COMMERCIAL REAL ESTATE AND FINANCE UPDATE FOR
LENDERS
TRAINING SESSION
MAY 2008
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
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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.
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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 >1,000m2
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
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DEC’s

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.
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Questions about EPC’s
Q.
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 EPC’s
to green mortgages in schemes run by energy companies.
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Questions about EPC’s continued
Q.
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.
Q.
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.
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Questions about EPC’s continued
Q.
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.
Q.
What are the penalties for non compliance

Who knows?
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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”.
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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 market’s
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.
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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.
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Code for Leasing Business Premises
4.
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.
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Code for Leasing Business Premises
6.
RECOMMENDATION 6: SERVICE CHARGES
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).
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.co.uk/
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Code for Leasing Business Premises
7.
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.
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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 bank’s 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.
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Background

Two issues lie at the heart of this case:
 whether the Limitation Act 1980 (LA 1980) applies to a lender’s 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.
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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).
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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.
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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.
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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.
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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 lender’s 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).
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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 lender’s 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.
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Companies Act 2006 – Changes Affecting Lenders
Future
 October 2009 – charge registration
 October 2008 – financial assistance abolition
Current – April 2008
 Document execution
 Insolvency expenses
 Filing accounts
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Companies Act 2006 – Changes Affecting Lenders
Past – October 2007
 Litigation
 Share security
 Board minutes
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Endeavours

Best

All reasonable

Reasonable
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Mortgage Fraud – The Warning Signs
 What are the warning signs?
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Valuation Clauses

Who is the Valuer?

What if he cannot act?

Circumstances of provision?

Basis?

Who pays?

Who is to receive the valuation?
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Contact Details
Jonathan Lawrence
Partner Banking Group
T +44 (0)20 7360 8242
jonathan.lawrence@klgates.com
Bonny Hedderly
Senior Associate Real Estate
T +44 (0)20 7360 8192
bonny.hedderly@klgates.com
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