Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities and other developments in MoFo’s European Real Estate team. In this edition, we provide an overview of recent case law on appropriation and valuing financial collateral in a commercially reasonable manner, discuss the changes to property disclosure requirements under the Levelling-up and Regeneration Bill and consider important updates in relation to the increased EPC rating required for commercial properties.

As always, we hope you enjoy reading MoFoReal and invite your feedback and suggestions for future issues.

Case law update: important guidance on appropriation and valuing financial collateral

By: David Spencer, Associate, London

The English High Court recently considered the validity of appropriation as an enforcement power and the duty imposed by the financial collateral regulations to ensure that the financial collateral subject to the appropriation is valued in a “commercially reasonable manner”, in its judgment handed down in ABT Auto Investments Ltd v Aapico Investment Pte Ltd [2022] EWHC 2839 (Comm).

The case is useful from a real estate finance perspective as it provides a number of lessons to lenders who may wish to consider the appropriation of shares in a property company as an alternative enforcement route to the more usual remedy of receivership or the statutory and contractual powers of sale.

• The appropriation itself was held to be legally valid on the basis that the relevant clause in the share charge (which granted the chargee the power to appropriate the shares) was sufficient to comply with the requirements of the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCARs).
• In exercising the power of appropriation, the chargee must ensure the valuation of the collateral is undertaken in a “commercially reasonable manner”.
• There are a number of key considerations to be taken into account when interpreting what a “commercially reasonable manner” means under the FCARs, but it is a fact-sensitive and objective test and there is a range of possibly valid and commercially reasonable procedures open to collateral-takers.
• Collateral-takers’ duties do not go beyond the two requirements that the contract contains a proper power for appropriation and that the collateral is valued in a commercially reasonable manner – for instance, there is no need to engage good faith or other equitable duties in conducting a valuation.

For more information about the case and a broader discussion about some of the issues highlighted above, please see our recent client alert.

Levelling-up and Regeneration Bill – changes to property disclosure requirements

By: Danielle Hirsch, Partner, London [Nafeesa Deen, London Trainee Solicitor, contributed to the drafting of this article]

Introduction

Further to the ending of the Committee Stage in the House of Commons on 20 September 2022, we highlight below some of the pertinent provisions of the Levelling-up and Regeneration Bill 2022-23 (the “Bill”) relating to property disclosure requirements that will likely impact those involved in the real estate sector.

Part 11 of the Bill[1] includes new disclosure requirements in England and Wales, which aim to make land ownership and control more transparent and reveal potentially sensitive transactional information about the arrangements affecting interests and rights relating to land. Whilst one of the aims of the requirements is to expose any evasions of the disclosure requirements under the Economic Crime (Transparency and Enforcement) Act 2022 (the “ECTEA 2022”) or sanctions, the new laws are also designed to meet the 2017 housing white paper land transparency commitment by collecting and publishing data on contractual arrangements used by developers to control land (such as rights of pre-emption, options, and conditional contracts) and for wider national and macroeconomic purposes. As such, the requirements are extensive and, under the current draft of the Bill, they appear to relate to all land transactions registered at the Land Registry, and not just to overseas owners of land registered at the Land Registry.

The disclosure requirements

• The proposed legislation would entitle the Land Registry to require disclosure of two categories of information.

• Information about the ownership and control of land:
  The Land Registry would have the power to require information for the purpose of identifying:

  • (1) landowners;

  • (2) those with relevant rights concerning the land; and

  • (3) those who can directly or indirectly influence the persons listed in (1) and (2) above in their exercise of that ownership or right,
    
    in order to determine the nature, extent, and/or duration of any land ownership, rights in the land, or ability to control or influence.

• Transactional information:
  The Land Registry would have the power to require certain transactional information about instruments, contracts, or other arrangements that involve:

  • (1) creating, altering, extinguishing, evidencing, or transferring relevant interests in land; or

  • (2) conferring, amending, assigning, terminating, or otherwise modifying relevant rights concerning land.

Such transactional information will comprise:

1. parties to a transaction;
2. persons on whose behalf or for whose benefit the parties to a transaction are or were acting;
3. terms of the transaction;
4. professional advisers;
5. source of funds; and
6. documents giving effect to or evidencing a transaction.

It is important to note that the disclosure requirements under the Bill are retrospective. Therefore, the information required to be disclosed can relate to matters that occurred before the provisions come into force.

It is currently unclear to what extent the information supplied to the Land Registry will be published. The Bill indicates that the regulations will govern the way disclosed information is retained, how it is shared with persons exercising functions of a public nature, and the way the information is published. Naturally, there are concerns regarding how commercially sensitive information will be protected when complying with the disclosure requirements.

It is clear that the circumstances under which the Land Registry can request disclosure have not yet been finalised. There is no doubt that as the Bill progresses further clarification will be provided and we will offer updates accordingly.

Enforcement of the measures

Both failure to comply with the disclosure requirements and providing false or misleading information to the Land Registry may constitute a criminal offence, punishable by fine and/or imprisonment.

Failure to comply with the disclosure requirements will also lead the Land Registry to reject registrations.

The impact of the disclosure requirements

With seismic shifts already occurring to increase the transparency of land ownership and control in England and Wales, Part 11 of the Bill acts as another layer of disclosure. It accompanies the requirements for information that are already present in the register of land ownership by the Land Registry, the persons of significant control (PSC) register at Companies House, and the register of overseas entities at Companies House brought into force by the ECTEA 2022. Consequently, those owning, dealing with, or controlling land in England and Wales are facing increasingly more onerous compliance obligations, which will only be exacerbated by the proposed retrospective effect of the Bill once it becomes law.

If you require guidance on any aspects relating to the information above, please contact the MoFo Real Estate team.

Update: Changes to the required standards of EPC ratings

By: Danielle Hirsch, Partner, London [Nafeesa Deen, London Trainee Solicitor, contributed to the drafting of this article]

The UK government (the “Government”) has released a consultation introducing changes to the application of the Minimum Energy Efficiency Standards (MEES). The Government considers the improvement of Energy Performance Certificate (EPC) ratings to be integral to its goal of achieving net zero by 2050. The Government’s 2020 white paper revealed its intentions to achieve an EPC rating of C for all rented non-domestic buildings by 2027 before rising to B by 2030. Therefore, with tightening obligations, it is vital for landlords of commercial property in England and Wales to evaluate their real estate portfolios and ensure their properties are compliant with the MEES.

From 1 April 2023, it will be unlawful for a landlord to continue to let a commercial property with an EPC rating of F or G (a “Sub-standard Property”). If a landlord possesses a Sub-standard Property, they must either complete the necessary energy improvement works (the “Works”) to increase its EPC rating to at least an E or register a valid exemption on the Private Rented Sector Exemptions Register (the “Exemptions Register”). Some of the available exemptions are:

• The consent exemption applies where the ability to complete the Works is prohibited by third-party restrictions (e.g., refusal of consent from a tenant or planning authority).
• The devaluation exemption applies where a surveyor considers that the Works will reduce the market value of the property by 5% or more.
• The seven-year payback test applies where the cost of the Works exceeds the amount that the landlord would recover from seven years of energy savings. When registering the exemption, landlords will need to submit three quotes from qualified installers and cost calculations.

If a landlord lets a Sub-standard Property (without a valid registered exemption), they could face a financial penalty of up to £150,000.

The landlord is also susceptible to reputational damage, as any breach will be entered into the Exemptions Register which is available to the public.

From 1 April 2023, if a buyer purchases a Sub-standard Property, they can register a temporary six-month exemption so that they can carry out the relevant Works or attempt to register a longer-term exemption which generally lasts for five years. However, it is important to note that, whilst landlords may intend to carry out the Works, their ability to exercise a right of entry depends on how the lease of a tenanted property is drafted. If there is no express right of entry, landlords will require the tenant’s consent. If the tenant refuses to provide such consent, then the landlord may be eligible to register a “consent exemption” (as discussed above).

With standards rising and deadlines looming, the MoFo Real Estate team would be delighted to discuss the implications of the changes to the MEES regulations with you.

Team News

We welcome Max Sternberg to London as an Associate. Max was previously an Associate in Morrison and Foerster’s Tokyo office and global real estate team. His experience will deepen the links between our London real estate practice and that in Asia.

[1] Previously Part 9 under the last iteration of the Bill on 20 October 2022.

Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities and other developments in MoFo’s European Real Estate team. In this edition, we provide an overview of recent case law on appropriation and valuing financial collateral in a commercially reasonable manner, discuss the changes to property disclosure requirements under the Levelling-up and Regeneration Bill and consider important updates in relation to the increased EPC rating required for commercial properties.

As always, we hope you enjoy reading MoFoReal and invite your feedback and suggestions for future issues.

Case law update: important guidance on appropriation and valuing financial collateral

By: David Spencer, Associate, London

The English High Court recently considered the validity of appropriation as an enforcement power and the duty imposed by the financial collateral regulations to ensure that the financial collateral subject to the appropriation is valued in a “commercially reasonable manner”, in its judgment handed down in ABT Auto Investments Ltd v Aapico Investment Pte Ltd [2022] EWHC 2839 (Comm).

The case is useful from a real estate finance perspective as it provides a number of lessons to lenders who may wish to consider the appropriation of shares in a property company as an alternative enforcement route to the more usual remedy of receivership or the statutory and contractual powers of sale.

• The appropriation itself was held to be legally valid on the basis that the relevant clause in the share charge (which granted the chargee the power to appropriate the shares) was sufficient to comply with the requirements of the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCARs).
• In exercising the power of appropriation, the chargee must ensure the valuation of the collateral is undertaken in a “commercially reasonable manner”.
• There are a number of key considerations to be taken into account when interpreting what a “commercially reasonable manner” means under the FCARs, but it is a fact-sensitive and objective test and there is a range of possibly valid and commercially reasonable procedures open to collateral-takers.
• Collateral-takers’ duties do not go beyond the two requirements that the contract contains a proper power for appropriation and that the collateral is valued in a commercially reasonable manner – for instance, there is no need to engage good faith or other equitable duties in conducting a valuation.

For more information about the case and a broader discussion about some of the issues highlighted above, please see our recent client alert.

Levelling-up and Regeneration Bill – changes to property disclosure requirements

By: Danielle Hirsch, Partner, London [Nafeesa Deen, London Trainee Solicitor, contributed to the drafting of this article]

Introduction

Further to the ending of the Committee Stage in the House of Commons on 20 September 2022, we highlight below some of the pertinent provisions of the Levelling-up and Regeneration Bill 2022-23 (the “Bill”) relating to property disclosure requirements that will likely impact those involved in the real estate sector.

Part 11 of the Bill[1] includes new disclosure requirements in England and Wales, which aim to make land ownership and control more transparent and reveal potentially sensitive transactional information about the arrangements affecting interests and rights relating to land. Whilst one of the aims of the requirements is to expose any evasions of the disclosure requirements under the Economic Crime (Transparency and Enforcement) Act 2022 (the “ECTEA 2022”) or sanctions, the new laws are also designed to meet the 2017 housing white paper land transparency commitment by collecting and publishing data on contractual arrangements used by developers to control land (such as rights of pre-emption, options, and conditional contracts) and for wider national and macroeconomic purposes. As such, the requirements are extensive and, under the current draft of the Bill, they appear to relate to all land transactions registered at the Land Registry, and not just to overseas owners of land registered at the Land Registry.

The disclosure requirements

• The proposed legislation would entitle the Land Registry to require disclosure of two categories of information.

• Information about the ownership and control of land:
  The Land Registry would have the power to require information for the purpose of identifying:

  • (1) landowners;

  • (2) those with relevant rights concerning the land; and

  • (3) those who can directly or indirectly influence the persons listed in (1) and (2) above in their exercise of that ownership or right,
    
    in order to determine the nature, extent, and/or duration of any land ownership, rights in the land, or ability to control or influence.

• Transactional information:
  The Land Registry would have the power to require certain transactional information about instruments, contracts, or other arrangements that involve:

  • (1) creating, altering, extinguishing, evidencing, or transferring relevant interests in land; or

  • (2) conferring, amending, assigning, terminating, or otherwise modifying relevant rights concerning land.

Such transactional information will comprise:

1. parties to a transaction;
2. persons on whose behalf or for whose benefit the parties to a transaction are or were acting;
3. terms of the transaction;
4. professional advisers;
5. source of funds; and
6. documents giving effect to or evidencing a transaction.

It is important to note that the disclosure requirements under the Bill are retrospective. Therefore, the information required to be disclosed can relate to matters that occurred before the provisions come into force.

It is currently unclear to what extent the information supplied to the Land Registry will be published. The Bill indicates that the regulations will govern the way disclosed information is retained, how it is shared with persons exercising functions of a public nature, and the way the information is published. Naturally, there are concerns regarding how commercially sensitive information will be protected when complying with the disclosure requirements.

It is clear that the circumstances under which the Land Registry can request disclosure have not yet been finalised. There is no doubt that as the Bill progresses further clarification will be provided and we will offer updates accordingly.

Enforcement of the measures

Both failure to comply with the disclosure requirements and providing false or misleading information to the Land Registry may constitute a criminal offence, punishable by fine and/or imprisonment.

Failure to comply with the disclosure requirements will also lead the Land Registry to reject registrations.

The impact of the disclosure requirements

With seismic shifts already occurring to increase the transparency of land ownership and control in England and Wales, Part 11 of the Bill acts as another layer of disclosure. It accompanies the requirements for information that are already present in the register of land ownership by the Land Registry, the persons of significant control (PSC) register at Companies House, and the register of overseas entities at Companies House brought into force by the ECTEA 2022. Consequently, those owning, dealing with, or controlling land in England and Wales are facing increasingly more onerous compliance obligations, which will only be exacerbated by the proposed retrospective effect of the Bill once it becomes law.

If you require guidance on any aspects relating to the information above, please contact the MoFo Real Estate team.

Update: Changes to the required standards of EPC ratings

By: Danielle Hirsch, Partner, London [Nafeesa Deen, London Trainee Solicitor, contributed to the drafting of this article]

The UK government (the “Government”) has released a consultation introducing changes to the application of the Minimum Energy Efficiency Standards (MEES). The Government considers the improvement of Energy Performance Certificate (EPC) ratings to be integral to its goal of achieving net zero by 2050. The Government’s 2020 white paper revealed its intentions to achieve an EPC rating of C for all rented non-domestic buildings by 2027 before rising to B by 2030. Therefore, with tightening obligations, it is vital for landlords of commercial property in England and Wales to evaluate their real estate portfolios and ensure their properties are compliant with the MEES.

From 1 April 2023, it will be unlawful for a landlord to continue to let a commercial property with an EPC rating of F or G (a “Sub-standard Property”). If a landlord possesses a Sub-standard Property, they must either complete the necessary energy improvement works (the “Works”) to increase its EPC rating to at least an E or register a valid exemption on the Private Rented Sector Exemptions Register (the “Exemptions Register”). Some of the available exemptions are:

• The consent exemption applies where the ability to complete the Works is prohibited by third-party restrictions (e.g., refusal of consent from a tenant or planning authority).
• The devaluation exemption applies where a surveyor considers that the Works will reduce the market value of the property by 5% or more.
• The seven-year payback test applies where the cost of the Works exceeds the amount that the landlord would recover from seven years of energy savings. When registering the exemption, landlords will need to submit three quotes from qualified installers and cost calculations.

If a landlord lets a Sub-standard Property (without a valid registered exemption), they could face a financial penalty of up to £150,000.

The landlord is also susceptible to reputational damage, as any breach will be entered into the Exemptions Register which is available to the public.

From 1 April 2023, if a buyer purchases a Sub-standard Property, they can register a temporary six-month exemption so that they can carry out the relevant Works or attempt to register a longer-term exemption which generally lasts for five years. However, it is important to note that, whilst landlords may intend to carry out the Works, their ability to exercise a right of entry depends on how the lease of a tenanted property is drafted. If there is no express right of entry, landlords will require the tenant’s consent. If the tenant refuses to provide such consent, then the landlord may be eligible to register a “consent exemption” (as discussed above).

With standards rising and deadlines looming, the MoFo Real Estate team would be delighted to discuss the implications of the changes to the MEES regulations with you.

Team News

We welcome Max Sternberg to London as an Associate. Max was previously an Associate in Morrison and Foerster’s Tokyo office and global real estate team. His experience will deepen the links between our London real estate practice and that in Asia.

[1] Previously Part 9 under the last iteration of the Bill on 20 October 2022.

[View source.]