Real Estate Finance Update for Real Estate Lawyers 2 March 2009

1. Real Estate Finance Update for Real Estate Lawyers 2 March 2009 Jonathan Lawrence

2. Lending to commercial property • Q4 2008: £2.2bn • Lowest since Q2 2000 • Less than a third of Q3 2008 • Peak was Q3 2007: £10.9bn

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Bell v Long and others [2008] EWHC 1273 (Ch) (cont) • 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

10. 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]."

11. 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

12. 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?

13. Unoccupied non-domestic property rates (cont) • 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

14. 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

16. 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

17. Celesq Webinars • April: Private Equity—The Story in 2009 for Non-Debt 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

18. 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?