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.

Should SBA 504 loans, the purpose of which are to promote economic development and create and retain jobs, be exempt from the HVCRE rules because ADC loans that qualify as community development investments are exempt from the HVCRE regulations?

SBA 504 loans, authorized by Title V of the Small Business Investment Act (15 U.S.C. § 695 – § 697g), provide small businesses with long term financing to acquire, construct, develop or improve fixed assets such as owner-occupied commercial real estate and heavy machinery. Financing is provided by a lender and a community development company (CDC). In a typical SBA 504 transaction, lender financing will provide 50% of the project costs secured by a first priority lien on the real estate and other 504 collateral, CDC financing will provide up to, but not more than, 40% of project costs secured by a second priority lien on the 504 collateral, and the borrower will typically contribute 10% of the project costs. The real estate must be at least 51% owner-occupied for existing buildings and 60% owner-occupied for new construction.

It is understandable that lenders would be concerned whether a SBA 504 loan is subject to HVCRE regulations. The HVCRE regulations and those governing the SBA 504 loan program are different and, in connection with construction loans, inconsistent.

A SBA 504 construction loan, in most cases, will require the borrower to contribute 10% to the project. Unlike a HVCRE loan which requires a borrower to contribute 15% of the “as completed” appraised value of the project, the SBA 504 loan requires the borrower to contribute 10% of the total project costs (see 13 C.F.R. § 120.910 (a)(4)), except to the extent that the SBA project involves the “acquisition, construction, conversion or expansion of a limited or single purpose building or structure”, in which case the borrower’s contribution is required to be at least 15% of the project costs (See 13 C.F.R. § 120.910(a)(2)). Where lenders may be most concerned is that period of time during the lender has a loan at a 90% LTV until the CDC loan is funded. The interim period is, in most cases 45 days, except in the case of a construction loan. The CDC loan does not fund until construction is completed which then requires the lender to hold a 90% LTV loan for a significantly longer period of time. The lender’s risk is typically mitigated by the CDC loan upon completion, reducing the lender’s LTV to 50%, and additional collateral such as payment and construction guaranties from the principal of the borrower and other business collateral beyond the 504 collateral.

As noted above, the HVCRE rules exempt ADC loans that otherwise qualify as community development investments. The purpose of SBA 504 loans is to promote economic development and create and retain jobs. Lenders may receive credit under the Community Reinvestment Act for making SBA 504 loans. Federal regulations governing community reinvestment define community development, in part, as “activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company Programs” set forth in 13 C.F.R. § 121.301 (see 12 C.F.R. § 345.12). It would seem that ADC loans made under the SBA 504 program are exempt from the HVCRE regulations because SBA 504 loans qualify as community development investment, but the question will remain pending clarification by federal regulators.


(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

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 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.

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 acknowledgment 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 acknowledgment. While it is widely believed that the failure of revised Title 56 to exempt commercial transactions from the witness and notary requirements, until the legislature further amends Title 56 to restore the notary acknowledgment 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 acknowledgment 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 known by the agent and otherwise in the principal’s best interests;
  • 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 acknowledgment 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 acknowledgment 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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