LAWYERS TO THE REAL
ESTATE & CONSTRUCTION
INDUSTRY
www.klng.com
Winter 2005/06
Overriding Interest
Trading places - introduction
to Property Derivatives
Welcome to the Winter Edition.
The Chancellor’s pre-budget report
announced that REITs will at last be
launched in the UK during summer
What would bring Henderson, Hermes,
Land Securities, British Land and
Helical Bar (to name but a few) into one
room to play a game? The answer is the
Property Derivatives Trading Forum.
The Forum is designed to give property
professionals a taste of trading in this
new form of financial instrument.
What is a Property Derivative?
At its most simple, a Property
Derivative is a "bet" on the performance
of the property market between two
parties. One party believes the market
will rise; the other party believes the
market will fall. A Property Derivative
allows investors to increase or decrease
their exposure to the property market
(or a sector of it) without having to buy
or sell properties and bear the
associated costs.
How does a Property Derivative
work?
The most common form of Property
Derivative is a Contract for Difference.
For example:
A property company wants to
increase its exposure to the UK
office market but cannot find
properties to buy or does not want
to spend the transaction costs
involved;
A pension fund has UK offices in its
portfolio but believes there is
downturn on the way and wants to
decrease its exposure to that sector
of the market.
The two parties enter into a three year
contract. They nominally loan each
other £50 million. The property
company charges interest on the loan at
LIBOR plus 0.60%. The pension fund
charges interest on the loan at the
annual percentage rate of increase in
the value of the UK office market (as
measured by the Investment Property
Databank - see further below).
On each anniversary of the date of the
contract the amount of interest owed by
both parties is calculated. If the
property company has earned less
interest than the pension fund then the
property company pays the difference
to the pension fund and vice versa.
Why use Property Derivatives?
Avoid traditional transaction costs
on buying property which can add
up to 8% of the purchase price;
Obtain access to a property market
sector, e.g. the UK retail market,
without buying assets in that sector;
Diversify a property portfolio which
is over-reliant on one type of asset;
2006. Further details, including the
level of conversion charge, are awaited
but the introduction of a UK REIT must
be good for the industry.
The same cannot necessarily be said
about Planning Gain Supplement which
some fear is the return of development
land tax. Consultation ends February
2006 and we shall be examining PGS in
a future issue.
Contents
Property Derivatives
1
Home information packs
2
Prescribed clauses for leases
2
Winter deals
3
Legal cases
4
Who to contact
4
Overriding Interest
Call a turn in the market without
going through the property selling
process.
How is the property market
measured?
The main sources are the indices
published by the Investment Property
Databank which cover the UK, many
EU countries, Canada, Switzerland and
Japan. Within the UK there are annual
and monthly indices for all property,
subdivided into retail, office and
industrial indices.
What are the recent
developments?
In 2005, British Land and another
property company increased
exposure to the property market by
£40 million and Prudential reduced
its exposure by £40 million under a
Contract for Difference. Also,
Deutsche Bank and Eurohypo
arranged a Contract for Difference
between a property company and a
life assurer;
The Property Derivatives Trading
Forum is up and running giving
property companies, insurance
funds and banks an opportunity to
participate in trading Property
Derivatives and to develop pricing
strategies without taking a financial
risk. The Forum met in October
and November and is due to meet
again in February and May 2006.
The Future
Estimates of the future size of the
Property Derivatives market vary.
However, they look likely to form part
of many companies' asset base as they
can rebalance a property portfolio
without major transaction costs.
For further information contact
Jonathan Lawrence tel 020 7360 8242 or
email jlawrence@klng.com.
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WINTER 2005/06
Home information packs (HIPs)
The Government has recently announced that HIPs will be compulsory for
residential sales from 1st June 2007. It is expected that there will be a "dry run"
starting some time this year. The Law Society has expressed its surprise that the
Government has chosen to fix a the date before there has been any proper testing
and evaluation. The CML also have concerns that the start will coincide with a
very busy period in the residential market.
Prescribed clauses for leases
This year there will be a significant
change in the way leases are presented.
The change applies to registrable leases
and so will catch a wide number of
leases that fall into the 7 years+
category. Essentially, the Land Registry
now require fourteen set clauses to be
completed at the beginning of the lease.
Much of this information is already
provided in leases in the form of
“particulars”, but some of it is additional
information. It is vital that the
prescribed clauses are completed
correctly as this is the information that
the Land Registry will use to compile
the registered leasehold title. Further, in
certain cases (although not all) it is the
prescribed clause that will prevail in the
event of inconsistency with the
remainder of the lease, so accuracy is of
paramount importance.
The new regime is voluntary from 9th
January 2006 and from that date the
Land Registry will provide feedback on
the success (or otherwise) of the use of
prescribed clauses as if they were
compiling the register based only on the
information given in the prescribed
clauses. In reality though the Land
Registry will still be looking at the
entire lease. However this regime of
assistance will come to an end with
effect from 19th June 2006 when the
use of prescribed clauses becomes
compulsory. If after this date the
prescribed clauses are not in order, a
futher application or deed of variation
may be necessary.
www.klng.com
Winter
deals
Arlington Property Investors
We acted for clients of Arlington
Property Investors on the sale of
various properties to a total value of
£35.15m. These comprised a retail
portfolio of six properties in
Nottingham, Bristol, Plymouth and
Wolverhampton for £20m, a single
let office building in Crawley for
£4,975,000, two adjacent office
buildings in Maidenhead for
£5,100,000 and two units on a
distribution park in Bristol for
£5,075,000. UK real estate partner
Nicky Myerson led the team
comprising associates/assistants
Chris Major, Ian Johnson and
Eleanor Smith.
Arlington Property Investors
We acted for clients of Arlington
Property Investors on the
acquisition of two properties,
comprising a distribution centre in
Chepstow for £4,350,00 (handled by
associate Chris Major) and a
warehouse/distribution unit in
Redditch for £3,744,00 handled by
real estate partner Redmond Byrne.
Bank of Scotland (Ireland)
We acted for Bank of Scotland
(Ireland) Limited in relation to a
£20.5 million facility to a NI
investor to acquire the Arndale
Shopping Centre, Headingley,
Leeds. The deal entailed a
complex Jersey Unit Trust
structure. UK Real Estate partner
Neil Rainey led the team.
Loftus Family Property
We acted for Loftus Family
Property in the letting of their
47,000 sq ft office building at 22
Baker Street, London W1 to Fujitsu
Services Limited. Our team was led
by head of UK real estate, Piers
Coleman, with construction partner
Kevin Greene.
WINTER 2005/06
3
Overriding Interest
Legal cases
Rent Review
Forfeiture
Negligence
A rent review clause contained a notice
deeming provision that fixed the rent on
the expiration of a notice served under it
but it also contained a proviso that
permitted the parties at any time after
the review date to appoint a third party
to determine the rent. It was held that
the proviso overrode the deeming
provision.
Where a tenant failed to remove rubbish
that it had covenanted to remove from
demised premises and the lease was
subsequently forfeited for other reasons,
the landlord's right to recover from the
tenant the cost of removing the rubbish
survived the forfeiture.
In assessing a landlord's entitlement to
damages for its solicitor's failure to serve
the correct 1954 Act notice on a tenant,
the Court said that, though the notice, if
served, would probably have been of no
effect, its service might have assisted
the landlord in its negotiations with the
tenant.
Comment: The requisite clear contraindications for time to be of the essence
were missing.
Comment: The cost of removal was
alternatively claimable as damages.
Vaughn -v- Jones, ChD
Talisman Property Co -v- Norton Rose,
ChD
Notices
Wilderbrook -v- Oluwu, CA
Business Tenancies
The Court of Appeal confirmed that,
where a lease required a business tenant
at the end of the term to remove all its
fixtures, the landlord could not rely
upon the need for the removal of those
fixtures to establish its redevelopment
intentions under s.30(1)(f) of the 1954
Act.
Comment: The first instance decision
was reported in the Summer 2005
edition of OI.
Comment: The landlord's loss of chance
was assessed at 30%.
It was held that the fact that a
residential property owned by an
individual was rented out and visited by
that individual regularly for rent
collection purposes did not make the
property a "place of business" where
documents could be served by third
parties.
Comment: The property owner's
limited right of entry under the lease
was a relevant consideration.
Rectification
Where negotiations regarding the grant
of an underlease had proceeded on the
basis that it would contain rent review
provisions that mirrored those in the
headlease but the final document
contained no such provisions, it was held
that the document should be rectified to
include a review clause.
Comment: There was sufficient
evidence of a mutual mistake.
O'Hara -v- McDougal, CA
Hussain -v- Bahadir, ChD
Wessex Reserve Forces & Cadets -vWhite, CA
Who to Contact
For further information contact
Steven Cox
scox@klng.com
T: +44 (0)20 7360 8213
Milton McIntosh
mmcintosh@klng.com
T: +44 (0)20 7360 8259
Susan Henning
shenning@klng.com
T: +44 (0)20 7360 8236
Kirkpatrick & Lockhart
Nicholson Graham LLP
110 Cannon Street
London EC4N 6AR
T: +44 (0)20 7648 9000
F: +44 (0)20 7648 9001
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WINTER 2005/06
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