Legal News

The Freedom of Information Act 2000

Avoiding public scrutiny

Since the Freedom of Information Act 2000 (‘FOIA’) came into force on 1 January 2005 we have all seen the reports in the press about how much celebrities have paid for their homes and may even have considered what impact this might have on our own.

However, are you aware that the same rules, together with the existing provisions of the Land Registration Act 2002 (‘LRA’), also apply to commercial property and that an important deadline is approaching on 13 October this year?

Since 13 October 2004, all leases and mortgages delivered to the Land Registry have been available for public inspection. For example, tenants in shopping centres and other multi-let buildings have been able to look at other tenants’ leases to check whether the landlord has offered them any concessions.

In order to protect landowners against the impact of this, it has been possible to apply to have any information that could be considered ‘commercially sensitive’ taken out, so that only the edited version is available for inspection.

However, the success of an application is at the discretion of the Registrar and one can still apply to see the unedited version on the grounds that the information is not ‘commercially sensitive’ or that it is in the public interest for an unedited copy to be provided.

Since 1 January 2005, the FOIA has provided a further right for the public to apply to the Registrar for copies of documents held at the Land Registry. There is no requirement to give any reasons for such an application, but there is also no automatic right to an unedited version.

From October 2005 the rights under the LRA will apply to all leases and mortgages held at the Land Registry, which will then be available to the public in their unedited form, unless an application has been made to designate certain information as exempt.

You should therefore consider reviewing all leases and mortgages that are already held by the Land Registry together with those that will be registered in the future, to decide whether there are any provisions that you would not want available for public inspection.

For further advice contact:
Simon Hart
Telephone +44 (0)20 7440 7055
simon.hart@mishcon.com

Government Reviewing Law on AGA and Subletting

Having abandoned proposals to abolish upward only rent reviews, the Government is now looking at Authorised Guarantee Agreements and controls on assignment and subletting.

The power for landlords to insist that every assigning tenant gives an AGA was introduced ten years ago, as compensation for the abolition of ongoing tenant liability under ‘privity of contract’. It has been suggested that after ten years it is time to review those rules, especially since landlords appear to be ignoring the advice contained in the voluntary Code of Practice for Commercial Leases, that a landlord should not demand an AGA unless the proposed assignee has a lower financial standing than the assigning tenant.

The practice of some landlords to insist on leases prohibiting sublettings at less than the passing rent, with no cashback side agreements or reverse premiums, is also under scrutiny. Perhaps in an attempt to avoid legislation on this, the British Property Federation has arranged for a group of property companies to support a commitment to allow subletting below the passing rent so long as the full market rent is payable.

The Government has been told that control on assignment and subletting is a complex subject and that there could easily be unintended consequences if the law was changed to restrict landlords’ rights. It might lead to a decline in the number of developments which rely on strength of initial tenant covenant, such as new development in untested locations. Landlords might respond by tightening up the criteria for acceptable assignees or even prohibiting assignments completely. An issue would be whether any new rules would apply only to new leases; the arguments against retrospective legislation are well known, but limiting the new law to new leases only could mean that the real impact of any new law would not be felt for some years. Overhanging all these issues is the difficult question as to how far the law should restrict freedom of contract between commercial parties. Watch this space!

For further advice contact:
Philip Freedman
Telephone +44 (0)20 7440 7018
philip.freedman@mishcon.com

OPCO/PROPCO financings

Mishcon de Reya Corporate Partner, Matthew Lindsay examines OPCO/PROPCO an increasingly popular method of property financing in corporate acquisitions today.

The OPCO/PROPCO structure often enables a borrower to raise additional funds compared to a straightforward ‘bricks and mortar’ financing provided the target company has a significant number of property assets with a related profitable business element. Ideal business sectors for this type of debt finance include: cinemas, care homes, shopping centres, petrol sites and public houses.

In the post acquisition structure, typically one company (the ‘PROPCO’) owns the properties and another company (the ‘OPCO’) owns and operates the business carried on at the properties. The PROPCO leases the existing properties to the OPCO, resulting in PROPCO having both an underlying interest in the property itself and also a rental stream from the OPCO. A parent company usually sits above the OPCO and PROPCO forming a ‘mini’ group.

The advantage of the OPCO/PROPCO structure from the ‘debt’ perspective is primarily that it increases potential debt capacity. It will give a bank lender a property asset to lend against (by way of term loan) and an operating business to lend against (by way of working capital facility). Banks lending into these situations are sometimes prepared to lend more debt and at more competitive rates than normal business lending.

The new structure does not come without its complications. In effect there are now three new relationships to consider, heightening the commercial tensions within the ‘mini’ group of companies, who will often have common directors with each group company. The relationship between the PROPCO as landlord and the OPCO as tenant; that between the PROPCO as borrower and landlord and the bank as lender to PROPCO; and that between the OPCO as tenant and the bank as lender to the OPCO. There are many issues of conflict that arise and the directors of each company need to remember their duties in relation to each company and its shareholders to avoid any pitfalls.

Notwithstanding the difficulties, provided all parties are mindful of their separate duties, these structures are proving successful in the current market place. They offer the borrower group more capital and offer the parent company of the borrower group more flexibility, with the possibility of the separate sale of the OPCO and the PROPCO.

For further advice contact:
Matthew Lindsay
Telephone +44 (0)20 7440 7138
matthew.lindsay@mishcon.com

Planning Law update

The 2004 Planning and Compulsory Purchase Act (‘the Act’) has brought in a series of reforms to speed up the planning process, with potentially restrictive consequences for developers. Provisions of the Act due to take effect this year include the following:

No longer will you be able to apply for an extension of time if your works have not started within the lifetime of your planning consent. When this provision comes into force – anticipated by the ‘ODPM’ to be in late July/early August 2005 – the only way to protect your planning permission before it lapses will be to commence development. Such extensions have, in the past, been a crucial tool to protect a development’s value where commencing works was not possible. You should review any consents that cannot yet be implemented now – even where these have several years to run – and consider applying for an extension while this option is still available.

Applications submitted but not determined prior to the implementation of this provision will still be considered.

The well established practice of ‘Twin-tracking’ is destined to end. A local planning authority (‘LPA’) will soon be entitled to refuse to consider a second application where the first is not yet determined or could be appealed. Although this power is discretionary, the cases where an LPA will agree to process a second application may be limited. The provision is not scheduled to be introduced until the performance of local planning authorities in dealing with applications has improved, so consider availing yourself of this practice while the opportunity remains.

LPAs may in future refuse to determine an application if they have refused a similar application within the previous two years and no significant change in circumstances has occurred in the meantime. Consider making a repeat application before this provision of the Act is implemented – expected to be in November 2005. Applications submitted after this date should emphasise any material changes from the earlier application and any significant changes in circumstances.

The ODPM is seeking to encourage early development by shortening the lifespan of planning permissions from five years to three with effect from late July/early August 2005. While the status quo will largely remain with regard to the lifespan of outline permissions, the five year ‘longstop’ in the case of early reserved matter approvals is removed. Although in future you may still apply for a longer period of consent, in practice, this will be harder to secure.

For further advice contact:
Oliver Goodwin
Telephone +44 (0)20 7440 7436
oliver.goodwin@mishcon.com

Property Investment Vehicles

In the last Budget the Government confirmed its commitment to the introduction of REITs, providing a suitable tax framework can be established. In this article we examine the vehicles currently available for collective property ownership and hence the need for REITs.

The basic tax position for a direct investor in UK real estate is relatively favourable. Net rental income is taxed as income. The ability to achieve relatively high gearing levels, and availability of capital allowances for a substantial part of expenditure on commercial property, can result in relatively low levels of tax on income. Furthermore, and this is unusual compared with other countries, the UK does not levy capital gains tax on nonresidents investing in UK property. Invariably a nonresident investor will hold UK real estate through an offshore company geared to the maximum extent permitted.

Life becomes more complicated where there are multiple investors in UK property. Each investor will want to ensure that his tax position is no worse than if he invested directly. This implies that any vehicle must be either tax transparent (so the vehicle itself is not taxed but each investor is taxed on his share of the investment as if it were a direct investment) or tax exempt so that the vehicle bears no tax itself with distributions from the vehicle being taxed in a broadly equivalent way as for direct investment.

The most widely known UK vehicle, the limited company, meets neither of these criteria. The company itself will be taxable at up to 30% on all its income and gains with further tax at the shareholder level.

For many years the UK has had another vehicle in the limited partnership and more recently the limited liability partnership has become available. These are tax transparent vehicles and in the early part of this decade enjoyed a boom in popularity as property investment vehicles, particularly as they also offered stamp duty advantages. They are not however a perfect vehicle because they were illiquid, there being no way of establishing a market in the partnership shares, nor is it possible for UK resident investors to defer paying tax on capital gains reinvested by the partnership. They were dealt a severe blow in 2004 when the stamp duty land tax (‘SDLT’) rules were amended so that SDLT became payable (in accordance with a mind boggling formula) on changes in interests in property owning partnerships.

Onshore unit trusts do not have favourable tax treatment so in the absence of a UK REIT we are left with offshore vehicles. Offshore companies have a role for joint ventures and investors looking only for capital growth, but are not attractive for UK resident investors looking for income because there is double tax on income.

An offshore unit trust is probably the best structure currently available offering tax transparency on income, a single layer of capital gains tax on realisation of units by investors and exemption from SDLT on dealings in the units. However, FSA rules prevent them from being widely marketed.

There is therefore a need for an accessible, liquid, tax efficient UK based vehicle. There is much industry enthusiasm for REITs but the latest Government consultative paper highlights a number of technical difficulties that will need to be resolved before they can become reality.

For further advice contact:
Belinda Bridgen
Telephone +44 (0)20 7440 7432
belinda.bridgen@mishcon.com