Overriding
Interest
Price Apportionment
“Are the fixtures and fittings REALLY worth that?!!”
Highlighting developments and
issues in the real estate industry
We have recently seen a number of transactions where the apportioning of the consideration
has become a contentious topic. We have seen transactions where the tenant, when
surrendering its existing lease and taking a grant of a new lease, has been anxious to ensure
that the consideration is allocated in respect of the surrender rather than as an inducement to
Summer 2010
In this issue:
Price Apportionment........................ 1
Events at K&L Gates........................ 2
Open Sesame................................. 3
Update on the AGA SagaGood Harvest................................. 4
Deals............................................. 5
Cases............................................ 6
take the new lease. Such an allocation can be advantageous for the tenant from a tax point
of view as the inducement payment would normally be treated as taxable income, whereas
an allocation made to the surrender could be treated as a capital payment with a different tax
result. On each occasion, the issue involved the landlord client conceding the point at Heads
of Terms stage with a view to getting the deal done.
Parties may be tempted to overstate the value of the chattels being sold with the property
and understate by a corresponding amount the price for the property in order to save on the
stamp duty.
Similarly, in litigation where the issues are multifaceted and the settlement involves a payment
that reflects different elements of the dispute that are subject to differing tax treatment, there is
the temptation to skew the settlement consideration to minimise the tax liability.
However, parties are under an obligation to arrive at an accurate apportionment of the
consideration rather than one that is advantageous for tax purposes. If the apportionment
is manipulated solely to produce a better tax result, then the implications could be very
serious, both for the advisors and the client. The Court of Appeal confirmed in Saunders v
Edwards (1987) that, where the consideration was deliberately misallocated (in that case
so as to produce a stamp duty saving), then the Court would not assist in the enforcement
of the contract as it had an illegal purpose (i.e, a fraud on the exchequer); the Court could,
for example, refuse an otherwise justified claim for specific performance of the contract. In
addition, the Court made it clear that they considered that any professional advisor involved in
assisting such actions will be guilty of professional misconduct. Worse still, the parties may be
committing the criminal offence of cheating the Revenue.
Parties to property transactions and to dispute settlements should only agree (and their advisors
should advise that they only agree) an apportionment of the consideration that is bona fide
K&L Gates LLP
110 Cannon Street
London EC4N 6AR
www.klgates.com
T: +44 (0)20 7648 9000
F: +44 (0)20 7648 9001
and reasonable given the subject matter. You should avoid being involved in deals and
settlements which do not satisfy this requirement as the consequences could be severe both for
the transaction and the personnel involved.
If you have any queries relating to the above, please contact Paul Beausang, who heads our
tax team in London, on +44 020 7360 8100 or paul.beausang@klgates.com
Events at K&L Gates
Brazilian Chamber
of Commerce
K&L Gates was pleased to host a breakfast
seminar in conjunction with the Brazilian
Chamber of Commerce in Great Britain
on Wednesday 30 June 2010. The guest
speaker at the breakfast seminar was Mr.
Welber Barral, Foreign Trade Secretary from
2
The attendees at the seminar included
These were the second and third events
representatives from the Brazilian Embassy,
K&L Gates has held in conjunction with the
Espirito Santo Financial Group S.A., the
Brazilian Chamber of Commerce and the
Royal Bank of Scotland, Grant Thornton UK,
Brazilian Embassy.
King’s College Brazilian Institute, the UK
Foreign and Commonwealth Office, and a
number of high profile Brazilian and
UK law firms.
the Brazilian Ministry of Development for
A further event hosted by real estate
Industry and Foreign Trade. Minister Barral
lawyers Neil Logan Green, Chris Major
has been hailed as an extremely successful
and Max Bartram on 21 July 2010 took
minister and key to the economic growth
the form of a lunch with a number of key
that Brazil has achieved over the last five
business individuals from leading Brazilian
years. He is also one of the leading
companies and political bodies. The theme
scholars on Latin American trade over the
of the lunch was the 2012 Olympics, with a
last 20 years having published 23 books on
talk given by the director of London 2012,
the subject.
Charles Wijeratna.
Overriding Interest
Real Estate Breakfast Seminars
in September
We will be hosting our annual real
estate breakfast seminars on 14 and 21
September. Further details will be posted on
our website, www.klgates.com.
Open Sesame
Councils often impose restrictions on the
restrictions fall away and an open A1
In light of these cases, owners of retail parks
type of goods that can be sold from retail
permission results. One of the cases goes
might like to consider
parks located away from town centres,
even further in finding that a planning
typically in relation to the selling of food or
obligation that had restricted what goods
products such as fashion and sports goods.
could be sold from a retail park no longer
The purpose of such restrictions is to protect
had effect in relation to a unit as a new
the vitality and viability of town centres
permission for alterations did not incorporate
from the impact of out of town retail parks.
the old planning obligation.
An open A1 (retail) permission is attractive
to a retail park owner as it can make
the property significantly more valuable
and easily marketable than one subject
to restrictions.
Councils are up in arms as they had
regarded many of these applications as
being merely for works not affecting the
• reviewing the planning history of their
park to see if there are any permissions
for amalgamations or sub-division that
did not include earlier use restrictions;
• considering whether any old planning
obligations still bind the units that are
the subject of those permissions; and
• applying for a lawful development
certificate for open A1 use.
operational use of the units and so did not
repeat the use restrictions in the permissions.
However, do not be surprised if this issue is
There have been two recent court cases that
We have some sympathy with the Councils,
considered again by the courts in the near
may be useful to retail park owners and their
as planning permission is not required for
future as it could cause significant problems
tenants. In both cases the judges concluded
sub-dividing or amalgamating units and
for Councils.
that when an application is submitted to
often small external works will have a
amalgamate or sub-divide a retail unit and
stand-alone permission that does not
the Council fails to re-impose use restrictions
affect the ‘operational’ permission that
in the resulting permission, then prior use
controls the use.
Summer 2010
3
Update on the AGA SagaGood Harvest
Summary
new guarantee, entered into voluntarily in
respect of a new tenant, and given willingly
The landmark decision of the High Court in
Good Harvest Partnership LLP -v- Centaur
Services Limited (Good Harvest) on 23
February 2010, was due to go before the
Court of Appeal on the 29 June. However,
contrary to market expectation, the case has
been settled at the last moment, and this
means that we will all have to live with the
first instance decision.
4
by the outgoing tenant’s surety, would
also be void. This decision, and the obiter
comments made by the Judge, caused much
commentary in the market and have been
widely reported on. It was not therefore
unexpected, given the repercussions of
the decision, that the landlord appealed.
What is surprising is that the case has been
settled at the last moment, and no doubt
At first instance it was held that any
many landlords and their lawyers will be
attempt by a landlord to insist that an
disappointed that we now have to live with
existing guarantor of an outgoing tenant
the decision, at first instance, including
enter into an AGA (Authorised Guarantee
the obiter comments. Please log on to our
Agreement) to guarantee the new tenant’s
website for a more detailed analysis of the
obligations, under a post 1995 lease, will
facts of the Good Harvest Case, and what
be void. Newey J also stated that even a
they mean in practice.
Overriding Interest
Deals
CB Richard Ellis Realty Trust
(CBRE RT)
Melanie Curtis, a London office partner
in the real estate team has recently closed
a multi jurisdictional deal for CBRE RT,
involving lawyers across our global
platform. CBRE RT teamed up with the
Goodman Group to establish two logistics
co-investment vehicles which are set to target
the UK and Continental Europe.
CBRE RT is a public, non-listed real estate
investment trust, introduced by Jeffrey
Weitzman, a partner in our New York
office. It invests primarily in office, retail,
industrial, and multifamily residential
properties in major metropolitan areas in
the United States, and may invest up to 30
percent of its assets outside of the United
States. “The formation of these co-investment
ventures marks an important milestone in
the broader objectives of our company”
It is expected that the UK vehicle will invest
said Philip Kianka, Executive Vice President
up to £400m and the Central European
and COO. “The venture will allow CBRE RT
vehicle will invest up to €400m in pre-let
to further diversify our investment portfolio
logistics development schemes over an initial
consistent with our investment strategy of
term of three years, with 80 percent of the
targeting up to 30 percent of our assets
equity provided by CBRE RT. Melanie Curtis
outside the U.S.”
coordinated and acted on the acquisition
of two UK seed assets, with the corporate
Nationwide
element being led by Howard Kleiman,
Jonathan Lawrence and Duncan Batty, a
a partner in the corporate team. The
partner and an associate respectively in
transaction also involved the acquisition of
the banking/real estate finance team are
three assets in Germany, on which Felix
advising Nationwide in respect of the
Greuner and Georg Foerstner, partners in
refinancing of a €50m facility secured
our Berlin office, advised.
against German real estate assets. Georg
Foerstner of our real estate team in Berlin
Guernsey Real Estate
Companies
Jonathan Lawrence and Gareth Lawson,
a partner and an associate respectively in
the banking/real estate finance team are
advising a group of Guernsey real estate
companies in respect of the refinancing
of €62m of debt with an existing lender.
Georg Foerstner of our real estate team in
Berlin is advising in respect of the German
real estate aspects.
Windsor Life Assurance
Company Limited/Aberdeen
Property Investors
Lawyers in the London office have advised
Aberdeen Property Investors in the
acquisition of a retail park in Bournemouth
in the region of £17m. Tenants at the
retail park include JJB Sports, TK Maxx,
and Sportsworld. Real estate partner
Chris Major led the deal, assisted by
Paul Alger and Eleanor Smith. Planning
advice was provided by head of planning,
Sebastian Charles.
is advising in respect of the German real
estate aspects.
Summer 2010
5
Cases
Break clauses
Agreement for lease
Professional negligence
A lease permitted the tenant to end the
An agreement for lease provided for a
A firm of surveyors was instructed by
term on giving the landlord six months’
landlord to construct a retail unit to be
investors to value a number of hotels. The
prior notice in writing. The tenant merged
occupied by a tenant, for the tenant to be
hotels were leased to hotel operators and
with a group of companies, asked that all
granted access for fitting out works and then
the leases contained rent adjustment clauses
future rent demands be sent to the parent
for the landlord to grant the tenant a lease
under which higher rents became payable
company and proposed to change its name
of the unit. The agreement further provided
at certain turnover levels after adjustments
to that of the parent company but never
for the landlord to make payments to the
for shortfalls. Given the structure of the rent
made that change. The tenant then gave
tenant in three instalments at specific
clauses, it was clear that the rents might
notice to exercise the break option which
points and stated that, if either party
not increase for some years. The surveyors,
was written on the notepaper of the parent
failed to perform any of provision of the
however, ignored the shortfall provisions
company and expressed to be for and on
agreement, then the other party could
in forecasting that the hotels were likely to
behalf of the parent company.
terminate on notice to the defaulting party.
generate surplus rents and they applied too
The landlord defaulted on the second
high a yield in arriving at capital values
payment instalment and the tenant served
for the hotels. The investors invested in the
notice to terminate.
hotels but suffered losses.
served by the parent company as agent for
It was held, however, that, as a matter of
It was found that that the surveyors’ error
the tenant.
construction, the agreement could only be
with regards the shortfall was of no
terminated for an act that amounted to a
consequence as the investors had not relied
repudiatory breach, that time was not of
on that part of their report and that, in any
the essence in respect of the instalment
event, the surveyors’ valuations had been
payments, and that the failure by the
within the usual 10 percent bracket so
landlord to pay an instalment did not go
liability in negligence was not made out.
It was held that the break notice was invalid
as the parent company was not the tenant
and the notice was not expressed to be
Comment: It is vital that any break notice
be given by the correct party as break
provisions require strict compliance to
take effect.
6
Hexstone Holdings - v -
to the root of the contract. The tenant was
AHC Westlink, ChD
therefore not entitled to terminate.
Overriding Interest
Comment: The court also said that, as the
investment market in hotels was immature
Comment: The court rejected as making no
and as there were a limited number of
business sense the tenant’s suggestion that
comparables, the appropriate margin of
any minor breach of the agreement could
error might well have been in excess of
permit termination.
10 percent.
Dominion Corporate Trustees - v -
K/S Lincoln - v - CB Richard Ellis Hotels
Debenhams Properties, ChD
(No. 2), TCC
Agent’s commission
Comment: It was said that the provisions of
Service charges
the option were clear and unambiguous and
An estate agent had earned a reduced
commission on an initial sale of a property
but agreed to waive that commission in
return for being given the opportunity to earn
commission on an onward sale to a further
purchaser. However, the property was sold
to a further purchaser introduced by another
agent, that purchaser having had some years
earlier tried to purchase the property.
had to be strictly complied with.
Under long leases of a residential block to
which an estate management company was
Hotgroup - v - Royal Bank of Scotland, ChD
Company Voluntary
Arrangement (“CVA”)
A High Court Judge has ruled against a
Company Voluntary Arrangement entered
into by the owner of fashion chains Miss
also party, the lessees covenanted to pay to
the estate management company a service
charge in respect of its management of the
block. Subsequent to the grant of the leases,
the estate management company entered
into an estate management deed with a third
party service provider for the provision of
various services in respect of the block for
It was held that the original commission
Sixty and Energie. Those in favour of CVAs
arrangement had been varied and that the
regard them as a very good alternative to
estate agent had not been the effective
administration, but they also have opposition
cause of the subsequent sale and so was not
from those who believe that landlords can
entitled to any commission.
be unfairly targeted. In this particular case,
It was held as a preliminary issue that the
the Court agreed with the latter view and
estate management deed was a qualifying
held that the CVA was unfairly prejudicial
long term agreement for the purposes
provide the names of potential purchasers
to the landlord. The Court went as far as
of section 20 of the Landlord and Tenant
and nothing more.
to say that there had been a “prima facie
Act 1985.
Comment: The Court said that it was not
sufficient for the estate agent simply to
a minimum period of 25 years. The lessees
were not consulted before the deed was
entered into.
case of misconduct” after they found that
Glentree Estates - v - Favermead, ChD
Break clauses
A lease contained an option to break that
enabled the tenant to terminate on the prior
service of notice on both the landlord and a
property management company. The tenant
sought to exercise the option and served
notice on the landlord but not on the property
management company.
It was held that the failure to serve the
administrators unfairly sided with the retailer
Comment: The requirements set out in the
against the landlord.
Service Charges (Consultation Requirements)
(England) Regulations 2003 were not
Comment: The Court redressed the balance
complied with and so it may well be found
between landlords and tenants on the
at the final hearing that dispensation from
grounds that the CVA unfairly prejudiced
the LVT is required in order for the estate
the landlord. Commentators believe that
management company to recover from
this case could signal the end to so called
the lessees.
“guarantee stripping”.
Paddington Basin Developments - v - West
Mourant & Co Trustees Limited and others -v-
End Quay Estate Management, ChD
Sixty UK Limited, ChD
management company meant that the option
to break had not been properly exercised.
Summer 2010
7
For further information contact:
Steven Cox steven.cox@klgates.com Milton McIntosh milton.mcintosh@klgates.com T: +44 (0)20 7360 8259
Bonny Hedderly bonny.hedderly@klgates.com T: +44 (0)20 7360 8192
Anchorage
Los Angeles
San Diego
Austin
Miami
Beijing
Berlin
Moscow
San Francisco
Boston
Newark
Seattle
T: +44 (0)20 7360 8213
Charlotte
New York
Shanghai
Chicago
Dallas
Orange County
Singapore
Dubai
Palo Alto
Fort Worth
Paris
Spokane/Coeur d’Alene
Frankfurt
Pittsburgh
Taipei
Tokyo
Harrisburg
Portland
Raleigh
Hong Kong
London
Research Triangle Park
Warsaw Washington, D.C.
K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle
East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth
and middle market companies, entrepreneurs, capital market participants and public sector entities. For more
information, visit www.klgates.com.
K&L Gates comprises multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices
throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates
LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and
maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates,
Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp.k.) maintaining an office in Warsaw; and a Delaware limited
liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices
are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to
any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.