Legal News

Protecting Your Second Most Valuable Asset

Even in the world of bricks and mortar, competitive business thrives on information. Gary Miller, Head of Mishcon de Reya’s Corporate Investigations and Asset Recovery Group explains how businesses in the property sector can protect their confidential information.

Client lists, funding arrangements and business plans are a few examples of the types of information critical to protecting a company’s business interests. Thankfully, there are a number of highly effective steps that can be taken to prevent this critical information being stolen from your organisation.

Information theft is predominantly carried out by existing employees stealing information from their employers. To deter this, you need to ensure that your key employees have signed properly drafted contracts of employment, containing enforceable restrictive covenants and confidentiality clauses.

Employees should be reminded periodically of their responsibilities and contractual obligations. This will give you a legal platform to bring a claim for breach of covenant or breach of confidence. In addition, you can retain the right within your employment contracts to monitor employees’ use of office IT facilities and to carry out investigations without the need to inform the employee.

Other practical measures that can be taken to prevent your organisation falling victim to information theft include ensuring that databases cannot be transferred outside your organisation or printed off, either remotely or by particular staff members. Use of internet based e-mail should be monitored and CD drives in desktop machines can be disabled to prevent them from being used to copy vast amounts of information. Also, USB ports at the back of machines can be set so that they do not operate with external hard disk devices that can be bought to store large amounts of data.

A business that has been subject to information theft has the right to obtain powerful injunctions and can recover damages for lost profits from the revenue generated by the thief. You may never eliminate the problem in its entirety, but you can certainly make it more of a challenge for those determined to rip you off. ■

Gary Miller
Telephone +44 (0)20 7440 7028
gary.miller@mishcon.com

What’s Cooking with AGAs?

Since the Landlord and Tenant (Covenants) Act 1995 came into force, commercial leases have routinely required an assigning tenant to give an authorised guarantee agreement (AGA) to the landlord, guaranteeing the lease liabilities of the assignee.

There has recently been pressure from prospective tenants to provide instead that the landlord may demand an AGA only “if reasonably required”, which is the formula imposed by the court in a lease renewal case and is mentioned in the 2002 Code of Practice for Commercial Leases. What would it mean to have an AGA only “if reasonably required”? Can a landlord derive comfort from that formula? Would a different provision be preferable?

The courts apply “reasonableness” tests in various ways. It may be landlord orientated, upholding the decision if it could have been reached by a reasonable landlord on genuine, non-fanciful, grounds – even if the judge himself would have made a different decision. In other cases it is a tenant-orientated test of whether it is reasonable to expect the tenant to accept the obligation. These tests can have different outcomes. It is likely that the landlord-orientated test, which applies to consent for assignment, will be applied where an AGA can be “reasonably required”; it is also likely that the considerations can include the effect on the value of the reversion, but this is not certain since there are no reported cases so far. This uncertainty is likely to be of concern in high value lettings to a particularly strong covenant.

Suppose a landlord letting a high value property cannot persuade the tenant to accept either an absolute AGA obligation or a requirement that any assignee must be as financially strong as the tenant. Rather than conceding that the AGA is to be given “if reasonably required”, here the landlord should try to impose a more specific test, e.g. that the AGA is to be given where the assignee is of lower financial standing than the tenant. This can be stated to apply to the financial standing of the tenant at the date of the assignment or at the time he originally took up the lease. Using that formula may remove some of the uncertainty from this changing area of law. ■

Philip Freedman
Telephone +44 (0)20 7440 7018
philip.freedman@mishcon.co.uk

Government Proposals for a Planning Gain Supplement: Good or Bad?

Following consultation earlier this year, the Government appears intent on pushing new legislation through so that Planning Gain Supplements (PGS) could be law in 2008.

The PGS is designed to assist in delivering new infrastructure – including health and school facilities – and to speed the process of bringing development forward, particularly new housing. There are serious concerns, however, that it will have quite the opposite effect by increasing costs and that it will act as a brake on development.

Potential disadvantages:

• Placing the cost, in effect, on landowners by reducing land values could result in “land-banking” and therefore slow development.
• Difficulties in agreeing valuation could lead to long delays and uncertainty.
• Lack of certainty as to where and when the Local Authority will spend the money on infrastructure will mean that individual development sites may be disadvantaged.
• Diversion of funds to regional infrastructure projects may be regarded as unfair by Local Authorities.
• If not strictly regulated, the continued existence of traditional Section 106 agreements in parallel could place an unfair burden on developers.

Potential advantages:

• It could direct contributions to much-needed major infrastructure improvements where currently “pooled” contributions are difficult to achieve and development is held back.
• If (and it’s a big “if”) the new system can be made workable by addressing the potential disadvantages, it could help speed the development process and delivery of major infrastructure.

Proposals are only in outline at this stage; the next stage of detail produced by the Government later this year in response to the consultation will be worth close attention. ■

Oliver Goodwin
Telephone +44 (0)20 7440 7436
oliver.goodwin@mishcon.com

The REIT Stuff

Gordon Brown’s most recent budget confirmed that REITs will be introduced next year. However, the conditions are such that REITs will not be appropriate in all cases, particularly for smaller funds. Here, Mishcon’s tax expert Belinda Bridgen provides answers to many of your most frequent questions about REITs.

What are the main requirements for REIT status?
In brief, a REIT must, throughout the relevant accounting period, be a non-close company having its ordinary capital listed on a recognised stock exchange and must own at least three rental producing properties, of which no one property accounts for more than 40% of their total value. At the beginning of the accounting period the value of those rental-producing properties must amount to at least 75% of the total asset value of the company.

How does a company become a REIT and what are the costs?
An existing property-owning company meeting the conditions may become a REIT by election. There are various formalities to be observed. There will be an entry charge of 2% of the market value of its properties brought into the regime. Payment of the charge may be spread over four years.

There will be considerable practical difficulties in using a new company as a REIT if it is to have that status for its first accounting period – for example, it may not be able to acquire the minimum three properties simultaneously on the day it is listed. Representations are being made seeking a relaxation of the requirements to facilitate the floating of a new vehicle. Further, in addition to the 2% entry charge, it will have to pay the normal 4% SDLT on acquiring the properties even where it acquires them from its promoting company, since any group relief from SDLT will be clawed back if it is floated within three years.

What are the listing requirements? Will an AIM listing suffice?
The company’s ordinary shares must be listed on a recognised stock exchange. An AIM listing does not qualify, but listing on certain overseas exchanges will. A listing in, for example, Luxembourg may be a convenient alternative to the London Stock Exchange.

Is all property income earned by a REIT exempt?
No, most income normally taxed as Schedule A is exempt but some is not, e.g. income from incidental letting of property held in a trade of property development, or rent from telephone masts, electrical wayleaves, gas pipelines etc. Also excluded are dividends from other REITS. Further, the business must be a property rental business and not, say, the exploitation of property which is taxed under Schedule D Case 1. So a hotel business will not qualify nor, depending on the circumstances, may the provision of serviced offices.

If we have non-qualifying income, are we prevented from being a REIT?
No, provided that such income accounts for less than 25% of the profits and that the value of the assets generating that income is less than 25% of the total value of the company’s assets.

Can the REIT hold its property indirectly?
To an extent. It may hold through subsidiaries where the group as a whole has REIT status and may invest in a joint venture company in which it has at least 40% of the equity. It may invest through a partnership or LLP. Income arising from investments held through most offshore unit trusts will be exempt, but not any capital gains. Income or gains from onshore unit trusts and OEICs will not qualify for exemption. Representations are being made in the hope of extending the range of investment vehicles available to REITs.

What are the requirements for Group REITS?
Where a company has qualifying subsidiaries, the whole group may be treated as a REIT. To comprise a group, the parent must own at least 75% of the ordinary share capital and more than 50% of the economic interest. It does not seem possible to exclude individual qualifying group companies from the regime. Although the parent must be UK tax resident, overseas subsidiaries are included and to the extent that they have UK property income, exemption from UK tax will apply. Overseas property income of non-resident companies is outside the scope of UK tax, but interestingly it will be taken into account as property rental business in determining whether the tests of 75% profits and assets being attributable to the property rental business are met; it also counts towards the three properties test.

The company has losses/unrelieved capital allowances. What would happen to them if it became a REIT?
Pre-REIT losses may, subject to the usual rules, be set against any non-exempt profits of the REIT. It appears that unused losses would be preserved and could be used if the company ceases to be a REIT. No balancing charge or allowance for capital allowances purposes will arise. Notional capital allowances will be calculated during the period a company is a REIT and if it ceases to be a REIT it will be entitled to allowances based on the notional written-down value at that time. ■

Belinda Bridgen
Telephone +44 (0)20 7440 7432
belinda.bridgen@mishcon.com