Overriding Interest

LAWYERS TO THE REAL ESTATE & CONSTRUCTION INDUSTRY

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Winter 2005/06 Overriding Interest

Trading places - introduction Welcome to the Winter Edition.

The Chancellor’s pre-budget report to Property Derivatives announced that REITs will at last be launched in the UK during summer What would bring Henderson, Hermes, portfolio but believes there is 2006. Further details, including the Land Securities, British Land and downturn on the way and wants to level of conversion charge, are awaited Helical Bar (to name but a few) into one decrease its exposure to that sector but the introduction of a UK REIT must room to play a game? The answer is the of the market. be good for the industry. Property Derivatives Trading Forum. The Forum is designed to give property The two parties enter into a three year The same cannot necessarily be said professionals a taste of trading in this contract. They nominally loan each about Planning Gain Supplement which new form of financial instrument. other £50 million. The property some fear is the return of development company charges interest on the loan at land tax. Consultation ends February What is a Property Derivative? LIBOR plus 0.60%. The pension fund 2006 and we shall be examining PGS in At its most simple, a Property charges interest on the loan at the a future issue. Derivative is a "bet" on the performance annual percentage rate of increase in of the property market between two the value of the UK office market (as parties. One party believes the market measured by the Investment Property will rise; the other party believes the Databank - see further below). Contents market will fall. A Property Derivative On each anniversary of the date of the allows investors to increase or decrease contract the amount of interest owed by Property Derivatives 1 their exposure to the property market both parties is calculated. If the (or a sector of it) without having to buy property company has earned less Home information packs 2 or sell properties and bear the interest than the pension fund then the Prescribed clauses for leases 2 associated costs. property company pays the difference to the pension fund and vice versa. Winter deals 3 How does a Property Derivative Legal cases 4 work? Why use Property Derivatives? The most common form of Property Avoid traditional transaction costs Who to contact 4 Derivative is a Contract for Difference. on buying property which can add For example: up to 8% of the purchase price; A property company wants to increase its exposure to the UK Obtain access to a property market office market but cannot find sector, e.g. the UK retail market, properties to buy or does not want without buying assets in that sector; to spend the transaction costs involved; Diversify a property portfolio which is over-reliant on one type of asset; A pension fund has UK offices in its 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 Home information packs (HIPs) property company increased exposure to the property market by The Government has recently announced that HIPs will be compulsory for £40 million and Prudential reduced residential sales from 1st June 2007. It is expected that there will be a "dry run" its exposure by £40 million under a starting some time this year. The Law Society has expressed its surprise that the Contract for Difference. Also, Government has chosen to fix a the date before there has been any proper testing Deutsche Bank and Eurohypo and evaluation. The CML also have concerns that the start will coincide with a arranged a Contract for Difference very busy period in the residential market. between a property company and a life assurer; Prescribed clauses for leases The Property Derivatives Trading Forum is up and running giving This year there will be a significant paramount importance. property companies, insurance change in the way leases are presented. funds and banks an opportunity to The change applies to registrable leases The new regime is voluntary from 9th participate in trading Property and so will catch a wide number of January 2006 and from that date the Derivatives and to develop pricing leases that fall into the 7 years+ Land Registry will provide feedback on strategies without taking a financial category. Essentially, the Land Registry the success (or otherwise) of the use of risk. The Forum met in October now require fourteen set clauses to be prescribed clauses as if they were and November and is due to meet completed at the beginning of the lease. compiling the register based only on the again in February and May 2006. Much of this information is already information given in the prescribed provided in leases in the form of clauses. In reality though the Land The Future “particulars”, but some of it is additional Registry will still be looking at the Estimates of the future size of the information. It is vital that the entire lease. However this regime of Property Derivatives market vary. prescribed clauses are completed assistance will come to an end with However, they look likely to form part correctly as this is the information that effect from 19th June 2006 when the of many companies' asset base as they the Land Registry will use to compile use of prescribed clauses becomes can rebalance a property portfolio the registered leasehold title. Further, in compulsory. If after this date the without major transaction costs. certain cases (although not all) it is the prescribed clauses are not in order, a For further information contact prescribed clause that will prevail in the futher application or deed of variation Jonathan Lawrence tel 020 7360 8242 or event of inconsistency with the may be necessary. email [email protected]. remainder of the lease, so accuracy is of

2 WINTER 2005/06 www.klng.com

Winter deals

Arlington Property Investors Arlington Property Investors Bank of Scotland (Ireland) We acted for clients of Arlington We acted for clients of Arlington We acted for Bank of Scotland Property Investors on the sale of Property Investors on the (Ireland) Limited in relation to a various properties to a total value of acquisition of two properties, £20.5 million facility to a NI £35.15m. These comprised a retail comprising a distribution centre in investor to acquire the Arndale portfolio of six properties in Chepstow for £4,350,00 (handled by Shopping Centre, Headingley, Nottingham, Bristol, Plymouth and associate Chris Major) and a Leeds. The deal entailed a Wolverhampton for £20m, a single warehouse/distribution unit in complex Jersey Unit Trust let office building in Crawley for Redditch for £3,744,00 handled by structure. UK Real Estate partner £4,975,000, two adjacent office real estate partner Redmond Byrne. Neil Rainey led the team. 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.

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 Where a tenant failed to remove rubbish In assessing a landlord's entitlement to deeming provision that fixed the rent on that it had covenanted to remove from damages for its solicitor's failure to serve the expiration of a notice served under it demised premises and the lease was the correct 1954 Act notice on a tenant, but it also contained a proviso that subsequently forfeited for other reasons, the Court said that, though the notice, if permitted the parties at any time after the landlord's right to recover from the served, would probably have been of no the review date to appoint a third party tenant the cost of removing the rubbish effect, its service might have assisted to determine the rent. It was held that survived the forfeiture. the landlord in its negotiations with the the proviso overrode the deeming tenant. provision. Comment: The cost of removal was alternatively claimable as damages. Comment: The landlord's loss of chance Comment: The requisite clear contra- was assessed at 30%. indications for time to be of the essence Vaughn -v- Jones, ChD were missing. Talisman Property Co -v- Norton Rose, Notices ChD Wilderbrook -v- Oluwu, CA It was held that the fact that a residential property owned by an Rectification Business Tenancies individual was rented out and visited by Where negotiations regarding the grant The Court of Appeal confirmed that, that individual regularly for rent of an underlease had proceeded on the where a lease required a business tenant collection purposes did not make the basis that it would contain rent review at the end of the term to remove all its property a "place of business" where provisions that mirrored those in the fixtures, the landlord could not rely documents could be served by third headlease but the final document upon the need for the removal of those parties. contained no such provisions, it was held fixtures to establish its redevelopment that the document should be rectified to intentions under s.30(1)(f) of the 1954 Comment: The property owner's include a review clause. Act. limited right of entry under the lease was a relevant consideration. Comment: There was sufficient Comment: The first instance decision evidence of a mutual mistake. was reported in the Summer 2005 O'Hara -v- McDougal, CA edition of OI. Hussain -v- Bahadir, ChD

Wessex Reserve Forces & Cadets -v- White, CA

Who to Contact Kirkpatrick & Lockhart For further information contact Nicholson Graham LLP Steven Cox [email protected] T: +44 (0)20 7360 8213 110 Cannon Street Milton McIntosh [email protected] T: +44 (0)20 7360 8259 London EC4N 6AR T: +44 (0)20 7648 9000 Susan Henning [email protected] T: +44 (0)20 7360 8236 F: +44 (0)20 7648 9001 www.klng.com Kirkpatrick & Lockhart Nicholson Graham is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one established in Delaware, USA, and one incorporated in England.

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