Real Estate Finance Update for Real Estate Lawyers
2 March 2009
Jonathan Lawrence
Lending to commercial property
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Q4 2008: £2.2bn
Lowest since Q2 2000
Less than a third of Q3 2008
Peak was Q3 2007: £10.9bn
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Mezzanine debt
 Debt finance that ranks in repayment priority behind
senior debt but ahead of trade creditors or equity;
commonly convertible into equity of/shares in the
borrower
 May have longer repayment period
 Higher interest rate
 Shares security with senior debt subject to an
intercreditor agreement
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Mercury Tax Group case [2008] EWHC 2721 (Admin)
 Client asked to sign incomplete document drafts
 Signature pages from drafts detached and stapled to
final version
 Drafts differed from final version by filling in blanks for
figures and changing key terms
 Document to be signed exists as a discrete physical
entity at the moment of signing
 Party signing an actual existing authoritative version
of the contract gives some, albeit not total, protection
against fraud or mistake
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Mercury Tax Group case [2008] EWHC 2721 (Admin)
(cont)
 Section 1(3) Law of Property (Miscellaneous
Provisions) Act 1989: execution of deeds
 Signature and attestation must form part of the
same physical document
 No evidence of general practice otherwise
 One solution: counterparts wording
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Innovate Logistics Limited (in admin) v Sunberry
Properties Limited [2008] EWCA Civ 1261
 Innovate Logistics Ltd (in administration) ('IL') occupied business
premises under a lease granted by Sunberry Properties Limited
('SPL')
 IL went into administration and the administrators entered into an
agreement with Yearsley Holmewood Limited ('YHL') for the sale of
IL's business as a going concern
 The lease was excluded from the sale. However, in breach of the
lease, the sale agreement granted YHL a six-month licence to
occupy the property
 SPL was granted permission to commence proceedings against IL,
alleging that the licence was in breach of the lease. IL appealed
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Innovate Logistics Limited (in admin) v Sunberry
Properties Limited [2008] EWCA Civ 1261
(cont)
 A main purpose of the administration was continuation of the
collection of book debts for the benefit of IL's creditors and,
therefore, it was essential that YHL occupy the property and
perform the contracts
 The purpose of the administration would be impeded if SPL was to
bring proceedings for termination of the licence. YHL would not be
able to perform the contracts and the customers would set off their
resulting losses from the debts they owed to IL. SPL's only loss if
permission were refused would be the difference between interest
on the rent paid quarterly in advance as per the lease and interest
on the rent paid monthly in arrears as per the licence. This
difference was likely to be significantly less than the loss likely to be
suffered by IL's creditors as a whole if the permission were granted
and, consequently, IL's book debts not collected
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Bell v Long and others [2008] EWHC 1273 (Ch)
 A receiver appointed by a mortgagee to sell mortgaged
property in order to recover a mortgage debt is effectively in
the same position as the mortgagee and owes a duty in
equity to all those interested in the equity of redemption to
obtain a proper price for the property
 A receiver is not a trustee of his power of sale for the
mortgagor and accordingly a receiver can chose the time of
sale even if that turns out to be disadvantageous to the
debtor who could have recovered more had the property
been sold later. The authorities draw no distinction for these
purposes between a Law of Property Act receiver and an
administrative receiver
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Bell v Long and others [2008] EWHC 1273 (Ch) (cont)
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Mortgagee has an unfettered discretion to sell a property when he likes to
achieve the repayment of the debt which he is owed. Mortgagee's decision is
not constrained by whether the exercise or non-exercise of the power will
occasion loss or damage to the mortgagor
It does not matter that the time may be unpropitious and that by waiting a
higher price could be obtained; a mortgagee is not bound to postpone in the
hope of obtaining a better price
The claimant could not demonstrate that no competent valuer standing in
Weatheralls' shoes at the time with the information which it had could
reasonably have given the advice they did
The strategy of a portfolio sale was acceptable in the circumstances as it
produced a guaranteed disposal of the properties and a finite liability for costs
and future interest. The receivers were not bound to wait for an indefinite
period in the hope of obtaining a higher return when they had a competitive bid
for all the properties in excess of any individual offers
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Land Registry restriction from 10 Nov 2008
"no disposition of the registered estate by the
proprietor of the registered estate or by the
proprietor of any registered charge is to be
registered without a written consent signed by the
proprietor for the time being of the charge dated [
] in favour of [
] referred to in the
charges register [or their conveyancer]."
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Land Registry restriction from 10 Nov 2008 (cont)
 2003 Rules: Restriction finished with phrase “or, if
appropriate, signed on such proprietor’s behalf by
[its secretary or conveyancer]”.
 Release can still be signed by authorised signatory
but will need certified copy power of attorney
 Banks’ LR facility letters still apply
 Purpose: Limit LR time investigating signatory
authority
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Unoccupied non-domestic property rates
 Is the Lender liable to pay the rates if it appoints a
receiver of the property?
 What if the Borrower subsequently goes into
liquidation?
 What if the Lender puts the Borrower into
administration instead of appointing a receiver?
 What if the Lender appoints a receiver and the
Borrower subsequently goes into liquidation?
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Unoccupied non-domestic property rates (cont)
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What if the Property is subsequently transferred
into an SPV controlled/owned by the Lender?
Practical solution: any receiver previously
appointed to cease to act for the Lender if the
Borrower goes into liquidation
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Primary and Special Servicing
 Manage commercial real estate loans at all risk levels as well
as direct property investment. Commercial property and loan
specialists, managing assets in multiple jurisdictions
 Primary: Matters running smoothly
 Special: Difficulties encountered
 Manage debt from multiple issuers. Understanding of
commercial real estate
 Proactively address and resolve issues, maximising the
performance of transactions
 Protect the interests of their clients, wherever the client is
invested in the transaction
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Primary and Special Servicing (cont)
 Special servicing of defaulted loans will be a growth
area for legal advice. It is anticipated that there will
be numerous troubled assets - both direct real
estate and loans involving UK and continental
European property on the horizon in 2009
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Celesq Webinars
 April: Private Equity—The Story in 2009 for NonDebt Sources of Real Estate Finance
 May: Cross-Border Bankruptcy and Security
Enforcement
 June: Attracting and Using Middle Eastern Money—
Investing in Real Estate in a Shariah Compliant
Way
 October: Property Derivatives
 November: Creative Approaches to Seller Financing
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Finance Breakfasts – Challenging Times theme
 6 May: Evening Q&A event follow-up to December
book launch: speakers include Trevor Williams,
Chief Economist, Lloyds TSB Corporate Markets
 13 May: Reviewing security and guarantees: How
can they be challenged? What are the pitfalls?
What preparations should I be making?
 20 May: How do I deal with my borrower / appoint a
receiver? Will amendments / waivers harm my
position?
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