Lawyers to the real estate & construction industry
overriding
interest
Spring 2004
contents
UK Reits - where are
we now?
1
Not for profit organisations
2
Legal Cases
3
Deals - Spring
4
Affordable Housing
4
Welcome to the
Spring edition...
Nicholson Graham & Jones is
taking a team to MIPIM for the
ninth consecutive year. We are
holding a cocktail party on
Wednesday 10 March between
5.00 p.m. and 7.30 p.m. at the
private beach restaurant at the
Gray d'Albion hotel. If you are
attending MIPIM, please feel free
to join us. Our team this year
UK REITS where are we now?
As indicated in the Pre-Budget report,
the Government appears to have
agreed finally that the UK should have
a tax efficient real estate vehicle. In
the Budget on 17 March 2004 the
Treasury will publish a consultation
paper on the desired form of the
vehicle, with a view to introducing it
in April 2005.
property market, as opposed to the
stock market. What may be the
advantages of establishing a UK REIT,
and what form is it likely to take?
form
J
It is likely that the UK REIT will be a
corporate vehicle, perhaps listed
like the French SIIC but unlike the
US REIT, closed ended and
internally managed. Listing will
improve the liquidity, but not all
property portfolios will be large
enough to justify the cost of
converting to a REIT.
J
The UK REIT is likely to be obliged
to focus on property investment
activities, and ancillary
includes specialists from the Real
Estate & Construction, Finance
and Projects sectors.
www.ngj.co.uk
The Government sees the REIT as a
tool to address the supply problems in
the UK housing market, and grow the
private rented sector, as well as a way
of improving access to indirect real
estate investment. Shares in overseas
REITs have typically traded at relatively
small discounts to net asset value,
thereby tracking more closely the
overriding
interest
development. Trading activities
will not be permitted.
J
J
income and gains, and so
effectively be tax transparent,
provided that it distributes a high
proportion of both its income and
gains. In return, like the French
SIIC, when a property company
converts into a REIT, there may be
an entry charge on its existing
gains, or else they would fall
outside the tax net. The French
model imposes a tax charge equal
to half the rate of corporation tax
(16.5%) on existing gains, spread
over four years, and the UK may
well follow suit. The company
may be permitted to utilise
available losses to reduce the entry
charge.
The Government should resist
imposing too heavy a regulatory
regime (e.g. on the number and
title of properties held, and the
level of gearing) or else the REIT
may be rarely used, like the
authorised property unit trust.
It is likely that there will be
restrictions on the size of
shareholdings, perhaps a maximum
holding of 25% by any investor, to
encourage shareholder
diversification, which is a common
feature of REITs established
elsewhere.
J
Tax
J
The UK REIT is likely to follow the
model of the French SIIC. It is
likely to be exempt from tax on
As far as distributions to
shareholders are concerned, these
are likely to be treated as dividends
and it is hoped that no
withholding tax will apply.
J
A UK REIT is likely to be regarded
as a corporate entity for stamp
duty purposes, and for this reason,
the transfer of shares in the REIT
should attract a 0.5% charge to
stamp duty, rather than the higher
rates of SDLT.
J
The UK REIT may become a more
popular vehicle than offshore unit
trusts, especially for UK investors,
especially if the Government is
going to change the UK source
rules for interest, so that it
becomes more attractive to borrow
from a UK or treaty lender.
If you have any queries please contact
Richard Woolich on 020 7360 8270 or
email richard.woolich@ngj.co.uk
Not for profit organisations
At present there is a good deal of
interest in "not for profit
organisations". Here are some FAQs.
deliver public services;
J
they are legally independent from
government;
J
they are not owned or controlled
by external private shareholders all surpluses are re-invested in the
organisation rather than being
available for distribution as
dividends to shareholders; and
J
as well as investors, other
interested "stakeholders" (such as
service recipients) may have a say
in how they are run.
What are they?
Not for profit organisations (or
"NFPs") are also known as "non-share
capital organisations", "public interest
companies", "not-for-dividend
companies" and "social enterprises".
Although there is a resurgent interest
in them, such as in the context of PFI,
a number of them have been available
for many years in the arena of public
and community services, such as
housing associations. NFPs have a
number of characteristics:
What form do they take?
J
2
they are organisations which
Therefore, NFPs are to distinguished
from standard profit-driven UK
companies where risk capital is
inherent. Examples of NFPs are:
Network Rail (a company limited by
guarantee), British Nuclear Fuels (a
limited company controlled by the
Government), The National Air Traffic
Service (a limited company partly
owned by the airlines which use its
services), housing associations and exlocal authority leisure services at
Greenwich and Bristol (Industrial and
Provident Societies).
Also government has proposed a new
corporate vehicle for community and
social enterprises, called a
"Community Interest Company"
("CIC"). These would be regulated in
Spring 2004
Legal cases
Repairs
Where a residential landlord was
under an implied obligation imposed
by Section 11 of the Landlord &
Tenant Act 1985 to maintain an
adequate water supply but the
supply failed due to a defect in a part
of the building not controlled by the
landlord, it was held that no breach
of the implied covenant had
occurred.
Comment: A landlord's liability
extends only to areas in which it has
an estate or interest.
Niazi Services -v- Van Der Loo, CA
Notices
The Court held that the failure by a
residential tenant seeking to
enfranchise under the Leasehold
Reform Act 1967 to refer in his
a similar way to companies, including
in terms of incorporation
requirements, directors' duties and
reporting requirements. It is proposed
that they would have to be acting for
a public interest and there would be a
special CIC regulator, who would
check that the CICs are not for profit
enterprises working for the public
interest. CICs are not yet in place and
will need new legislation.
Why use them?
NFPs are sometimes viewed as a
potentially more politically acceptable
model for the delivery of public
services than typical equity-backed
project vehicles. Where an NFP is
used, there is the advantage that what
enfranchisement notice to the
previous leases as required by the Act
was a mere "excusable inaccuracy".
Comment: This decision is in marked
contrast to the recent harsh decision
of McDonald -v- Fernandez (2003) on
1988 Housing Act notices.
Earl Cadogan -v- Strauss, CA
Forfeiture
A landlord who issued forfeiture
proceedings but subsequently
discontinued those proceedings was
found to have recovered the right to
pursue rent arrears that arose from a
period after proceedings were issued.
Comment: The Court refused to limit
the right of recovery to where
proceedings were dismissed by the
Court, as opposed to discontinued by
the landlord.
are widely considered and understood
to be public services are being shown
to be delivered for their own sake,
rather than as a means of making a
profit.
However, to the extent that any
private enterprise is taking any risk in a
project it will negotiate strongly that it
should be paid for doing so. Actually,
this may be perfectly acceptable to the
procuring authority, provided that
profits are contained and politically
justifiable. The procuring authority
may therefore be thinking of using
NFPs not so much in a sweeping
rejection of the private sector making
profits but as a vehicle which fits in
with its aim of linking profits to good
Mount Cook Land -v- Media Business
Centres, ChD
Improvements
Where a tenant served a notice of
intended improvements under section
3 of the Landlord & Tenant Act 1927
but subsequently sought to withdraw
its notice following receipt of a
counternotice from the landlord to
the effect that it intended to carry
out the works itself and increase the
rent, it was held that the landlord
could not proceed with the works.
Comment: A tenant is not obliged to
accept a landlord's counter proposal
under the 1927 Act with its rental
consequences.
Norfolk Capital Group -v- Cadogan
Estates, ChD
services.
Using NFPs is not the whole answer to
such issues and issues of getting
genuine value for money. Care will
also be needed that services from the
sub-contractors are paid for at an
affordable rate which does not diverge
from the market rate over time.
Ultimately, service delivery is likely to
be the single most important test of
the political success of the project.
There are a number of other issues
affecting NFPs such as financing, tax
transparency and governance
structure. If you would like to know
more and would like a copy of our
brochure on NFPs, please contact us.
3
overriding
interest
Deals
J
We acted for Pearl Assurance Plc
and National Provident Life Limited
in the surrender of two long leases
by the occupational tenant at
Maylands Avenue in Hemel
Hempstead and the subsequent
sale of the reversion together with
other land to Gazeley Properties
Limited in the sum of £22 million.
Property Assistant Liz Moir led the
transaction.
J
We also acted for Leckhampton
Estates Investments, a privately
owned company, on the
acquisition of a portfolio of 154
residential investment properties
from Dutch investment vehicle,
Ibus for the value of £14 million.
Partner Steven Cox led the team,
assisted by Kate Gould.
J
We acted for Roko Leisure (a joint
venture between Sellar Properties
Group, Penta Capital and the Civil
Service Sports Council) in
connection with the latest Roko
health and fitness centre currently
under construction at
Bournemouth with finance
provided by Allied Irish Bank.
Property assistant, Kate Gould led
the transaction along with banking
partner, Richard Hardwick.
Who to contact
For further information contact
Steven Cox, Milton McIntosh, or Susan
Henning.
steven.cox@ngj.co.uk
milton.mcintosh@ngj.co.uk
susan.henning@ngj.co.uk
© Nicholson Graham & Jones 2004
4
J
We acted for HypoVereinsbank,
the debt provider, in the recent
purchase by Delancey Group Plc of
Pimlico's J Sainsbury from Pimlico
Village Developments Ltd. Banking
partner, Andrew Besser and
Property partner, Justin Salkeld led
the transaction.
Affordable Housing Group
The affordable housing sector is
undergoing considerable change, and
facing many new challenges.
Nicholson Graham and Jones has
formed an Affordable Housing Group
to draw together its expertise in real
estate, construction, projects and
finance in this important sector. The
work of the Group will be of interest
to all those involved in the sector
including:
Developers involved in regeneration or
working with housing associations to
unlock the potential of mixed use or
residential sites;
Housing associations looking to merge
or restructure, or to expand their
development programmes;
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
020 7648 9000.
Internationally a member of GlobaLex.
The contents of these notes have been
gathered from various sources. You
should take advice before acting on any
material covered in overriding interest.
Lenders looking to develop innovative
structures secured on affordable
housing stock, or offering
development finance; and
All those involved in social housing PFI
or in the diversification of Housing
associations into non-housing PFI,
social care or education.
Nicholson Graham and Jones has skills
in a wide range of areas from town
and country planning to tax, charities
to corporate, and commercial property
to litigation, all working together to
deliver commercial solutions to the
ever more demanding needs of clients
in this sector. Please contact
Sebastian Charles, or your usual
contact at Nicholson Graham and
Jones for more information.