Register of Overseas Entities
As detailed in our last update (available here), the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") received royal assent, with most of the provisions relevant to our clients taking effect from 1 August 2022. The Act requires overseas entities who wish to acquire certain real estate in the UK, to register with Companies House by providing certain information about their beneficial ownership, before they acquire the property. However, the Act also had retrospective effect, such that the Act required overseas entities, which owned registered property before 1 August 2022, to register with Companies House on or before 31 January 2023. However, by 24 April of this year, only 27,500 of the 33,000 estimated overseas entities had successfully registered.
Now that this deadline has passed it means, any overseas entities that have failed to register will be unable to sell, lease or grant a charge over its land until they successfully register (with the Land Registry obligated to place restrictions against the title in the meantime). In addition to this, civil and criminal sanctions apply, such as a daily fine of up to £2,500 can be imposed; as well as prison sentences. Clients are therefore advised to act swiftly to register to avoid any unintended consequences. Further details are available here.
EPC Ratings
From 1 April 2023, changes were introduced to the Minimum Energy Efficiency Standards Regulations. It became unlawful for landlords to continue to let out commercial properties with an EPC rating of F or G. Accordingly, if a landlord wishes to rent a property that does not meet these requirements, they will either need to complete renovations to increase the rating to an E (at least) or they will need to register a valid exemption on the Exemptions Register. Some of the exemptions include:
- the consent exemption, where there are third-party restrictions prohibiting the completion of works;
- the devaluation exemption, where a surveyor believes the market value will decrease by 5% or more as a result of the works; and
- the seven-year test, where it will cost the landlord more than seven years of energy savings to recover the cost of the works.
Penalties have also been introduced for any landlord that continues to let properties failing to meet the requirements. They could face a fine of up to £150,000, and any breaches will be entered onto the Exemptions Register.
There is an expectation that landlords will start divesting themselves of properties, given the potential cost of undertaking their improvements. With suggestions of the UK government’s aim is to increase this rating to a C by 2027, before rising to a B by 2030, divestments in these properties could be a longer-term problem. From a buyer’s perspective though, this could be an opportunity, especially given that a buyer purchasing a property failing to meet the EPC requirements can apply for a six-month exemption (or potentially a longer term exemption of up to five years to complete any works required to upgrade the property). Further details are available here, including the ability to obtain funding to assist with such projects.
Pay Now, Argue Later
The case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 concerned a dispute between a landlord and tenant as to the amount of a service charge payable by the tenant. According to the terms of the lease, the landlord was expected to provide a certificate of the total costs and the sum payable by the tenant; and that in the absence of manifest or mathematical error or fraud, such certificate would be conclusive. The tenant challenged the certificate on the basis that this only showed the landlord’s costs; and not the amount payable by the tenant. The tenant contended that they should not have to pay the full costs incurred by the landlord, especially where there were disagreements on the necessity of works carried out.
The Supreme Court stated that an objective interpretation of the lease (taking into account the operation of other clauses in the contract), was that the certificate was conclusive of the total costs incurred by the landlord, but not of the tenant’s liability. However, they suggested that the tenant should have first paid the sum, but then relied on other dispute resolution clauses within the contract to raise a grievance as to the amount of the charge. This effectively suggests that such service charge clauses operate as a ‘pay now, argue later' provision. According to the Supreme Court, this approach assured the landlord of payment without delay, yet still allows the tenant to dispute the charge.
Fire and Building Safety
On 23 January 2023, the Fire Safety (England) Regulations 2022 (the "Regulations") came into force. The Regulations implement the majority of the recommendations from the Grenfell Tower Inquiry in the aftermath of the Grenfell Tower disaster and introduce a number of changes to the existing law. The Regulations impose more obligations on the ‘responsible person’ (which, would include the building owner, but could also include persons in control of common parts of the building) and apply to all multi-occupied residential buildings in England with common parts.
As such, the impacted buildings can include real estate assets commonly seen in real estate financings, such as student accommodation and mixed-use properties that have a residential element.
The duties vary according to the size of the buildings but, at minimum, will require the provision of information to tenants on fire safety instructions and fire door information on an annual basis. For high-rise buildings over 18m in height or with seven storeys or more, the duties are most stringent and include monthly checks on evacuation routes and keeping in communication with the local Fire & Rescue Service. However, more critically, for residential buildings over 30m in height, the results of a consultation (which closed on 13 March 2023) are pending, seeking views on whether an additional second staircase should be built to provide alternative exit routes in the event of a fire. Both our real estate and lender clients should keep abreast of this point, as there are likely to be substantial additional costs for impacted properties, which may need to be factored into any real estate financings.
LIBOR Discontinuation
After years of discussion in this area, the end is in sight for LIBOR. On 30 June, the remaining few (USD) LIBOR settings will cease or become unrepresentative (with all other settings having already ceased). For new contracts therefore, parties should now be using one of the five successor rates that are available, depending on the currency in use. In the case of sterling, SONIA is now actively used in the market, with the compounded in arrears formulation used for calculating interest in documentation, given the limited use cases permitted for term SONIA.
However, a different course was taken in the US, with borrowers and lenders given more scope to choose between term SOFR and a compounded in arrears formulation. As such, we are now seeing an increased use of term SOFR in our transactions.
The UK's Spring Budget
On 15 March 2023, the chancellor issued the UK’s budget plan, which builds upon the mini-budget that was introduced in September 2022. The introduction of the spring budget is intended to help revitalise the UK economy and support growth across the country. In its latest report the Office for Budget Responsibility confirmed the economic outlook of the UK has improved since its last forecast in November and that despite previous concerns, the UK would avoid falling into a (technical) recession later this year. Whilst a number of new policies were put forward, the changes likely to affect our real estate finance clients were the following:
- it was confirmed that the main rate of corporation tax on taxable profits over £250,000 has increased from 19% to 25%. Profits of less than £50,000 will attract 19% tax and businesses earning profits between £50,000 and £250,000 will be taxed at the main rate; but may be eligible for marginal relief;
- companies will be able to deduct investment in new machinery and technology to lower their taxable profits. There will be a 100% capital allowance on investment in new plant and machinery and a 50% first-year allowance on investment in special rate plant and machinery, with the remaining 50% deductible in subsequent years; and
- new investment zones will also be introduced across 12 sites in the UK. These zones will benefit from tax incentives, including tax breaks, and will each receive £80m in funding across the next five years.
The Collapse of Silicon Valley Bank and Others
News of Silicon Valley Bank’s ("SVB") demise in mid-March sent shockwaves across the finance sector, with many considering implications under their loan documentation; as well as wider implications of the collapse.
For those holding deposits with this institution, thankfully in the US, the Federal Deposit Insurance Corporation (FDIC) stepped in to protect depositors and in the UK, the takeover of the UK subsidiary by HSBC ensured the same. Otherwise depositors would have had to rely on national provisions on this, which equate to $250,000 and £85,000 respectively, in the US and UK.
If SVB were a lender under your loan agreement, thought was being given to whether defaulting lender (and possibly impaired agent) provisions were activated; and whether this had the knock-on effects of potentially downsizing commitments under your loan. Again however, FDIC’s actions in the US and the acquisition by HSBC in the UK meant that the status quo was to be preserved and borrower groups were expected to continue to service their loans.
Since then, there has been other collapses and takeovers in the US and Europe (most notably, that of Credit Suisse), but thankfully regulators have stepped in speedily to avoid too many issues from a documentation stand-point.
Certain of our recent discussions on this topic are available here and here.