COMMERCIAL REAL ESTATE AND FINANCE UPDATE FOR LENDERS

1 / 28

About This Presentation

Title:

COMMERCIAL REAL ESTATE AND FINANCE UPDATE FOR LENDERS

Description:

... immediate enforcement action against a defaulting borrower, it may wish to take ... right of action would then start when a default occurred rather than giving the ... – PowerPoint PPT presentation

Number of Views:34

Avg rating:3.0/5.0

Slides: 29

Provided by: TAW45

more less

Transcript and Presenter's Notes

Title: COMMERCIAL REAL ESTATE AND FINANCE UPDATE FOR LENDERS

1
COMMERCIAL REAL ESTATE AND FINANCE UPDATE FOR
LENDERS

TRAINING SESSION
MAY 2008

2
Commercial Real Estate And Finance Update For
Lenders

Energy Performance Certificates
Code of Practice for Commercial Leases
Property Case Law Update
Companies Act 2006
Endeavours
Mortgage Fraud
Valuation

3
Energy Performance

These regulations require
EPCs (energy performance certificates) and
recommendations for improvement of the energy
performance of the building to be produced when
buildings are constructed, sold or rented out
DECs (display energy certificates) to be
displayed in larger buildings "occupied by public
authorities and by institutions providing public
services to a large number of persons and
therefore frequently visited by those persons",
and the production of advisory reports with
recommendations for improvement of the energy
performance of the building
Air-conditioning systems to be inspected at
regular intervals not exceeding 5 years. This
regulation came into force on January 1st 2008,
so that larger units will require inspection by
January 4th 2009, and smaller units by January
4th 2011.

4
Energy Performance

The phasing of the measures is provided in the
table below

6 April 2008 EPCs required on construction for all dwellings EPCs required for the construction, sale or rent of buildings, other than dwellings, with a floor area over 10,000 m2
1 July 2008 EPCs required for the construction, sale or rent of buildings, other than dwellings, with a floor area over 2,500 m2
1 October 2008 EPCs required on the sale or rent of all remaining dwellings EPCs required on the construction, sale or rent of all remaining buildings, other than dwellings Display certificates required for all public buildings gt1,000m2
4 January 2009 First inspection of all existing air-conditioning systems over 250 kW must have occurred by this date
4 January 2011 First inspection of all remaining air-conditioning systems over 12kW must have occurred by this date
5
DECs

Regulation 16 requires DECs to be displayed by
the "occupier" of a building with a total useful
floor area over 1,000m2, where the occupier is
either a public authority, or an institution
which provides public services to a large number
of persons and is frequently visited by those
persons.
The certificate must be displayed prominently in
a place that it is clearly visible to members of
the public. In addition, Regulation 16 requires
occupiers to have in their possession (but not
display) an advisory report containing
recommendations for the improvement of the energy
performance of the building.
The Government's explanatory memorandum states
the latter category would include, for example,
public museums and swimming pools but would
exclude hotels and retail outlets.

6
Questions about EPCs

Why is this relevant to Lenders?
There is no standard definition of a green
mortgage, but some lenders offer a discounted
interest rate for energy efficient homes or for
loans to make energy efficient improvements. The
government actually announced as far back as
September 2006 that it is considering introducing
measures that would link EPCs to green mortgages
in schemes run by energy companies.

7
Questions about EPCs continued

What does on the market mean? Does the
borrower have to have produced full sales
particulars or can they just tell their
colleagues that they propose selling the
property?
A building is put on the market when it is first
advertised or otherwise communicated to the
public (or a section of the public) as being
available for sale or rent.
Who will pay for an EPC? Will it be the borrower?
If a landlord upgrades a property to ensure it
enjoys a better rating it will seek to recover
its costs from the tenants and the provisions of
the lease, particularly service charge provisions
will require close scrutiny.

8
Questions about EPCs continued

What happens if there is no accredited energy
assessor available to provide an EPC? Can they
still put the property on the market?
The official guidance provides that there is a
defence against a penalty charge notice if they
commissioned an EPC at least 14 days before it
was required and despite all reasonable efforts
they have not received a valid EPC at the
relevant time. They will need to provide
evidence that a proper request was made to an
accredited energy assessor.
What are the penalties for non compliance
Who knows?

9
Commercial Lease Code What Lenders Should Know!

At a time when the commercial property market is
holding its breath to see what the market will do
in the light of the current credit crunch, an
unlikely opportunity for some landlords may be
found in the Code for Leasing Business Premises
new name!
The property market has historically operated
within a narrow range of lease structures and
generally based on what is known as the
institutional lease. Broadly, these lease
arrangements seek to pass on the whole of the
risk in a property to the tenant enabling the
landlord to see the rental return as a pure
income receipt leaving the tenant responsible for
the property repairs and maintenance etc. Banks
are very familiar with the concept of the
institutionally acceptable lease.

10
Commercial Lease Code an opportunity?

Although the length of leases granted to tenants
has reduced significantly from a norm of 25 years
to closer to 10 years often with break clauses,
the content of the leases has remained fairly
constant.
The Government has been looking to introduce
great flexibility into the markets offering in
part through the issuing of the Code which deals
with the manner in which negotiations about the
terms and content of commercial leases are
handled and how landlords and tenants work
together.
Although currently voluntary, the Code (now in
its third edition) does encourage landlords to
offer variations from these institutional terms.

11
Commercial Lease Code an opportunity?

The Code is limited to 10 recommendations (rather
than the 23 contained in the former version), and
is expressed in more authoritative terms. The
Code continues to recommend the practice of
offering alternative lease terms - requiring the
landlord to state whether these are available.
However, a landlord is only required to price out
alternative terms if a tenant requests it to do
so.

12
Code for Leasing Business Premises

RECOMMENDATION 4 RENT REVIEW

Rent reviews should be clear and headline rent
review clauses should not be used. Landlords
should on request offer alternatives to their
proposed option for rent review priced on a
risk-adjusted basis. For example, alternatives
to upward only rent review might include up/down
reviews to market rent with a minimum of the
initial rent, or reference to another measure
such as annual indexation. Where landlords are
unable to offer alternatives, they should give
reasons. Leases should allow both landlords and
tenants to start the rent review process.
13
Code for Leasing Business Premises

RECOMMENDATION 6 SERVICE CHARGES
The RICS has published the Code of Practice for
Service Charges in Commercial Property (which is
based on the former Guide to Good Practice). The
Code can be seen at http//www.servicechargecode.c
o.uk/

Landlords must, during negotiations, provide best
estimates of service charges, insurance payments
and any other outgoings that tenants will incur
under their leases. Landlords must disclose
known irregular events that would have a
significant impact on the amount of future
service charges. Landlords should be aware of the
RICS 2006 Code of Practice on Service Charges in
Commercial Property and seek to observe its
guidance in drafting new leases and on renewals
(even if granted before that Code is effective).
14
Code for Leasing Business Premises

RECOMMENDATION 7 REPAIRS

Tenants repairing obligations should be
appropriate to the length of term and the
condition of the premises. Unless expressly
stated in the heads of terms, tenants should only
be obliged to give the premises back at the end
of their lease in the same condition as they were
in at its grant.
15
Court of Appeal upholds High Court decision
denying bank the right to recover possession of
mortgaged property

Ashe v National Westminster Bank PLC 2008 EWCA
Civ 55
On 5th February 2008, the Court of Appeal held
that a banks right to recover possession of
property by enforcing its security over its
interest in leasehold land was statute-barred.
This case looks at the meaning of adverse
possession in the context of enforcement actions
for the recovery of mortgaged land and,
importantly for lenders, highlights the risk of
enforcement claims becoming time-barred if
lenders delay taking action against a borrower in
default.

16
Background

Two issues lie at the heart of this case
whether the Limitation Act 1980 (LA 1980) applies
to a lenders right to recover possession of a
mortgaged property occupied by the borrowers.
whether the borrowers, who were in exclusive
possession of their mortgaged property for more
than 12 years after the limitation period began
to run, were in adverse possession of it for
the purpose of the LA 1980.

17
General rule on when a lender has a right to
possession

The general rule is that a lender has a right to
possession from the date of the mortgage
(Four-Maids Ltd v Dudley Marshall (Properties)
Ltd 1957 Ch 317).
Where the mortgage states that the lender is not
entitled to possession until the borrower
defaults, time for claiming possession does not
run until there is a default (Wilkinson v Hall
(1837) 3 Bing NC 508).

18
Decision

The Court of Appeal dismissed the appeal by the
bank and upheld the decision that an action to
enforce the legal mortgage in favour of the bank
was statute-barred (sections 15 and 17, LA 1980).
The crucial issue was whether the actions of the
borrowers and bank meant that the borrowers were
not in "adverse possession" of the property as
this was fundamental to the question of whether
the LA 1980 applied.

19
Reason

The judge held that
The borrowers were in "adverse possession" of the
property both at the time the mortgage was given
and after the borrowers made the last payment to
the bank.
The meaning given to "adverse possession" in Pye
was of general application to actions for the
recovery of land, including land that was
mortgaged.
The lender had failed for more than 12 years to
protect its security either by taking steps to
enforce its right to possession or obtaining
payments from the borrowers.

20
Comment

This case has practical implications for banks
and other lending institutions who have taken
security over land and who delay taking
enforcement action against a borrower for
whatever reason and who take insufficient action
to protect their legal interests during a
prolonged period of borrower default.
The point of the LA 1980 is to prevent stale
claims being taken and to end ongoing disputes.
This case should remind secured lenders of the
need to take action to protect their security
interests when it is clear a borrower is in a
position of ongoing default.

21
Lender protection measures - What can you do?

If a lender decides not to take immediate
enforcement action against a defaulting borrower,
it may wish to take the following steps to
protect its security interest over land to avoid
falling foul of the limitation period
Ensure that within the 12-year limitation period,
part-payments of debt are made by the borrower,
however small. This case highlights that the
limitation period will only start to run from the
date on which the last payment of debt is made to
the lender. Any part-payments which the borrower
makes mark the start of a new limitation period
(section 29(5), LA 1980).
Check that the relevant security document
includes a provision which states that the
lenders right to possession is dependent on
payment default or linked to other events of
default in the underlying credit agreement. A
lender's right of action would then start when a
default occurred rather than giving the lender an
immediate right to possession which otherwise
arises when the mortgage is created. A court will
not imply a term into a legal mortgage
restricting the rights of a lender to take
possession of a property (see National
Westminster Bank plc v. Skelton 1993 1 WLR 72).

22
Lender protection measures

Ensure that the borrower acknowledges in a signed
statement that the lender has a continued legal
interest in the land. The right to recover the
land is then treated as starting on the date of
the acknowledgement instead of when the lenders
interest in the land is first created (section
29(2), LA 1980).
Give the borrower express permission to remain in
possession of the property even if he is in
default. This should prevent the borrower
claiming that he is in "adverse possession"
(paragraph 8, Schedule 1, LA 1980). Time does not
run unless the occupier of the land is in
"adverse possession" of the property and means
that the borrower is less likely to be able to
claim the benefit of the LA 1980.