Real Estate Legal Update : Global Corporate Real Estate Property and Planning Lawyer & Attorney : Reed Smith Law Firm

SEC Action Threatens Already Shaky Housing Market

Mortgage real estate investment trusts (“MREITs”), which provide much needed liquidity to a capital starved real estate market, are at risk of losing a key exemption under the Investment Company Act of 1940 (the “Act”). MREITs are currently exempt from the Act and its limits of the amount of leverage a fund can use to acquire assets. The exemption currently allows MREITs to use high levels of leverage to boost returns. Many MREITs use low-rate, short-term bonds to finance bond purchases. If MREITs become subject to the Act, an important source of liquidity for the housing and real estate markets could be lost.

On August 31, 2011, the Securities and Exchange Commission issued concept release IC-29778 (PDF) seeking comments from the public as to whether MREITs, should remain exempt from the Investment Company Act of 1940 (the “Act”) pursuant to Section 3(c)(5)(C) of the Act. The public comment period for the concept release ended on November 7, 2011. 

The SEC’s stated goals in issuing the concept release (PDF) are to: “(1) be consistent with Congressional intent underlying the exclusion from the Act provided by Section 3(c)(5)(C); (2) ensure that the exclusion is administered in a manner that is consistent with the purposes and policies underlying the Act, the public interest, and the protection of investors; (3) provide greater clarity, consistency and regulatory certainty in this area, and (4) facilitate capital formation.”

Under Section 3(c)(5)(C) of the Act, any person “not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates and who is primarily engaged in one or more of the following businesses . . . (C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” is not an investment company for purposes of the Act. MREITs have little in common with traditional property REITs aside from satisfying REIT requirements that 75% of the MREIT assets be real estate related and 90% of taxable income is returned to investors as dividends.   

According to the National Association of Real Estate Investment Trusts (“NAREIT”), there were 29 publicly traded MREITs with a combined equity market capitalization of $43 billion. MREITs provide critical financing and liquidity in the real estate capital markets by funding mortgage related residential and commercial loans, originating mortgages and mortgage related loans. (See NAREIT comments to SEC.) As we have seen, credit markets have tightened significantly since the financial crisis and the burst of the housing bubble. FannieMae and FreddieMac have required billions in taxpayer bailout dollars to remain marginally solvent while many in Washington call for the winding down of all government sponsored entities. According to the Mortgage Bankers Association (“MBA”), MREITs have stepped in to fill a portion of the credit void. MREITs have “raised over $30 billion of capital in 88 initial public offerings and secondary offerings since 2008” and have raised another “$11 billion in the first part of 2011 alone which translates into $71 billion of mortgage demand out of a net supply of $203 billion.” (See MBA Comments to SEC).

The SEC’s focus on the leverage that MREITs use to acquire assets seems terribly misplaced. With an average leverage of 8-1, MREITs can lock in spreads of 200 basis points and produce yields in the mid-teens. When compared to mortgages held by banks, the 8-1 leverage is tame in comparison. When a bank holds a mortgage that is not guaranteed by FannieMae or Freddie Mac, the bank is required to hold 8% capital in reserve, or an 11.5 to 1 leverage. When those mortgages are guaranteed by Fannie and Freddie, the credit reserve requirement is cut by 80% resulting in a more than 60-1 leverage. At a time when the real estate market, particularly housing, is starved for capital, freezing out an important player is ill-advised and inconsistent with the SEC’s stated goals in issuing the concept release.

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This post was written by Siobhan Hayes and Catrin Phillips.

Almost exactly a year ago we posted a blog on the High Court case of London Tara Hotel Limited v Kensington Close Hotel Limited, where it was decided that a personal licence to use a roadway granted to the previous owner of the Kensington Close Hotel did not prevent the current owner from acquiring an easement based on over 20 years’ continuous use. The Court of Appeal has upheld the High Court decision and made a couple of interesting comments in the process:

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We have previously posted on the impact of the 2009 Goldacre case (Goldacre (Offices) Limited v Nortel Networks UK which ruled that landlords of tenants in administration are able to claim rent as an expense of the administration when the administrators use leasehold property for the benefit of the tenant’s creditors. 

Is this really as good as it seems?

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This post was written by Annette Beresford and Siobhan Hayes.

Next year could bring some interesting changes for non-UK domiciled developers and investors in UK property. Businesses that undertake the development of commercial or residential property or the letting of commercial property may gain the tax-free use of offshore income and gains in the UK. The Government is consulting on a proposal to allow this from 6 April 2012.

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This post was written by Jon Pike, Richard Perkins and Siobhan Hayes.

Last spring we posted on the difficulties facing landlords and tenants as a result of the High Court decision in Good Harvest.  Yesterday we had some good news as the Court of Appeal has reconsidered the point and introduced some commercial common sense into the law.

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Property investors have been happy working with minimal regulatory control for property investments using limited partnerships, unit trusts and companies and both onshore and offshore entities but all that is about to change. The E.U.’s Alternative Investment Fund Managers Directive (AIFMD) has been staggering through the E.U. regulatory process and is expected to be published a little later this summer (later than advertised) and to be fully in force in 2013. EU managers of property investment funds are going to have to be authorised, work with liquidity controls and restrictive borrowing powers, have to defer their remuneration and will have to appoint an independent depository for each fund that they manage. 

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This post was written by  Katherine Campbell and Siobhan Hayes

We have posted previously on the difficulties of operating break clauses effectively . Today the Court of Appeal (in a case where we were acting for the landlord) has considered the meaning of a break clause which was conditional on the tenant delivering up with vacant possession.

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This post was written by Emma Parsons and Siobhan Hayes.

Increasing numbers of property developments contain a residential element sold off on long leases and a commercial element let on market rent terms. Those used to managing commercial leases may not realise how highly regulated the collection of residential rent and service charge is - Recent regulations have now revised the form of demand to be used when collecting residential ground rent and it is important to keep up to date in order to collect money due efficiently.

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This post was written by Marjorie Holmes and Siobhan Hayes.

We have seen our first court ruling on competition law issues in a lease renewal case and this is news given the uncertainties the real estate world is facing from 6 April 2011 when competition law starts to apply in full to all real estate transactions.

The case is a preliminary skirmish in a dispute about a lease renewal for the oil terminal at the Port of Immingham. Humber Oil and its landlord Associated British Ports (ABP) (both large scale commercial enterprises) are in competition with each other to provide the same service.   The case raises interesting issues for anyone in a dominant position in their market with the obvious examples being the owners of other ports, motorway service stations, airports and some shopping centre owners. 

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This post was written by Harriet Morgan and Emma Parsons

From 6 April 2011, residential property with a consideration of over £1m will be subject to a higher SDLT rate of 5%.

This means that a purchaser whose transaction will complete on or after 6 April 2011 will find themselves paying more SDLT than if completion had taken place the day before!  This increase only applies to land which consists entirely of residential property.  It does not apply to non-residential or mixed used property.

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This post was written by Katherine Campbell and Siobhan Hayes.

This January saw yet another case on break notices reminding all of us how careful both landlords and tenants need to be when leases are being brought to an end. In this case the landlord’s managing agents will be wishing that they had said less.

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This post was written by Catrin Phillips and George Brown

Looking back at our original blog and subsequent update on the Bribery Bill, you may be forgiven for wondering when on earth the promised guidance from the Government will be published. The Ministry of Justice consulted on the draft guidance between September and 8 November last year. Because of the delayed publication of that guidance the planned implementation of the Bribery Act was postponed to April 2011. 31 January 2011 was set as the new deadline for the publication of the guidance, but the Government has not met this target either.

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This post was written by Philip Olmer, Marjorie Holmes and Siobhan Hayes.

From the time the UK joined the EEC, sections of UK industry have had to grapple with European competition law requirements on anti competitive and monopolistic behaviour. In terms of real estate, competition law had really only affected public sector procurement projects and certain monopolistic businesses such as motorway service areas. From April next year the Competition Act will apply to land agreements. The two real estate lawyers writing this blog are still struggling to get to grips with the consequences of the variable enforceability of potentially anti-competitive agreements. Our colleagues specialising in competition law are very clear that we will have to!

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This post was written by Siobhan Hayes and Catrin Phillips.

A recent case in the High Court, London Tara Hotel Limited v Kensington Close Hotel Limited, underlines the importance of careful management and monitoring of property interests, especially when rights are granted by licence, to avoid the accidental grant of easements in perpetuity.

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This post was written by  Katherine Campbell and Siobhan Hayes

In January we posted on the impact of a case that ruled that landlords are able to claim rent as an expense of the administration when a tenant’s administrators are in occupation of all or part of a leasehold property. In another win for a landlord, the Court ruled that rent can be claimed as an expense of the administration when a tenant’s administrators permit occupation of the leasehold property under a licence. With the balance tipped a little more in favour of the landlord we think this may change the way administrators deal with property.

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This post was written by Philip Olmer, Catrin Phillips and Siobhan Hayes.

There have been numerous press reports about the Coalition Government’s intention to axe many of the quangos created by former Labour administrations as part of the Government’s effort to reduce the country’s deficit. Recent articles have speculated that up to 200 of these quangos will be axed - from British Waterways and the Infrastructure Planning Commission to the Audit Commission (see the Daily Telegraph and the BBC articles). Much has been made of the effect of potential job losses such cuts would entail, particularly in more deprived areas of Britain, but there has been no mention of the other significant component of shutting these operations – that is, the cost of disposing of the properties occupied by those quangos and the likely effect on the landlords of these properties in terms of loss of rental income, other property costs and the effect on reversionary values.

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This post was written by Siobhan Hayes , Philip Olmer and Alex Heaton

Earlier this year we wrote about the impact of the Good Harvest case (Good Harvest Partnership LLP v Centaur Services Limited), both from the perspective of the landlord and of the tenant . Much of the commentary from the spring of this year was advising those involved in property to wait and see what the outcome of the Appeal would be; however, the Good Harvest case settled before it got to the Court of Appeal. Now we need to operate with the High Court decision standing as good law unless (or until) there is a dispute that is large enough to involve a Court of Appeal decision on the same subject.

This posting covers what we are experiencing in advising our clients in practice.

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This post was written by Catrin Phillips, Lynsey Ellard and Siobhan Hayes

Break clauses are often incorporated into leases as a way for the tenant and occasionally, but less frequently, the landlord to maintain flexibility.  In the present market they are often exercised by tenants.  But exercising break rights and even the clauses can cause problems for the unwary tenant and great care must be taken to ensure that the break is exercised successfully - recent caselaw has highlighted some of the potential difficulties.

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The ability of landlords to recover the costs of taking action against tenants for dilapidations or indeed any breach of covenant can be fraught. Far from being an automatic entitlement, it will depend upon the wording of the lease. Costs clauses in leases are many and varied - some rather better than others.

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This post was written by Siobhan Hayes and Indeg Kerr.

In earlier postings on our environmental update blog we have introduced the UK’s Carbon Reduction Commitment (Energy Efficiency) Scheme (“CRC”). From 1 April 2010 the CRC Regulations will apply. Property investors, even those who fall outside the CRC themselves, will have to supply their buyers with information on their buildings’ carbon emissions. Lack of information could wreck the timetable for the deal.

This posting is designed to give you a brief idea of what you will need to disclose on the sale of an investment property once the CRC comes into force on 1st April this year.

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This post was written by Richard Nicoll, Catrin Phillips and Siobhan Hayes.

A decision by the High Court on the liability of a guarantor has just been published and is already causing concern and consternation in the market.

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This post was written by Mark Hargreaves, Emma Parsons and Catrin Phillips.

Following on from our original blog on the Bribery Bill there have been some changes to the Bill during its speedy passage through Parliament. We have no doubt that this Bill will be enacted before the General Election. Agents, investors and developers do need to be aware of the new law and will be required to review internal procedures and contracts with those supplying services to them to ensure they minimise any risks of a criminal sanction.

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This post was written by Clare Whitaker, Katherine Campbell and Siobhan Hayes.

A decision by the High Court in December has strengthened the position of landlords who sometimes do not get paid during the administration even where the administrator is running the business from the property.

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This post was written by Siobhan Hayes and Richard Nicoll.

Every Tenant’s worst nightmare is to miss a break date in a Lease of unwanted space! With rental demand currently weak, Landlords are likely to take any technical point they can to defeat a Tenant’s break notice and the rental void it would trigger.

Often the decision to serve break notices is left until close to the deadline and with the current disruptions caused by the post strike the risks of slip ups are increased. Tenants need to plan ahead to avoid last minute panics. Also because of the law relating to service, Landlords may not be able to assume that non receipt of a formal notice by the deadline means that the lease continues.

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This post was written by Siobhan Hayes and Clare Whitaker.

We have spent a lot of time thinking about landlords being affected by tenants going into administration over the last year. This posting is about a court case where the landlord’s administrators were trying to postpone the tenant’s application to Court for the grant of a new tenancy under the 1954 Act.

The administrators failed in their attempts to defer the 1954 Act proceedings even though it severely affected the value of the property in question and the amount that was going to be paid out to the secured creditor.

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This post was written by Siobhan Hayes and Lesley Davey.

At the beginning of October the UK’s Competition Commission (CC) recommended to Government that introduces as “competition test” in planning decisions for large grocery stores. This follows on from the CC’s 2008 supermarkets’ investigation where it found that the planning regime helped larger supermarkets restrict competition in local markets. Whether or not the Government takes up the recommendation remains to be seen, however the CC’s investigation has also brought all land agreements under the competition law spotlight.

The Government is currently consulting on whether land agreements generally should continue to be exempt from competition law. At the time the exemption was introduced it was thought that the majority of land agreements would not have a negative impact on competition in markets. However the CC’s supermarkets’ investigation highlighted that provisions in land agreements could impact on competition. If the exemption is removed, landlords and tenants would have to review carefully provisions that we currently think of as quite usual to ensure they do not breach competition law.

This posting considers what effect a removal of the exemption would have on landlords and tenants?

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This post was written by Siobhan Hayes and Katherine Campbell.

This week we have seen the headlines about the Focus DIY Corporate Voluntary Arrangement (CVA). It is reported that landlords have accepted the CVA and that will enable Focus to continue a significant part of the business and to retain a large number of jobs. Welcome news in many respects.

CVAs can have a significant impact on a property investment so this posting considers how CVAs work and their impact on leases?

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This post was written by Siobhan Hayes and Katherine Campbell.

Many landlords use an old remedy to recover unpaid rent from sub-tenants where tenants have gone into default. This is set out in Section 6 of the Law of Distress Amendment Act 1908. The remedy pre-dates the rescue culture intended by administration by nearly a century. Given the increasing number of tenant companies in administration, landlords are asking whether the old Section 6 right survives the moratorium that administration gives to the administrator whilst he tries to restructure or sell the company or its business.

This is an area where there is some legal debate at present. We are of the opinion that landlords can use this remedy but it is untested by case law.

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This post was written by Katherine Campbell and Siobhan Hayes.

Tenants exercising break clauses in their leases are creating plenty of work in the property disputes field at the moment. Many tenants who have the opportunity to break the term of their lease are seizing it, and landlords in return want to find any way possible to challenge the validity of those notices. This posting identifies some of the topics arising on lease breaks.

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This post was written by Siobhan Hayes and Richard Nicoll.

The duty on investors and other owners to notify building insurers and keep them updated of all material circumstances should not be under-estimated.  Failure to do this may result in cover being prejudiced.

An unusual case that reached the Court of Appeal earlier this year made us think about whether property investors have got more to disclose to their buildings insurers in this market.  They probably have.

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