(UK) CDM Regulations are Changing

The construction industry is preparing itself for new health and safety practices as a result of the CDM Regulations 2015 which will come into force on 1 April 2015. Developers of big projects will undoubtedly be affected but the Regulations also affect much smaller construction projects too.

Developers will need to be aware that the role of the client is being extended and the CDM Co-Coordinator role is being replaced with that of the “principal designer” so developments in the planning stage now will have to operate under the new Regulations.

Our construction team has written an alert which sets out some of the key changes and points to be aware of particularly in the transitional period.

View the full alert here.

Tenancy Deposits Clarified

This post was written by Sarah Frost

 It is now the best part of a decade since the tenancy deposit protection provisions in the Housing Act 2004 (the “Act”) came into force on 6 April 2007. A string of Court of Appeal decisions resulted from ambiguities and inconsistencies in the Act and later regulations (the Housing (Tenancy Deposits) (Prescribed Information) Order 2007). 

As part of the Deregulation Bill, Parliament are seeking to amend the existing legislation to clarify the law. The key practical point for landlords is the clarification of the rules as they apply to tenancy deposits received prior to 6 April 2007 which are still held by the landlord or agent under tenancies which have continued or been renewed informally.

As a general principle, all tenancy deposits must be protected. This now expressly includes deposits under tenancies that came into being before 6 April 2007 but have since been allowed to “roll over” as statutory periodic tenancies. “Protecting” a deposit means either insuring it or paying it into a custodial scheme and serving the prescribed information on the tenant within the statutory time frame.

The original time frame for service of the prescribed information on the tenant in relation to fixed terms starting after 6 April 2007 was 14 days, later extended to 30 days from receipt of the deposit. However, the existing legislation left it unclear if and when deposits should be protected in relation to pre-6 April 2007 “roll over” tenancies.

 The amended legislation makes it clear that “roll over” deposits must be protected, but also gives landlords a window of 90 days from the date of commencement of the Deregulation Act 2015 in which to protect these deposits. Bearing in mind the that one of the penalties for failure to properly protect a tenancy deposit is the inability to serve the notice to end the periodic tenancy itself as well as financial penalties, landlords would be well advised to take advantage of this window of opportunity.

(US) Like Kind Exchanges: Steps to Avoid The Capital Gains Trigger

What is a Like Kind Exchange in Real Estate?

A like kind exchange is the transfer of real estate which involves the sale of real property and a subsequent purchase of replacement property by a taxpayer without triggering capital gains taxes from the initial sale. Many different types of transactions may qualify for a like-kind exchange but our focus is on the sale and acquisition of one real estate investment property or property used in the conduct of a trade or business for another. For taxpayers who are eligible, like-kind exchanges are a beneficial way to sell and invest in real estate without significant tax consequences.

How Does it Work?

Section 1031 of the Internal Revenue Code provides allows a taxpayer to defer capital gains taxes relating to an exchange of like-kind property if certain requirements are met. It is important to note that the taxes are deferred and not completely avoided. In general, the taxpayer must comply with the following:

  • New property and old property must be “like-kind.”
  • Property must be held for investment or business purposes (personal residence excluded).
  • Value of new property must be equal to or greater than the value of old property.
  • New property must be identified within 45 days and acquired within 180 days of the sale of the old property.
  • The transaction must be properly structured property. For example, use of a qualified intermediary to receive proceeds from the sale of the old property.

What is Like-Kind?

The Code provides minimal guidance on the definition of what constitutes like-kind. Treasury Regulation § 1.1031(a)-1(b) simply provides that like-kind refers to “the nature or character of the property and not to its grade or quality” without further distinguishing what constitutes the nature, character, grade or quality of a property. In practice, however, the definition of like-kind relating to real estate property has been fairly broad.

What are some things to look out for?

In order to defer capital gains from the disposition of the old property completely, the taxpayer must ensure that the value of the old property does not exceed the value of the new property. If the value of the old property is greater, the taxpayer will be taxed on capital gains for the positive difference between the value of two properties in the tax year that the property was sold.

Personal property is subject to more rigorous rules than real estate property. If the exchange of the real property includes personalty, the taxpayer must take caution to ensure that the personal property also complies with like-kind restrictions which are more stringent than the real estate definition.

(UK) Rates and Refurbishments - when is a building in repair?

This post was written by Siobhan Hayes

The question of how to value a building which is undergoing substantial refurbishment came before the Court of Appeal who ruled yesterday that the Valuation Tribunal had wrongly attributed a rateable value of £1 to offices which had almost all of its internal elements stripped out including the cooling system, all internal and external plant, electrical wiring and had no sanitary fittings. It has ruled on what ‘repairs’ are but the judgment will not give many investors clarity over what their rates liability could be during refurbishment works.

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(US) Revised Pennsylvania Statute Creates Power of Attorney Chaos

This post was written by Steven Regan and William Bornstein

The Pennsylvania Legislature enacted extensive changes to Title 56 of the Decedents, Estates and Fiduciaries Code affecting powers of attorney, effective as of January 1, 2015. The amendments create a number of issues for creditors in commercial transactions and individuals and businesses engaging in the transfer of equity interests, bonds or other assets of a business.
The general rules applicable to execution of a power of attorney require, in part, that the power of attorney be acknowledged before a notary and witnessed by two individuals older than eighteen years of age. Prior to the recent amendments, Title 56 exempted from the notary acknowledgement and witness requirements certain transactions including:

  • powers granted to or for the benefit of creditors in commercial transactions,
  • a power granted for the sole purpose of facilitating the transfer of stock, bonds or other assets,
  • a power contained in a governing document for a corporation, partnership, limited liability company or other legal entity by which a director, partner or member authorizes another to do things on behalf of the entity; and
  • a warrant of attorney to confess judgment.

Under the current version of Title 56 (20 Pa.C.S.A. § 5601(e.1)), the exemption applies to the witness requirement, but not the notary acknowledgement requirement. As a result, commercial loan documents, for example, which contain terms pursuant to which the borrower grants a power of attorney to the lender, should include a notary acknowledgement. While it is widely believed that the failure of revised Title 56 to exempt commercial transactions from the notary requirements is a drafting error or oversight, until the legislature further amends Title 56 to restore the notary acknowledgement exemption, financial institutions would be well advised to engage in a careful review of their loan and credit documents, identify terms pursuant to which the borrower grants a power of attorney to the lender, or which grant the lender the right to confess judgment against the borrower, and include a notary acknowledgement to each loan document in which the borrower grants a power of attorney to the lender or includes a right to confess judgment.

Revised Title 56 also adds a new section (§ 5601.3) imposing duties on the agent. The general obligations of the agent, which may not be waived by the principal, require the agent to act:

  • in accordance with the principal’s reasonable expectations, to the extent actually known by the agent and, otherwise, in the principal’s best interest;
  • in good faith; and
  • only within the scope of the authority granted in the power of attorney.

The first of the above agent duties is problematic for lenders because, when acting under a loan document power of attorney, the lender is typically protecting its rights or enforcing its remedies under the loan documents, which includes executing on the borrower’s collateral. The lender’s actions under a loan document power of attorney are almost exclusively intended to protect the lender’s (agent’s) best interests, not those of the principal (borrower). While this issue may not have a drafting solution, it may be advisable to revise the power of attorney grant in each loan document to include an acknowledgement by the borrower as to the borrower’s reasonable expectations that the lender’s actions under the power of attorney may be adverse to the borrower’s interests. That, however, does not relieve the lender from the duty to otherwise act in the best interests of the borrower, a duty which is completely at odds with the nature and purpose of a grant of a power of attorney in loan and credit documents.

This is an issue that must be fixed by the Pennsylvania legislature.

Section 5601.3 of revised Title 56 enumerates certain other duties of the agent which may be waived by the principal by the terms of the power of attorney. These other duties include, but are not limited to:

  • act loyally for the principal’s benefit,
  • a duty to not commingle the funds of the agent and principal,
  • not creating conflicts of interest that would impair the agent’s ability to act in the principal’s best interests,
  • act with care, diligence and competence, and
  • keep records of receipts, disbursements and transactions made on behalf of the principal.

The above duties are imposed on an agent, except as otherwise provided in the power of attorney. As such, these duties may be waived by the principal and powers of attorney granted in loan and credit documents should include an express waiver of the duties imposed by 20 Pa.C.S.A § 5601.3(b).

Had Pennsylvania adopted the Uniform Power of Attorney Act (UPA Act), or, at a minimum, the applicability section of the UPA Act, all of these issues would have been avoided. Section 103 of the UPA Act provides that the act applies to all powers of attorney except for four enumerated blanket exemptions. The exemptions include a power coupled with an interest granted to a creditor in a commercial transaction and a proxy or other delegation to exercise voting or management rights with respect to an entity. While the Pennsylvania Legislature is expected to correct what is widely believed to be an oversight or drafting error, and hopefully retroactively, in the meantime lenders would be prudent to revise their loan, credit and other documents that contain a power of attorney to account for the acknowledgement requirement and address the agent duties imposed by revised Title 56.

Analysis: Early closure of the ROCs regime ruled lawful

This post was written by: Jonathan Hewitt; Richard Ceeney; Malcolm Dunn


The Government’s decision to close the Renewables Obligations Certificates (ROC) subsidy scheme for larger solar PV installations (above 5MW) two years early, and the grace periods introduced to mitigate the effects of the closure, were upheld as lawful by the High Court at the end of 2014 after a challenge by solar operators. This is despite a successful challenge over the change to the Feed-in-Tariff regime for smaller installations in 2012. In this blog, we will analyse the likely effect of this ruling.

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(US) High Volatility Commercial Real Estate: New Rules Have Effect on Cost and Availability of Mortgage Capital

On January 1, 2015, the final Basel III rules regarding regulatory capital for banks with greater than $500 million in assets and all savings and loan holding companies took effect. Basel III imposes new rules for high volatility commercial real estate (HVCRE) which the regulations define as a credit facility that finances the acquisition, development or construction (ADC) of real property. The HVCRE rules may affect the availability and pricing of commercial real estate mortgage capital.

Regulators use the risk weight total of a bank’s risk-weighted assets to calculate how much capital a bank needs to sustain itself through challenging markets. Subject to certain exceptions, the regulations assign a 150 risk weighting to HVCRE loans which means that for purposes of risk weighting a $10 million HVCRE loan will count as $15 million toward the bank’s risk weight total.

Loans that finance the acquisition, development and construction of one to four family residential properties, projects that qualify as community development investment and loans to businesses or farms with gross revenue exceeding $1,000,000 are exempt from the HVCRE classification.

A commercial real estate ADC loan may avoid the HVCRE classification if:

  • the loan-to-value ratio (LTV) is equal to or less than 80%
  • the borrower contributes capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development costs out of pocket) of at least 15% of the real estate project’s “as completed” appraised value, and 
  • the borrower’s 15% is contributed to the project before the lender advances any funds under the loan and remains in the project until the loan is converted to a permanent loan or paid off.

The LTV requirement is typically not an issue as lenders tend to be more conservative with LTVs typically in the 65% to 70% range for ADC loans.
The second exemption, which requires the borrower to contribute 15% in cash or unencumbered readily marketable assets to the project, deviates from traditional lender requirements in two important ways. Traditionally, borrower equity was calculated as a percentage of the total project costs. Now, a borrower is required to inject 15% of equity into the project measured against the project’s “as completed” appraised value which, inevitably, is higher than the total project costs thus requiring a borrower to put more equity into a project.

Also, lenders traditionally counted the current value of the land towards the borrower’s equity requirement. Under the new HVCRE rules, a borrower who acquires the project property concurrently with or in a reasonable time prior to the loan closing is not impacted as the acquisition cost for the land counts towards the borrower’s 15% equity requirement. On the other hand, a borrower who either bought and held land for the right market conditions or contributes land that has long been held by the borrower will likely find itself limited to the land’s acquisition cost rather than the current market value toward its equity requirement. As a result, borrowers will have to obtain other sources of capital to satisfy the 15% equity requirement which may adversely affect the project’s feasibility.

The effect the HVCRE rules have on ADC lending remains to be seen. It is not clear that all smaller financial institutions are currently fully complying with the new rules in bidding for ADC loans, which may result in a temporary competitive advantage in pricing and equity requirements. Long term, the new rules may result in banks reallocating capital to investment options with a higher return thereby limiting financing available for commercial real estate. So long as interest rates remain at or near historic lows, ADC lending seems to remain a popular investment for some banks such as M&T Bank which expanded its construction loan portfolio by 15% in 2014 to 7.6% of its total loan portfolio while other lenders take a more conservative approach to construction lending.

It remains to be seen whether construction lending remains strong under the new HVCRE rules.


Please can I have your Autograph Mr Ramsay!

This post was written by: Stuart Wright and Siobhan Hayes

 You might have seen some of the recent media coverage of Gordon Ramsay’s court case relating to a personal guarantee given to his landlord that was signed using an “automated pen” operated by his estranged business partner and father in law. A significant sum was at stake given the personal guarantee guaranteed the tenant’s obligations to the tune of £640,000 per year for 25 years and some issues arose that will matter outside the celebrity world.

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(US) Unamicable Split: Inherited Real Property and the Texas Forced Sale Statute

When multiple people inherit an interest in real property, each is responsible for their share of the ad valorem taxes of the property. What happens if one party fails to meet its tax obligations? What recourse is available to a party that pays more than its share of the tax obligations? In Texas, a co-owner may force the sale of an owner’s interest in real property as reimbursement for property taxes paid on the owner’s behalf.

The forced sale remedy is governed by Chapter 29 of the Texas Property Code. The forced sale remedy is limited to cases of real property that is not otherwise exempt from forced sale under the Texas constitution or other state laws and is received by inheritance, under a will, by joint tenancy with a right of survivorship, or by any other survivorship agreement. The remedy is also available when the real property is owned in part by a certain tax exempt nonprofit organizations with a corporate purpose of developing low-income housing.

A person may file a petition for forced sale in the district court of the county where the real property is located if:

  • the petitioner has paid the other owner’s share of ad valorem taxes imposed on the property for any three (3) years in a five (5) year period (or two (2) years in a three (3) year period in the case of a nonprofit organization); 
  • the other owner has not reimbursed the petitioner for more than half of the total amount paid by the petitioner for the taxes on the owner’s behalf; and
  •  the petitioner made a demand that the other owner reimburse the petitioner for the amount paid by the petitioner for the taxes on the owner’s behalf.

Upon completion of the hearing on the forced sale petition, if the court is satisfied that the petitioner has met each of the above requirements by clear and convincing evidence, the court will enter an order that divests the defendant’s interest in the subject real property and orders the petitioner to pay to the defendant an amount equal to the fair market value of the defendant’s interest in the property, as determined by a court appointed independent appraiser, less the amount of defendant’s share of ad valorem taxes paid by the petitioner. The court order should also direct the defendant to executed and deliver a deed conveying the defendant’s interest in the property to the petitioner.

Bright Days for Large Scale Solar Operators; Sunstroke for the Smaller Players: Latest News on CfDs

This post was written by: Jonathan Hewitt, Richard Ceeney and Malcolm Dunn

National Grid has made its decisions as to eligibility for participation in the first Contracts for Difference auction but the auction process itself has been delayed as some applicants have asked Ofgem to review National Grid's decisions. However, the Secretary of State for Energy and Climate Change, Ed Davey, by letter, assured the Select Committee that the process could still see contracts awarded by 17 April 2015.

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(US) The EB-5 Visa Program: A Popular Real Estate Financing Program's Reauthorization Is Uncertain

The EB-5 Visa Program has become an increasingly popular vehicle for real estate project financing in the United States. Last year, for the first time in the Program’s history, the annual supply of EB-5 immigrant investor visas, which is capped at 10,000, was fully depleted. More than 11,000 foreign citizens applied for EB-5 Visas in 2014.
The EB-5 Program was established by Congress in 1990. It is intended to stimulate the U.S. economy through job creation and capital investment by foreign investors. It is administered by the U.S. Citizenship and Immigration Services (USCIS), a division of the Department of Homeland Security. The EB-5 Program sunsets every three years and must be renewed by Congress for the program to continue. It’s up for review again in September of 2015. 

EB-5 Visas are available to investors who make a direct minimum investment of $1,000,000 in an ongoing project or start a new business in the U.S. which preserves or creates ten or more jobs for U.S. workers. The direct investment amount is reduced to $500,000 if the investment is made in a targeted employment area. Investment through a private or public economic entity known as an EB-5 Regional Center devoted to increased domestic capital promotion, job creation, improved regional productivity and increased economic growth is also permitted. In this case, indirect job preservation or creation can satisfy EB-5 Program requirements. 

Upon making an EB-5 investment and upon approval of the application, a foreign investor (and immediate family including children under age 21) will be granted conditional permanent residence. If the foreign investor can show that the investment satisfies the EB-5 job creation requirements after about two years, the foreign applicant will be granted permanent residence.

Fortune magazine reports that the growth in demand for EB-5 financing is largely attributed to Chinese citizens whom account for more than 80% of applicants. They seek greater freedom, a cleaner environment, and expanded educational opportunities for their children. Some U.S. developers have been active in seeking funds from foreign investors interested in EB-5 Visas. One example is Related Cos., which had an exhibit at the “Invest in America Summit” held each March in Shanghai, China. New York’s Hudson Yards, a Related Cos. development, is reportedly being financed in part through EB-5 program funds.
 In 2013, the Inspector General for the Department of Homeland Security harshly criticized USCIS’s management of the EB-5 program, saying poor record keeping made it impossible to verify claims of job creation, and that rules don’t allow the agency to punish EB-5 Regional Centers over instances of fraud. A recent Washington Times report about high-profile incidents of EB-5 fraud and skepticism about the government’s job creation claims have generated an audit of the Program by the Government Accountability Office. The audit is at the request of Senators Chuck Grassley of Iowa, Bob Corker of Tennessee and Tom Coburn of Oklahoma, ahead of Congressional evaluation of the Program for reauthorization in September 2015.

The popularity of the Program has caused concerns about application process timing, which can take up to three years, notwithstanding the fact that USCIS estimates indicate a timeline closer to 14.7 months for issuance of conditional Visas and 8.6 months for Visas. Long processing times can make EB-5 financing less popular for direct investment in individual projects, as developers are often on tight financing timelines.

The results of the Government Accountability Office audit will impact the debate on the future viability of the Program and its reauthorization. Also, there have been calls by some in Congress to make the Program permanent. As we approach September, any uncertainty surrounding extension of the Program, coupled with a strengthening US Dollar, may prove to be a disincentive to foreign investors, frustrating EB-5 financing opportunities for real estate developers.

(UK) When Is An Emergency Not An Emergency

this post was written by Sarah Frost and Siobhan Hayes

It is the time of year when the Great British weather batters buildings up and down the country causing signs to fall off some and roofs to cave in! Beware, though, if you are the Landlord or manager of a mixed use building – emergency repairs may cost you more than you think.

Section 20 of the Landlord and Tenant Act 1985 contains detailed provisions regulating residential service charges. If you are the Landlord or manager of a mixed use building which includes long residential leases (i.e. leases longer than 21 years) you will need to comply with Section 20 if you want to recover service costs in full from your residential tenants.

Section 20 imposes a two and sometimes three part consultation procedure for one-off expenditure that would result in a re-charge to any individual residential tenant of more than £250 (“Qualifying Works”). This procedure can take two to three months and applies to all Qualifying Works, urgent or not.

If urgent repairs are required (for example for health and safety reasons), it is possible to apply to the First Tier Tribunal for a dispensation which effectively disapplies all or part of the consultation requirements. This procedure in itself takes approximately 6 weeks and will not assist where urgent works are required.

If you carry out Qualifying Works without going through the consultation procedure and without obtaining emergency dispensation, you may only be able to recover £250 per residential tenant. In some cases this could be extremely costly.

There is no formal “urgent works” procedure currently in place, but accepted market practice is to start emergency Qualifying Works immediately but at the same time apply to the First Tier Tribunal for dispensation from Section 20. Dispensation cannot be guaranteed, but if emergency works are genuinely required (and are not the result of poor building management) it should be forthcoming. It may also be the case that the risk attached to not obtaining dispensation is lower than the risk of allowing a potentially dangerous situation to continue.

(US)Northern California Tech Firms Hunt for Space: Dramatic Impact On The Commercial Office Market

In an article published on Law360.com titled "Tech Was 'Not Tethered To Spreadsheets' For 2014 RE Buys," Simon Adams of Reed Smith's Real Estate Practice Group comments on the real estate market effects in Northern California caused by a booming tech industry demand for office space.

Tech companies are doing massive deals, often demanding lease terms and amenities not driven by bottom line considerations. And, they're willing to pay top dollar, affecting the overall market for commercial space.

“Players in Silicon Valley are into what you would describe as a land grab,” Simon T. Adams of Reed Smith LLP said. “They are so willing to take real estate positions.”

The demand for space is so great that due diligence periods have narrowed, forcing lawyers to work quickly and creatively to get deals completed before competitors for the same space can take action.

“Lawyers have both anticipated their clients’ needs and desires and at the same time kept a very close eye on other interested parties and anticipated what their reaction would be,” Adams said. “Because of that, they’re willing to change the structure of a transaction or part of a transaction. ... There’s a level of creativity that’s new.”

The full article can be read here.

(US) Preservation vs Development: History Complicates San Francisco's Surging Real Estate Development Market

 In an article published on Law360 titled "History Complicates San Francisco's Surging Real Estate Development," Simon Adams of Reed Smith's Real Estate Practice Group comments on the challenges developers face with historic-designated properties in the city.

 " I think [the need for housing is] a particular challenge to San Francisco right now,”  noting the tension between the city’s need for more development — particularly residential — and the challenges of getting such development done in historical building-heavy downtown cores such as SOMA, where many are made of nonreinforced masonry, making renovations a costly endeavor.

The full article can be read here.


(UK) Dan's Banger's Didn't Break and other Break Clause news

This post was written by Stuart Wright, Lynsey Ellard and Siobhan Hayes.

We have two items to post on breaks.

  • The first is the surprising news that M&S have been given leave to appeal to the Supreme Court over the issue of the refund of the rent they had paid their landlord when they exercised a break. We will post again when there is news. We have a number of posts on apportioning and refunds of rent that you can read here.
  • The second is The Dan’s Bangers case (Sirhowy Investments Ltd v Henderson & Anor) – involving a second hand car dealer’s site which highlighted the continuing trend in lease break clause cases where compliance with the pre-conditions to a break are required to be strictly complied with for the break to be effective.
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