Real estate finance law in the United Kingdom

Yes. Security can be granted to a foreign lender.

Yes. Lenders can take a mortgage over land and buildings on the land.

2.1 The distinction between mortgages on land and buildings on the land?

There is no distinction in law: the definition of ‘land’ includes all fixtures attached to it. Accordingly, all buildings (unless they are movable) by definition constitute ‘land’ and are subject to the same mortgage as the plot of land on which they are situated.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

Land Registry mortgage certificates for a certain value are not issued. Mortgage-backed securities can be issued evidencing debt secured by mortgage in a securitisation transaction. The cost depends on the complexity of the transaction. These are transferable.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Yes. Second ranking security can be taken. The registration is effected the same way as for the first-ranking security. It is usual in commercial transactions for a priority deed to be entered into and registered at the Land Registry.

2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?

Yes, but it is usual in commercial transactions for a lender to agree with the owner to place a restriction on the title at the Land Registry to ensure that prior consent is obtained.

2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)?

No.

2.6 Can “all monies” mortgages be taken?

Yes.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Yes. A lender can take security over rent by way of first fixed charge or security assignment. However, a mortgage over land gives the lender the ability to sell the land with all rents receivable.

2.8 It is customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Yes. Such security can be taken by way of first fixed charge or security assignment. However, the creation of a fixed security (charge or assignment) requires the lender to exercise control over the charged accounts i.e. to restrict the chargor’s rights to withdraw funds. This is often not practicable in the case of operational accounts. These are therefore left to be freely operated by the chargor until the bank decides to enforce its security. Still, such accounts are subject to a floating charge which ranks behind fixed charges and preferred creditors.

An overwhelming majority of land in England and Wales is registered at the centrally-maintained Land Registry. All mortgages over land (whether registered or not) must be registered by submitting the mortgage instrument to the Land Registry which then records the details of the mortgage against the title of the mortgaged property. If the security is created by an English company or by a foreign company that has registered a branch in England and Wales, the mortgage should be first registered at Companies House (the UK’s registry of companies) within 21 days after the date of the mortgage’s creation.

3.1 Consequences of failure to register?

Failure to register at Companies House will render the security conferred by the mortgage void against the liquidator or administrator and any creditor of the company. Failure to register at the Land Registry means a third party purchaser in good faith may acquire the land free of the mortgage.

3.2 Formalities for execution of security and costs?

Certain rules apply to the way a mortgage instrument is executed. These are relatively simple and involve the inclusion of certain wording into the document and it being signed by either two signatories of the mortgagor or by a single signatory in a presence of a witness. There are no additional costs.

Yes.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

In bilateral transactions, no new security needs to be signed if the new and the previous lenders assign the mortgage as between themselves. However, the lenders commonly require the chargers to confirm that the change to the lenders has no effect on the existing security. In syndicated transactions using a Security Trustee, the security is held automatically for the lenders from time to time.

Control over changes in the tenants depends on the terms of the lease. Whether the original tenant will remain liable under the lease depends on the time of its creation. Tenants under leases created before 1 January 1996 remain contractually liable in relation to the obligations in the lease. A tenant under a “new” lease (i.e. created on or after that date) will only be liable if it entered into an authorised guarantee agreement. There are still a substantial amount of “old” leases in operation.

Generally this is done privately. This depends on the type of the charge the lender holds. Two primary remedies available to a holder of security including a floating charge over the whole or substantially the whole property of a company are: (a) an out-of-court appointment of an administrator (where the company is incorporated in the UK); or in relation to a foreign company, if its centre of main interests (COMI) is in England and Wales, or (b) an appointment of an administrative receiver (although this is now only possible in a limited number of circumstances). A holder of a mortgage of real estate may: (i) exercise its power of sale or (ii) appoint a receiver. The remedy of foreclosure is little used and discussed in more detail in paragraph 6.5 below.

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

Yes. Such choice will be recognised and upheld by an English court if (a) it was freely made in good faith by the parties and not for the purpose of avoiding the mandatory law of another jurisdiction; and (b) there are no reasons for avoiding that choice on the grounds of public policy.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Yes, although this depends on any relevant treaties.

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

The key difference between a receiver and an administrator is that a receiver owes its duties to the lender which appointed it whereas an administrator acts in the interest of all creditors and has a primary goal to rescue the company as a going concern.

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

This depends on the enforcement action taken by the lender. If the lender takes possession of the property, then he will be responsible for maintenance and insurance. The lender can avoid this by appointing a receiver instead.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

Foreclosure is available but rarely used in practice. It involves a two stage court process (the mortgagor being given time to pay after the first stage). The mortgagee’s right to foreclose arises when the legal date for redemption has passed. There is no requirement to sell by public action.

The English legal regime is generally favourable towards lenders. However, the rules relating to the floating and fixed charges, legal and equitable mortgages and the registration requirements are quite intricate at times and have to be understood in detail to appreciate the quality of the security taken in each particular situation. One example is taking fixed security over bank accounts which is an area of law that is constantly developing.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes.

Yes. Share charges (please see 4 below) usually rank in order of creation (provided they are properly registered).

(a) A share charge must be registered with the Registrar of Companies at Companies House in England & Wales within 21 days from the date of creation of the share charge. Form MG01 is submitted together with an original of the share charge and a fee of £13.

(b) The articles of association may need to be amended to permit a transfer of shares on enforcement of the security.

(c) A power of attorney is required from the owner of the shares in favour of the lender (usually included in the share charge itself).

(d) The lender should obtain a blank stock transfer form, signed by the owner of the shares.

(e) The lender should take custody of the share certificate(s).

3.1 Consequences of failure to register?

The consequences of non-registration include invalidity against administrators and liquidators and a loss of priority against other creditors of the borrower who subsequently register a charge against those assets.

3.2 Formalities for execution of security and costs?

To provide valid security a share charge must be in writing and executed as a deed. Deeds in England & Wales are executed by (i) one director and a secretary; (ii) two directors; (iii) one director in the presence of a witness; (iv) an attorney in the presence of a witness or (v) under the common seal of the company. Deeds can be signed in counterpart in England & Wales.

The cost of registering a share charge with the Registrar of Companies at Companies House is £13 (please see 2 above).

No. There are usually two ways in which security is taken over shares in England & Wales:

(a) Legal mortgage – this involves transferring the shares into the name of the lender and issuing a new share certificate to the lender. The lender becomes the owner of the shares and this is recorded in the Register of Members of the company. In the event of a default the lender may sell the shares. When the loan is repaid, the shares are retransferred back to the borrower or shareholder.

(b) Equitable mortgage or fixed charge (these are virtually indistinguishable) – unlike a legal mortgage, this security does not involve the transfer of ownership in the shares to the lender. The charge “encumbers” the shares by attaching the lender’s power to sell the shares. The lender takes custody of the share certificate(s), together with blank stock transfer form(s) (the transferee’s name is blank) executed by the owner of the shares. If there is a default, the lender may enter its name into the stock transfer form, or that of a purchaser.

It is usually the case that an equitable mortgage over shares (or fixed charge) is taken. There is more administration involved in taking a legal mortgage and this would expose the lender to possible liabilities and/or obligations as owner of the shares.

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

On enforcement, the shares can be sold to a third party (the powers of sale are usually included in the share charge). It is worth noting that fewer buyers may be willing to buy a private company than the real estate itself due to other potential liabilities.

Yes. Security can be enforced directly without recourse to the courts or any requirement to have a public or auction. A receiver may be appointed under the terms of the share charge to exercise the powers of sale or the lender may sell the shares itself without appointing a receiver.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur?

Yes. It is usual in commercial transactions for shareholder loans to be subordinated. This is effected by entering into a subordination agreement or intercreditor agreement. In light of recent experience following the credit crunch, lenders are more concerned that in order to be able to sell the shares without retaining the residual liability for shareholders’ loans, it is necessary to be able to sell the shares free of such debt. This can be achieved if there are provisions for the debt to be written off as part of the enforcement or if the lender takes security to be taken over the loans from the shareholders.

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

1.1 Typical lease length?

There is no minimum/maximum length of lease and this depends on commercial negotiation. Retail leases in the current market would typically be for 5 – 10 years with prime office leases for a typical term of 15 – 20 years. The average length of a new lease is shortening: in 2008 it fell to 5.9 years compared to 8.7 years in 1999.

1.2 Maximum/minimum lease length if any?

The lease length is commercially agreed between the parties. Lease terms can extend from a period of weeks or up to 999 years.

1.3 Statutory controls and obligations re renewal/termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

If a business lease is granted, then this will usually fall within the provisions of the Landlord and Tenant Act 1954 (“1954 Act”). Pursuant to the 1954 Act the tenant will have an automatic right to renew the lease at the end of the lease term unless the landlord and tenant have agreed that the automatic rights of renewal do not to apply (by the landlord serving a statutory notice and the tenant swearing a statutory declaration before the lease is granted or an agreement for lease has been exchanged). The business tenancy will then be ‘1954 Act excluded’ and no rights of renewal will apply.

Where the lease is not excluded from the 1954 Act, the landlord may only be able to oppose a tenant’s request for a renewal lease in restricted circumstances prescribed by statute – eg. where the landlord intends to demolish or reconstruct the premises and requires possession of the premises in order to do so.

The parties can also agree a contractual (as opposed to a statutory) right of renewal to be incorporated within the lease.

1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)?

As stated above, the 1954 Act protects tenants with an automatic lease renewal unless the parties agree that the provisions of the 1954 Act should be excluded.

1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

None other than any contractual break rights which may be agreed between the parties.

2.1 Rental income receivable quarterly/monthly in-advance/in-arrears?

Rent is typically paid either quarterly or monthly in advance, but can be in arrears and depends on what is commercially agreed between the parties.

2.2 Periodicity of reviews?

To be determined commercially between the parties but typically on office leases, rent is reviewed every five years.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

As agreed between the parties, but typically upwards only based on market rent.

2.4 Are rents/reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

No.

3.1 Internal maintenance, decoration and repair?

This depends on what is agreed between the parties and the extent of the premises demised (let) to the tenant. If the internal premises only are demised, then the landlord would usually retain the obligations for external maintenance, decoration and repair and may recharge any costs incurred to the tenant through a service charge. Where the tenant takes a lease of the whole property (internal and external) it would be usual for the tenant to be responsible for all internal and external repairs and maintenance.

3.2 External maintenance, decoration and repair?

See 3.1 above.

3.3 Structural repairs?

See 3.1 above.

3.4 Insurance?

Either party can insure the premises, although it is usual for the landlord to insure with the cost of insurance being recovered from a tenant by way of ‘insurance rent’.

3.5 VAT?

Value-added tax will be payable where the landlord has elected to charge VAT.

3.6 Rates?

These are usually the responsibility of the tenant.

3.7 Other typical outgoings?

Dependent on what is commercially agreed between the parties but the tenant will usually pay all other outgoings (eg. utilities) and property taxes.

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

Where the landlord manages the property (which is usual where the premises form part of a multi-let building or estate), it will provide the services (which usually, include security, heating, lighting and decoration, repair/replacement of external and common areas and equipment). All such costs would be recovered by way of a service charge.

4.1 Are terms of leases/contracts recognised and supported by case law in the jurisdiction?

Yes.

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated/qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction?

If there is no specific requirement a RICS appraisal would be a sensible precaution. The requirements as to any appraisal will depend on what is prescribed by the relevant documentation, eg. definition and requirements of a ‘Valuation’ in a contract.

5.2 Is it possible/customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

Yes. An environmental consultant may be appointed to undertake a range of different investigations and reports.

5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

Yes. A lender may assume the liability attaching to a borrower, depending on the liabilities of the borrower. For example, where there are past breaches the borrower or its purchaser may have agreed to indemnify a previous owner against all environmental liabilities and a lender when enforcing its security would assume this liability. Where there are present breaches of environmental law, it is assumed that any owner, including a mortgagee which is in possession of the land, would be liable.