

4. Distributed mains supplies:

These are rare, but occur where water is supplied by a mains provider and then further distributed through a private water network. Risk assessments are still required, even though the water originates from a mains source.

Relevant persons are also responsible for the sufficiency of a private water supply. Supply can change in drought or severe cold weather, or as a result of a burst or leaking pipe etc.

In these cases, relevant persons are responsible for putting in place alternative arrangements and central responsibility is with the owners of the supplies, who should have an emergency plan in place. An owner of a water supply can never just disconnect the supply, even in the event of non-payment by a user.

If a local authority finds that a water supply is insufficient, either due to quality or quantity, then they are able to serve a ‘private supply notice’ on the owner of the supply, setting out the steps they must take to rectify the situation. This can prove expensive, particularly if the required action is to connect to a mains water supply. If an owner of a water supply does not comply with the notice, the local authority can do it on their behalf and recover the costs from the owner.

A more serious notice – ‘a regulation 18 notice’ is served where a supply is proved to be a danger to human life. If this is not complied with, it is a criminal offence carrying up to 2 years’ imprisonment, and/or a fine.

Abstraction:

Taking water from a source is known as abstraction. A licence is required from the Environment Agency where an average of over 20m3 is abstracted daily. This is unlikely to be the case for a single residential dwelling. Again, abstraction without a licence, where one is required, can be a criminal offence.

Licences are transferred with a property on a sale, but a buyer does need to contact the Environment Agency to transfer the rights under the licence.

Summary:

To summarise, a relevant person is responsible for the quality and quantity of a private water supply, with central responsibility lying with the owner of the supply. Local authorities can enforce the regulations, and it can be costly to comply with them, and it is essential that an abstraction licence is obtained where an average of over 20m3 of water is abstracted daily.

Advice from a specialist should be obtained if you are purchasing a property responsible for a private water supply or serviced by one.

Author

Jayne Beardmore

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Anthony Goodmaker shortlisted for Lawyer of the Year at the YN Property Awards 2024

5 February 2024
News

We are delighted to announce that Anthony Goodmaker, Partner in Forsters’ Commercial Real Estate team, has been shortlisted for Property Lawyer of the Year at the YN Property Awards 2024.

The annual YN Property Awards celebrate industry achievements across the property sector and raise vital funds for Norwood, the oldest Jewish charity in the UK. Founded in 1795, Norwood supports people with learning disabilities and autism, and offers support to vulnerable children and families.

The winners will be announced in February 2024.

Author

Anthony Goodmaker

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