(UK) The latest thinking on lease guarantees

The dust has now settled on the recent cases involving discussion on the continuing AGA, GAGA situation and its inter play with section 25 of the Landlord and Tenant (Covenants) Act 1995.

The second case has given us just a little bit more certainty about how lease guarantees on an assignment can be made to work whilst not introducing anything radically new. (See our previous post on the first case here).

Our advice to investor landlords is –

  1. As previously stated the best understanding we have from the cases is that a guarantor may guarantee the obligations of the outgoing tenant on an assignment in the AGA (often now called a GAGA or a sub guarantee).
  2. Repeat guarantees are not valid so a current guarantor may not validly stand as guarantor for the obligations of the incoming assignee.
  3. We have contradictory statements in the cases about whether a tenant can assign to its guarantor and for landlords the safe advice is to prohibit this.
  4. There is no way round the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 by setting up a pre-agreed arrangement to ensure that the guarantor will stand in again. The anti-avoidance provisions of Section 25 of the Act are as wide as we all feared and pre arrangements will fall foul of the Act.
  5. In rare instances where tenants have assigned leases without landlord’s consent the assignment of the lease back to the original tenant with a guarantee given by the original guarantor is possible. This is because assignments in breach of a lease do not create a release of the liabilities in the first place.

For tenants, particularly those in a large group but with one valuable parent guarantee to offer the outcome of the cases still feels like a restriction on freedom to contract when leases prohibit assignments intra group (which many now do).

What next? Most leases being granted now contain appropriate provisions for dealing with this thorny issue of the guarantee on an assignment but we are seeing issues arising is in investment sales and purchases where the tenant has a parent company guarantee and the lease wording pre-dates our modern understanding of the law. Some investment purchases are delayed whilst a deed of variation to the lease is negotiated. Investors looking at new assets to purchase should take a close interest in this subject.

 

 

Delay to registration under the Heat Network Regulations

In our post on 20 March we explained the implications of the Heat Network (Metering and Billing) Regulations 2014 and in particular the need for heat suppliers to register before 30 April 2015. In amendment regulations of yesterday the date for registration has now, thankfully, been put back to 31 December 2015. Minor tidying up amendments have also been made to the regulations and we will report on these if they are significant. For now, it is good news.

(US) Are Small Business Administration 504 Loans Exempt from High Volatility Commercial Real Estate Regulations?

As discussed in a prior blog , Basel III regulations governing high volatility commercial real estate (HVCRE) went into effect. The HVCRE rules require lenders to assign a higher risk weighting to loans for the acquisition, development or construction (ADC) of commercial real estate. The higher risk weighting may be avoided 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.

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(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

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.

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

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.

The case is Newbigin v S J and J Monk. The building was only built in the late 1990s. During the recession the freeholders stripped out the building. It had been vacant for some time.

Refurbishment works were undertaken in 2012 when the first floor was vacant, without its ceiling or sanitary fixtures; had only half of its raised floor and had no cooling and electrical wiring or other plant.

By statute the rateable value has to be assessed by reference to rental value assuming a reasonable state of repair “but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic”.

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(US) Revised Pennsylvania Statute Creates Power of Attorney Chaos

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 to Title 56, exempted from the notary acknowledgment 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.

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Analysis: Early closure of the ROCs regime ruled lawful

Summary

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.

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