Real estate

Transcription

Real estate

Real Estate
Gazette
STUDENT
HOUSING –
A NEW ASSET
CLASS IN
GERMANY
belgium
“even the healthcare sector
does not escape social land
charges”
spain
PUBLIC HEALTHCARE, PRIVATE
MANAGEMENT: THE SPANISH REAL
ESTATE PERSPECTIVE
usa
KEY CONSIDERATIONS AND
TRENDS IN THE HEALTH CARE REAL
ESTATE SECTOR IN THE UNITED
STATES
SPECIAL EDITION:
healthcare ASSETS
& residential
assets
denmark
MORE AND MORE ESCO PROJECTS
ARE LAUNCHED IN DENMARK
portugal
DEVELOPMENTS IN INSURANCE
LAW AFFECTING THE PORTUGUESE
LEASING MARKET
romania
STATE GUARANTEED HOUSING
LOANS IN ROMANIA- EVOLUTION,
BENEFITS AND PERSPECTIVES
australia
LAUNCH OF AUSTRALIA’S
SIGNIFICANT INVESTOR VISA: A
WORLD OF OPPORTUNITY FOR
MANAGED FUNDS
middle east
the new saudi mortgage law
uk
ONLINE REAL ESTATE AUCTIONS
ARE CLEAR FOR UK TAKE-OFF
Issue 11 winter 2013 | www.dlapiperrealworld.com
DLA_ISSUE_11_cover.indd 2
18/02/2013 12:31
CONTRIBUTORS
Issue 11 . winter 2013
REAL ESTATE
GAZETTE
STUDENT
HOUSING –
A NEW ASSET
CLASS IN
GERMANY
BELGIUM
“EVEN THE HEALTHCARE SECTOR
DOES NOT ESCAPE SOCIAL LAND
CHARGES”
SPAIN
PUBLIC HEALTHCARE, PRIVATE
MANAGEMENT: THE SPANISH REAL
ESTATE PERSPECTIVE
USA
KEY CONSIDERATIONS AND
TRENDS IN THE HEALTH CARE REAL
ESTATE SECTOR IN THE UNITED
STATES
SPECIAL EDITION:
HEALTHCARE ASSETS
& RESIDENTIAL
ASSETS
DENMARK
MORE AND MORE ESCO PROJECTS
ARE LAUNCHED IN DENMARK
PORTUGAL
DEVELOPMENTS IN INSURANCE
LAW AFFECTING THE PORTUGUESE
LEASING MARKET
ROMANIA
STATE GUARANTEED HOUSING
LOANS IN ROMANIA- EVOLUTION,
ISSUE 11 WINTER 2013 | www.dlapiperrealworld.com
AUSTRALIA
SIGNIFICANT INVESTOR VISA: A
WORLD OF OPPORTUNITY FOR
MANAGED FUNDS
MIDDLE EAST
THE NEW SAUDI MORTGAGE LAW
UK
ONLINE REAL ESTATE AUCTIONS
ARE CLEAR FOR UK TAKE-OFF
Janice Yau +852 2103 0884 [email protected]
Warwick Painter +61 292868252 [email protected]
Els Empereur +32 3 287 28 45 [email protected]
Kristof Hectors +32 2 500 6521 [email protected]
Marek Stradal +420 222 817 401 [email protected]
Maria Vilfort +45 3334 4377 [email protected]
Fabian Hinrichs +49 69 271 33 322 [email protected]
Falko Tappen +49 69 271 33 325 [email protected]
Viktor Radics +36 1 510 1178 [email protected]
Helen Hangari +971 4 438 6326 [email protected]
Bård Braathen +47 2413 1525 [email protected]
Pawel Bialobok +48 22 540 74 80 [email protected]
Joanna Marciniak +48 22 540 7417 [email protected]
Luís Filipe Carvalho +351 21 358 36 20 [email protected]
Mónica Pimenta +351 21 358 36 20 [email protected]
Adrian Cazan +40 372 155 808 [email protected]
Ines Chamarro +34 91 788 7332 [email protected]
Javier Isturiz +34 91 788 7325 [email protected]
Martin Pallares +34 91 788 7304 [email protected]
Nicholas Redman +44 20 7796 6168 [email protected]
Maxine Hicks +1 404 736 7809 [email protected]
Andrew Levy +1 212 335 4544 [email protected]
Joshua Sohn +1 212 335 4892 [email protected]
Jermaine McPherson +1 212 335 4979 [email protected]
Although this publication aims to state the law at 31 December 2012, it is intended as a general overview and
discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking
legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on
the basis of this publication. If you would like further advice, please speak to Olaf Schmidt, Head of EMEA Real
Estate, on +39 02 80 618 504 or your usual DLA Piper contact on +44 (0) 8700 111 111.
DLA Piper is an international legal practice, the members of which are separate and distinct legal entities.
For further information please refer to www.dlapiper.com.
Copyright © 2013 DLA Piper. All rights reserved.
18/02/2013 12:31
A Note From
the Editor
The eleventh
issue of the DLA
Piper Real Estate
Gazette focuses
on healthcare and
residential assets
“
Governments
are attempting
to revive sluggish
residential
property
markets
”
W
e hope you will find Issue 11 of DLA Piper’s Real Estate Gazette
interesting on several accounts.This edition includes a focus on
healthcare real estate issues in various jurisdictions and on how
residential assets are treated in various countries where we operate.
Despite the difficulties we all know about of accessing finance in some parts of the
global economy, new opportunities are out there to be seized. The opportunities are
diverse. China’s retail space is expanding at break-neck speed (page 18) and reforms
to Australia’s visa regime promise to attract more inward capital from astute investors
(page 20). We note that student accommodation is becoming increasingly attractive
in Germany (page 26). Furthermore, the imminent changes to mortgage rules in Saudi
Arabia promise to open up the property development market as never before in
ways that have been anticipated feverishly (page 30).
Turning to our areas of focus, healthcare real estate assets have received considerable
attention as an investment opportunity in the USA and recent changes to legislation
with the introduction of “Obamacare” have caused developers to review the position
(page 10). Healthcare is becoming attractive to developers in Spain due to the
greater involvement of the private sector in the management of facilities (page 8).
However there are risks in developing sectors too. Cash-strapped governments may
require developers to construct a minimum percentage of affordable social housing
as a condition for receiving planning consent and such conditions can impact on the
healthcare sector, as can be seen in Belgium (page 6).
Governments are attempting to revive sluggish residential property markets by
providing more security for developers and by increasing consumer confidence.
Initiatives include reforms to time share arrangements in Spain to help energize
a fragile market. (page 16). In Denmark, interesting risk-sharing initiatives with an
environmental goal are beginning to entice investors (page 12) and efforts in Portugal
to provide clarity over the scope of rental insurance may inject additional confidence
in the market (page 13). Romania is using a guaranteed loan mechanism to increase
the supply of funds to the residential construction sector (page 14).
All in all there has never been a better time to call on DLA Piper’s unsurpassed
breadth of expertise when you make your next move in the real estate market,
wherever and whatever that might be.
Olaf Schmidt, Head of International Real Estate
ISSUE 11 • 2013 | 3
DLA_ISSUE_11_Pages.indd 3
18/02/2013 12:18
Issue 11. winter 2013
healthcare Assets
belgium
06
“even the healthcare sector does not escape social land
charges”
spain
06
08
PUBLIC HEALTHCARE, PRIVATE MANAGEMENT: THE SPANISH REAL
ESTATE PERSPECTIVE
usa
10
KEY CONSIDERATIONS AND TRENDS IN THE HEALTHCARE REAL
ESTATE SECTOR IN THE UNITED STATES
residential assets
denmark
14
12MORE AND MORE ESCO PROJECTS ARE LAUNCHED IN DENMARK
portugal
13
DEVELOPMENTS IN INSURANCE LAW AFFECTING THE PORTUGUESE
LEASING MARKET
romania
14
STATE GUARANTEED HOUSING LOANS IN ROMANIA - EVOLUTION,
16
spain
16
A NEW LIGHT ON SPANISH TIMESHARE PRODUCTS
4 | real estate gazette
18/02/2013 12:18
CONTENTS
general real estate
asia
18
THE GREAT MALL OF CHINA: CHINA’S MIDDLE CLASS IS SET TO DRIVE
GLOBAL CONSUMER SPENDING
australia
20
LAUNCH OF AUSTRALIA’S SIGNIFICANT INVESTOR VISA: A WORLD OF
OPPORTUNITY FOR MANAGED FUNDS
czech republic
22
CHANGES TO BUILDING LAW IN THE CZECH REPUBLIC
germany
24
TAX ON INBOUND REAL ESTATE INVESTMENTS
26
germany
26
STUDENT HOUSING - A NEW ASSET CLASS IN GERMANY
hungary
28
PERFORMANCE GUARANTEES IN CONSTRUCTION DISPUTES - TWO
RECENT HUNGARIAN COURT DECISIONS
middle east
30
THE NEW SAUDI MORTGAGE LAW
norway
32
REAL ESTATE COMPANIES - NORWEGIAN TAX TRENDS
poland
34
32
RENEWABLE ENERGY IN THE LIGHT OF PLANNED CHANGES TO
CONSTRUCTION LAW IN POLAND
uk
36
ONLINE REAL ESTATE AUCTIONS ARE CLEAR FOR UK TAKE-OFF
usa
38
LENDERS: BEWARE OF RESTRICTIONS ON YOUR RIGHT TO ASSIGN
YOUR LOAN
38
ISSUE 11 • 2013 | 5
18/02/2013 12:18
HEALTHCARE assets | BELGIUM
“EVEN THE HEALTHCARE
SECTOR DOES NOT ESCAPE
SOCIAL LAND CHARGES”
ELS EMPEREUR AND KRISTOF HECTORS, BRUSSELS
T
he Flemish Decree of 27
March 2009, covering
affordable social housing
(Decree), has had an
unquestionable impact on the real
estate sector. This Decree requires
developers to construct a specific
percentage of affordable social
housing for certain types of large scale
real estate projects as a condition of
receiving development consent.
Where an application is made for
development consent to build at least 10
houses or 50 apartments or permission is
sought to develop 10 building plots then
the developer must agree that between
10% and 40% of the development
must be affordable housing. The actual
percentage share depends on whether
the owner is a private or a public entity.
Until recently, it was unclear how
this Decree would impact on the
healthcare sector. Would retirement
homes and sheltered accommodation
be subject to the affordable social
housing requirement? Some issues have
now been clarified as a result of an
amendment to the Decree made on 23
December 2011 that came into force on
6 February 2012.
Building projects involving the
development of “care facilities” only
are not subject to the affordable social
housing requirement, unless the project
involves the construction of one or more
of the following facilities:
a) Housing for assisted living
b) ADL-housing (“Activities of Daily
Living”)
c) Housing that has been sold to, and
then used by an “Office” (that is to say a
relevant organization) as defined in the
Decision of the Flemish Government
of 18 December 1998, concerning the
recognition of and financial support
for services providing sheltered living
conditions for people with disabilities
d) Housing that has been sold to, and
of 17 November 2006, concerning the
recognition of and financial support for
integrated living projects for people with
disabilities
e) Housing that has been sold to, and
of 18 February 1997, concerning the
establishment of the procedure for the
recognition and closure of retirement
and nursing homes, psychiatric nursing
homes and sheltered living schemes.
Mixed building projects which include
both care facilities and private housing,
are also excluded from the scope of the
Decree but only in relation to the care
facilities element of the development.
This exemption is subject itself to an
exception concerning any building
project that contains one or more of the
facilities (a-e) mentioned above.
A “care facility” has been defined
broadly as “a facility of an organization,
recognised by the Flemish Community,
that carries on activities in the field
of care provision, health education,
preventative health care, family care,
social welfare, the reception and
integration of immigrants, care for the
disabled and elderly, youth protection
and social assistance provided to help
prisoners reintegrate into society”, as
mentioned in article 5, § 1, I and II
of the special law of 8 August 1980
concerning the reform of institutions.
Certain types of organization carrying
on health-related activities for students
are excluded from the definition.
Some care facilities - service flats as
well as housing for sheltered living- are
thus in principle subject to the same
requirements for constructing affordable
social housing as mentioned above.
The Flemish Parliament realized how
far-reaching this legislative modification
would be for the healthcare sector and
included a transitional provision in
the Decree. This transitional provision
appeared to suggest that the categories
of care facility mentioned above that
fall within the affordable housing
requirement would be temporarily
excluded from the obligation until
the Flemish Government approved an
Executive Decree covering additional
recognition requirements for persons
requiring certain types of care support.
This Executive Decree was adopted on
12 October 2012 and is applicable as of
1 January 2013.
This Executive Decree brings the
transitional measures to an end and has
an effect on all applications for the types
of building project mentioned above (a
to e) for care facilities. All applications
for a building permit filed after 12
October 2012 will be subject to the
affordable social housing requirement .
18/02/2013 12:18
healthcare assets | belgium
“The Flemish Parliament has realised
how far-reaching this legislative
modification would be for the
healthcare sector
”
ISSUE 11 • 2013 | 7
18/02/2013 12:18
general real estate | spain
PUBLIC HEALTHCARE,
PRIVATE MANAGEMENT:
THE SPANISH REAL ESTATE
PERSPECTIVE
INÉS CHAMARRO AND JAVIER ISTURIZ, MADRID
T
he Spanish National Health
System is the agglomeration
of public health services
that has existed in Spain
since it was established through, and
structured by, the General Health Law
of 1986. Management of these services
has been transferred progressively to
different autonomous regions of Spain,
although some services continue to be
operated by the National Institute of
Health Management. Coordination of
these services is harmonized by the
Interregional Council of the Spanish
National Health Service in order to give
cohesion to the system and to guarantee
the rights of citizens throughout Spain.
Traditionally, the management of
healthcare services has been classified
in two categories: “direct management”,
which corresponds to the healthcare
services provided either directly by the
relevant health authority or by a public
company owned by a public health
authority; and “indirect management”,
which corresponds to the healthcare
services provided by a private entity
through a public contract entered into
between the relevant health authority
and a private company. It is important
to note that not all healthcare services
can be delegated to private entities.
Excluded services include in particular
those requiring the use of public
authority.
In recent years some of the Spanish
regional governments have advocated
replacing the direct public management
of healthcare facilities by a presumably
more efficient private management
system, although recent measures in
this direction have sparked an intense
public debate.
As indirect management gains
momentum, the Spanish healthcare
sector seems set to become a popular
investment target. The private
management of healthcare facilities
has already attracted attention in the
last few years and several international
investment funds have entered the
Spanish market by investing in private
companies operating healthcare
facilities. However, getting into a
deal without knowing the pitfalls can
be risky and, as the market evolves,
certain recurrent real estate issues have
already started to emerge. These are
most prevalent in transactions involving
share acquisitions by private companies
operating healthcare facilities and in
public tenders for the provision of
healthcare services.
18/02/2013 12:18
healthcare assets | spain
“the Spanish healthcare sector
seems set to become a popular
investment target
”
The most frequently used models for
operating healthcare facilities through
the indirect management system are
public contracts for the provision of
healthcare services and administrative
concessions granted for the construction
and operation of healthcare premises
that deliver healthcare public services.
Usually, the first option is used for
delivering healthcare public services
by private entities through pre-existing
privately owned premises, while
the second is used to facilitate the
construction of new healthcare premises
and their long-term operation.
The particular terms and conditions
applicable to public tenders for the
construction and operation of healthcare
facilities can expressly prohibit or
restrict any change in the control of the
operating company and make it subject
to prior mandatory authorization by the
competent sanitary authority. Generally,
any unauthorized change of control will
be treated as a breach of the assignment
clause in the contract and give grounds
for early termination. It is thus important
to take into account the timing of
the authorization and ensure that all
formalities are complied with before
planning completion of the transaction.
Where private companies construct
and operate healthcare premises under
contract, the public health authority
granting the public contract will be
the regional government, but the land
where the healthcare premises will be
built is often owned by a city council.
This means that prior to awarding the
tender both governments will need to
reach an agreement (generally a freely
assignable contract) to regulate the
conditions applicable to the construction
of the premises, such as restricting its
use to healthcare. The contract will
also contain any planning conditions
concerning road access, minimum
number of car parking spaces, land
occupation or maximum buildable
floors. The freely assignable contract
frequently stipulates a maximum
period for effecting an assignment and
will include a clause stating that any
infringement of the conditions laid
down by the freely assignable contract
will allow the city council to recover
possession of the land (thus making
it essential to verify that the premises
comply with all technical specifications
included in the contract).
As an alternative solution, when
premises already exist, it is also not
unusual to find that the healthcare
premises are leased to private companies
through a standard lease agreement. In
such cases, it is important to make sure
that the terms laid down by the lease
agreements are consistent with the terms
established in the healthcare public
services contract held by the private
company. It is also advisable to link
early termination rights under the lease
agreement to the early termination rights
under the public health services contract
in order to avoid a situation in which the
healthcare public service contract could
be terminated but with the rent payment
obligation remaining enforceable.
The private contract entered into
between the construction company and
the company holding the public contract
for the construction and operation of the
healthcare premises is also very relevant,
as it must be agreed in order to fulfill the
terms and conditions contained in the
public contract. Negotiating appropriate
clauses on assignments to third parties
and on step-in rights in the construction
or turnkey agreements can turn out to be
crucial.
A commonly encountered real estate
issue affecting old urban healthcare
facilities is that the premises either
do not possess a municipal operating
authorization or, if they do have an
authorization, it has not been updated
following any refurbishment and
modernization of the premises. This
issue could potentially compromise
the development of the facility since,
according to planning regulations,
operating without the relevant
authorization would require the facility
to be closed down and a fine to be
imposed. In practice, however, and given
the public use of the premises, no city
council would order the closure in such
circumstances unless serious harm might
follow if the premises were to continue
operating in their unauthorized state.
It is also not unusual to discover that
modernization works carried out at
healthcare premises have never been
registered with the appropriate land
registry. This is generally a minor
issue, since under Spanish Law it is not
mandatory to keep premises registered
and updated in the Land Registry. This
problem may come to light, however, if
funding for the project is being sought,
because banks will generally want to
ensure that a mortgage extends to the
premises both in their current state
and after any subsequent additions
and modifications. If the bank requires
that the registration of the premises is
updated as a condition of receiving the
funding then the potential for significant
stamp duty costs should always be taken
into account.
ISSUE 11 • 2013 | 9
18/02/2013 12:18
healthcare assets | usa
KEY CONSIDERATIONS
AND TRENDS IN THE
HEALTHCARE REAL
ESTATE SECTOR IN
THE UNITED STATES
MAXINE HICKS, ATLANTA
Overview of Current Trends
As the global real estate recession has
continued, healthcare real estate has
persisted as a unique niche sector that
has performed consistently well over the
past several years even with uncertainty
about the industry in the face of
additional governmental regulation that
is forthcoming in the United States.
Tighter lending standards and more
discerning capital markets since the
onset of the recession have led to a flight
to quality in real estate investment,
and healthcare real estate has led the
way in presenting outstanding real
estate investment opportunities. At the
same time as institutional investors
and real estate investment trusts have
increased their level of involvement in
healthcare real estate, hospital systems
and healthcare providers have been
thinking more strategically about ways
to release monetary value from their
real estate assets. Real estate assets
that many health systems gave little
thought to as capital assets decades ago
are now highly valued for their location
and integration to hospital facilities.
Healthcare real estate has grown not
only on the macro level through the
development of on-campus medical
office buildings and facilities offering
cancer, ambulatory surgical, and heart
treatments, but also on the micro level
where hospitals and healthcare providers
have become non-traditional tenants,
and, increasingly, anchor tenants, in
retail shopping precincts, mixed-use
developments and office parks.
The “Inside-Out” Trend
The over-arching trend that is driving
healthcare real estate is the “insideout” trend. The “inside” component
of the trend is that hospital systems
are increasingly employing more and
more physicians. Physicians that are not
employed by hospitals are more likely
to join large physician practice groups.
While some one-person and two-person
physician practices remain, the numbers
of those practices are dwindling. As
a result, successful medical office
buildings will require the hospital
system or a large physician group to be
an “anchor” tenant of the building for
the building to be attractive to funders.
This has led to increased competition,
and thus, diminished returns, for the
smaller number of valued healthcare real
estate assets, most of which will need
hospital sponsorship and either an on
campus or other strategically important
location to be viable.
The “out” component of the trend
stands for out-patient—that is, hospital
systems are increasingly leasing spaces
or purchasing land and constructing
buildings for outpatient clinics in
communities that are adjacent to
the primary service location of the
hospital. For example, Peters Township,
Pennsylvania, a densely populated
suburb of Pittsburgh that lacks a hospital
within its borders, has seen West Penn
Allegheny Health Systems lease a
former grocery anchor space in a Class
“B” retail precinct while St. Clair
Hospital is constructing a new outpatient
facility near the busiest crossroads of
the township. These new development
deals are the direct results of hospitals
wanting to extend their brand name
and deliver service to communities that
are twenty to thirty minutes away from
their primary hospitals. The “inside-out”
trend exemplifies the competitive nature
of developing quality real estate assets,
but also shows the need for new real
estate development in healthcare that is
outpacing the need for new real estate
development projects generally.
18/02/2013 12:18
healthcare assets | usa
Healthcare Regulatory
Concerns and Involvement of
Third Party Developers
Healthcare real estate assets have
their own special characteristics and
require the real estate practitioner to be
well-versed in several industry-specific
regulations and standards. Healthcare
regulatory issues, in particular, are a
critical component in the development
of healthcare real estate. For example,
the Stark Law and the Anti-Kickback
Statute are two federal laws that
govern transactions between healthcare
providers and physicians. In particular,
if a hospital is considering developing
its own medical office building and
leasing space to healthcare providers
that are referral sources for hospital
business, the hospital not only must
offer rent that is at a fair market value,
but also the development of the medical
office building that is commercially
reasonable from a rate-of-return
standpoint to sponsor. If a medical office
building leases at rates that result in a
below market return for the hospital,
compliance issues could arise.
Because of the complications involving
healthcare regulatory issues, many
hospitals prefer to employ third party real
estate developers to enter into long-term
ground leases with the hospital for the
development of vertical improvements
on the hospital campus. The real estate
developer then has the responsibility to
secure tenants for the building and make
a return on the asset. It is not uncommon
in the ground lease, however, for the
hospital to impose use restrictions to
ensure that, among other items: (i) no
tenant in the office building can perform
services that are compete with services
provided by the hospital and (ii) no
competitors of the hospital can lease
space in the medical office building.
Healthcare Real Estate for
the Long Term
Another distinguishing characteristic
of healthcare real estate is that
healthcare providers build and occupy
facilities for the long term. Hospitals
that sponsor medical office buildings
are concerned not only about the shortterm impacts of the building on medical
delivery, but also on the building being
able to evolve over several decades into
a key component of healthcare delivery
on the hospital campus. Hospitals,
consequently, become increasingly
involved not only in the real estate
transaction, but the design finishes and
build out components of the facility
to ensure that the building is designed
flexibly and effectively. Physician
tenants, on the other hand, strongly
prefer to remain in their spaces for
long periods of time. Physicians often
move expensive, bulky equipment into
their tenant spaces and loathe having
to relocate frequently. The stability of
physician tenant practices is attractive
to real estate investors as the healthcare
tenant market is more stable than the
traditional office market.
The future
While there are many positive
components of healthcare real estate
development, the industry will continue
to be burdened with uncertainty as
many key components of the Obama
administration’s Affordable Care Act
begin to take effect in 2013. While there
was an initial flurry of new healthcare
real estate development after the Act
was passed, new development has
now reached a plateau as hospitals and
healthcare providers carefully assess
the real life impacts of the new regime.
Even with the uncertainty, it is likely that
the inside-out trend for healthcare real
estate will continue to persist and that
a consistent demand for healthcare will
continue to make healthcare real estate a
sector to watch in 2013 and beyond.
ISSUE 11 • 2013 | 11
18/02/2013 12:18
residential assets | denmark
MORE AND MORE ESCO
PROJECTS ARE LAUNCHED
IN DENMARK
MARIA VILFORT, HORTEN, COPENHAGEN
B
oth the environment and
climate change feature
constantly on the European
political agenda. As a
result, more and more buildings
are being renovated with a view to
securing energy savings and to spare
the environment. This has created a
market for ESCO projects, which are
now becoming much more common
in Denmark. In 2012 ESCO projects
covered approximately 1.4 million sq.
m. of building development.
What is an ESCO project?
ESCO stands for Energy Service
Company. In an ESCO project a
private company is engaged by a
contractor (often one from the public
sector) to improve a building’s energy
requirements.
The purpose of an ESCO project is
to finance the renovation through the
anticipated energy savings made as
a result of the renovation. This way
the owner of the building incurs no
renovation costs because payments and
interest are paid through savings that are
guaranteed by the ESCO Company. It
is also possible for the parties to agree
different financial outcomes. By way
of example, if the ESCO company
guarantees savings of 20 per cent on
energy costs, the parties can agree that
savings between 20 and 23 per cent
will go to the owner of the building, but
savings above 23 per cent will be split
between the parties. This gives both
parties an incentive to reach the highest
possible level of savings.
An ESCO project is generally
considered a win-win situation. The
building owner secures a renovated
building and the expense of doing so is
covered by future savings. The savings
are even guaranteed by the ESCO
Company. Moreover, ESCO Companies
that are capable of generating high
energy efficiency compared to the
investment cost required can achieve
high profit margins.
An ESCO project is developed in three
stages. The first stage comprises an
examination of the relevant buildings. In
this stage the ESCO companies collect
consumption data, consumption prices,
data on the most recent renovation
or rebuilding, data on the expected
future use of the buildings and so
on. The second stage consists of the
actual construction works. The third
stage may last 10 to 15 years during
which the ESCO Company monitors
and adjusts the feature that creates the
energy savings. Over this period some
ESCO companies also provide training
and education services to the building
owner’s employees on how to operate
the new installation.
ESCO in Denmark
Until now it has generally been the
case that ESCO projects have attracted
the interest of local authorities and
ESCO companies. Currently there are
25 public ESCO projects in Denmark.
The owner of the building can also
be a private party. If the building’s
owner forms part of the public sector
then a public procurement exercise
must be completed in accordance with
EU legislation. The ESCO companies
compete between themselves as to
which company guarantees the largest
savings. Sometimes tenders are
requested after stage 1 which means that
more potential ESCO companies can be
involved in the review of the building.
From 1 January 2013 local authorities
in Denmark are subject to a ceiling
on the number of developments they
may carry out. This means that local
authorities have financial limits on the
number of development projects they
are allowed to commence. This can
result in a decrease in the number of
ESCO projects if the authorities choose,
for example, to build a new school
instead of participating in an ESCO
project.
In Denmark social housing receives
government subsidies for renovation
projects and this makes social housing a
potential beneficiary of ESCO projects.
However, rent laws in Denmark are
complicated and may influence the
willingness of ESCO companies to
participate in a project. Energy saving
renovations improve rental properties
and therefore rental returns should
increase. The first ESCO project in
Denmark covering a social housing
development was completed in 2012.
In order for the ESCO project to be
accepted by the tenants the increase
in rent had to be balanced by a similar
reduction in utility bills. Thus the
tenants’ monthly costs remained the
same. In general, however, most social
housing tenants receive housing benefit
from the government, which is fixed
by reference to the amount of rent. Any
increase in rent is met by an increase
in housing benefit. As a result, tenants
receive a net benefit from the reduction
in their energy utility payments. From
the building owner’s point of view the
owner benefits from the increase in
rental income. Owners are encouraged
to participate because over time, if no
energy improvements are carried out,
tenancies will decrease in value because
the property’s value will decline. With
these advantages ESCO social housing
projects are likely to be more common
in Denmark in the future.
The most recent development to affect
the ESCO project market concerns its
extension to private house owners. This
is known as “ ESCO-light” because
the size of buildings covered under
the scheme are often more modest.
The purpose of ESCO-light is to make
it easier for private home owners to
implement energy savings. However,
opportunities for making savings are not
as great as for a public ESCO project
due to the much smaller scale of energy
consumption in a private home. For
this reason the payback period is longer
in ESCO-light projects and this might
dissuade some private owners from
investing in energy savings. That said,
given the impact of ESCO development
projects in the public sector and in
social housing, it is not beyond the
realm of possibility that the ESCO-light
model will also gain more and more
ground in Denmark in the future.
Horten is DLA Piper’s focus firm in
Denmark
18/02/2013 12:18
residential assets | portugal
DEVELOPMENTS IN
INSURANCE LAW AFFECTING
THE PORTUGUESE LEASING
MARKET
LUÍS FILIPE CARVALHO AND MÓNICA
PIMENTA, ABBC LAW FIRM, LISBON
A
New Urban Lease Law
has created a specific
legal regime covering the
regulation of rent guarantee
insurance. The law on rent guarantee
insurance is expected to be drafted soon
and should be ready for publication by
the end of the first half of 2013. This
law completes the legislative package
dealing with urban regeneration and
construction in leased buildings.
Although previously unknown in
Portugal, rent guarantee insurance is
an insurance product that is already
available in some European countries
such as France and Spain. When
deciding to rent their property the vast
majority of landlords have serious
concerns over possible damage to the
property and fear that the tenant may fail
to pay the rent.
The main objective of rent guarantee
insurance is to cover the risk of default
by the tenant of its obligation to pay rent
to the landlord. Coverage of additional
risks may be agreed between the
landlord and the insurance company,
such as damage caused by the tenant
to the property, costs and expenses
incurred by the landlord for any eviction
procedure, the reimbursement of rents
and any consequential compensation.
This type of insurance policy can cover
several properties or just one alone and
in the case of the former can be issued
for instance to real estate agencies and to
homeowners’ associations.
The idea is to protect landlords against
non-performance of the rental agreement
and to protect the lease contracts.
Rent guarantee insurance will not be
mandatory but should serve to boost the
rental market.
Although this legislation has yet to
be enacted, insurance companies have
already started to offer this product,
providing coverage for reimbursement
of unpaid rent, legal action relating to
disputes over the lease agreement and for
defending claims from other insurance
companies. Cover is being offered for
certain types of criminal proceedings
relating to imprudent or negligent use
of the property, vandalism caused by
the tenant both to the property and to
the landlord’s assets, as well as claims
for damages to such property and assets
arising from the actions of third parties.
Notwithstanding the existence in the
market of some insurance products we
will have to wait at least until the end
of the first half of 2013 for the law to be
approved. Only then will we be able to
assess market reaction to this new product
development and be able to evaluate its
main advantages for landlords.
ABBC Law Firm is DLA Piper’s focus
firm in Portugal
“
Rent guarantee
insurance will not
be mandatory but
should serve to
boost the rental
market
”
ISSUE 11 • 2013 | 13
18/02/2013 12:18
residential assets | romania
STATE
GUARANTEED
HOUSING LOANS
IN ROMANIA
– EVOLUTION,
BENEFITS AND
PERSPECTIVES
ADRIAN CAZAN, BUCHAREST
I
n the context of the global
economic crisis, banks became
more reluctant to grant loans and
required the intended beneficiaries
to put additional guarantees in place.
This led eventually to a general brake on
financing which affected many sectors,
including real estate. The number of real
estate transactions diminished and prices
dropped in response to the contraction in
the market.
Given this economic context, the
Romanian Government has decided to
intervene in the market and has adopted
the First House scheme (Scheme). A
key feature of the Scheme is that the
Romanian State guarantees the loans
offered by banks for the acquisition or
construction of dwellings.
Legal framework and
procedures
The legal framework applicable to
the Scheme consists of Government
Decision 717/2009 on approving the
rules for implementing the “First
House” scheme, and Government
Emergency Ordinance 60/2009 on
certain measures for implementing the
“First House” scheme. Since they were
enacted, both Government Decision
717/2009 and Government Emergency
Ordinance 60/2009 have been subject to
several amendments.
Loans granted by banks for the
acquisition or construction of dwellings
are guaranteed by the State through a stateowned non-financial institution named the
“National Fund for Guaranteeing Loans
to Small and Medium Sized Companies”
(National Fund).
In order to participate in the Scheme,
the banks are required to fulfill certain
conditions imposed by law. If these
conditions are met, the banks sign
a protocol with the National Fund.
Examples of such conditions are: (i) the
interest on Euro loans cannot exceed
the EURIBOR interest at three months
plus a fixed maximum margin of four
per cent (ii) the banks have national
coverage and (iii) the banks do not
require the payment of related fees as a
pre-condition to making the loan.
Based on the protocol signed with the
National Fund, the banks can request a
guarantee from the state provided that
all the legal conditions are met. When
the Scheme started, the state guaranteed
100% of the loan. Currently the State
guarantees 50% of the loan amount,
meaning that the risk of non-payment
is divided equally between the banks
and the state. The guarantee covers only
the loan amount, excluding interest or
bank fees, and is reduced by the amount
of each monthly instalment paid by the
beneficiary to the bank.
In the case of non-payment, the state
must cover the amount it has guaranteed
at the bank’s request.
Scope of the Scheme
The Scheme was intended not only
to facilitate access to loans, but also to
achieve a social purpose, namely to help
individuals buy their own home. In line
with this social purpose, the Scheme
is limited to loans granted by banks
for the construction or acquisition of
dwellings. Dwellings are defined by law
as any immovable property which has
the purpose of being used as a dwelling,
including any associated facilities.
In spite of its limited application, the
Scheme has benefited the economy
indirectly. Since it was enacted in 2009,
the Scheme has injected approximately
€3 billion into the local economy,
and this has had an indirect impact on
sectors connected to construction.
Beneficiaries of the state
guarantee
As a rule, the beneficiaries of the state
guarantee can be only individuals.
If the loan is granted for construction
purposes, the beneficiary may be an
association without a separate legal
personality. In this case, at least one of
the members of the association must
be the owner of the land where the
construction will be sited.
In order to be eligible for the Scheme,
beneficiaries are required to meet certain
restrictive conditions. Some of these
conditions are general and apply to any
person who wishes to obtain a loan under
the Scheme. Other conditions apply
only in particular cases, depending on
(i) the destination of the loan, namely
whether the loan is used for acquiring
or for constructing a dwelling, or (ii)
the construction stage of the dwelling
18/02/2013 12:18
residential assets | romania
which is being acquired (for example,
the conditions the beneficiary is required
to meet will be different for completed
dwellings as compared to dwellings still
being built). A summary of the general
conditions that apply to the acquisition or
construction of dwellings is set out below.
The beneficiaries must make a formal
declaration either that (i) they do not
own individually or together with their
spouse a dwelling or (ii) own only one
dwelling with a usable area of less
than 50 sq. m. which was not obtained
through the Scheme. In addition, the
beneficiaries are required to make an
advance payment of at least five per cent
of the value of the dwelling they intend
to purchase or construct, and to insure
the dwelling against any risks. The loan
can be used to acquire or construct only
one dwelling.
Beneficiaries are prohibited from
selling the dwelling for a period of five
years or from creating encumbrances
over the dwelling for the entire duration
of the state guarantee. The mortgagees
for any dwelling acquired or
constructed with the benefit of the loan
will be the state and the financing bank
for the entire duration of the loan, with
a first ranking mortgage. This gives
priority to the State and the financing
bank in the event of enforcement
procedures being commenced.
The legislation caps the amount of
each state guarantee for the financing of
individual acquisitions or developments.
For example, where the completed
dwelling acquired is ready for use, the
ceiling is 95% of the acquisition value
up to a maximum of (i) €57,000 or (ii)
the value of the dwelling as ascertained
in a valuation report.
Developers of residential units cannot
obtain state guaranteed loans under the
Scheme in order to implement their
projects. However, they do benefit
indirectly, as they will be able to sell
individual apartments in the residential
developments more easily.
Guaranteed amounts
The maximum amount of state
guarantees under the Scheme was
initially approved for 2009 and
amounted to a total of €1 billion. For
each of the following years, the funds
were approved separately and decreased
substantially. For 2012, the total funds
available amount to €200 million.
If the funds approved for one year are
not exhausted the balance is carried over
to the following year. Thus in 2011 total
funding reached almost €1.7 billion.
By the end of the year the funds were
almost completely exhausted.
Comments
According to public records published
online, the banks have granted more
than 70,000 state-guaranteed loans
with an aggregate value of almost €3
billion since the start of the Scheme.
The Scheme managed to offer effective
support for retail real estate loans and
prevented price reductions in the market.
Although not intended for this purpose,
the Scheme has benefited participating
banks too. According to statistics
published by the National Fund, under
0.1% of the total number of loans
granted under the Scheme were said by
the banks to be in arrears by September
2012. This percentage is much lower
than the average for standard mortgage
loans, which according to the National
Bank of Romania was 17.34% in
September 2012.
Due to the success of the Scheme
and the increasing demand for state
guaranteed loans, the Government
intends to extend the Scheme in 2013.
On 13 December 2012, the Ministry
of Finance published on its official
website for public consultation a draft
government decision approving an
additional €200 million to be used
in 2013 for guaranteeing loans under
the Scheme. Therefore, it is expected
that the Scheme will be extended in
2013 and it will continue to produce
beneficial effects.
However, the scope of the Scheme’s
application in the future is uncertain.
According to the governing scheme for
2013 - 2016 published in December
2012, the Government intends to
limit the application of the Scheme to
newly constructed dwellings only. The
Government’s intention has not yet
taken any legal form and it is difficult
to foresee whether it will be actually
implemented in legislation.
ISSUE 11 • 2013 | 15
18/02/2013 12:18
residential assets | spain
A NEW LIGHT
ON SPANISH
TIMESHARE
PRODUCTS
MARTIN PALLARES, MADRID
W
ith the Spanish real
estate sector beginning
to show signs of a
tentative recovery
from the economic crisis, confidence
in the sector was boosted further last
July by the timely publication of a new
Timeshare Law.
This legislation (Law 4/2012 of 6 July
2012) transposes Directive 2008/122/
EC of the European Parliament and of
the Council of 14 January 2009 on the
protection of consumers in respect of
certain aspects of timeshare and longterm holiday products into the Spanish
legal framework.
Even though Spain already had a
Timeshare Law dating back to 1998, itself
a product of another European Directive,
Spanish national law makers took this
opportunity to revamp the timeshare
regulations by addressing additional issues
that had troubled consumers in the past.
Such concerns included the rather vague
definition of a timeshare product and
whether a consumer had the right to end
the agreement once a cooling-off period
had expired.
Under the new Timeshare Law,
timesharing is defined as a right that a
consumer acquires, for consideration,
to use accommodation for one or more
overnight stays for certain periods of
time, over a term ranging between one
and fifty years. The law emphasizes
the difference between timesharing and
ownership and even prohibits timesharing
agreements from including the word
“ownership” in them.
Furthermore, the range of timeshare
“the range
of timeshare
products has
been expanded
”
products has been expanded to include
not only real estate but also movable
properties such as cruise-ships and
caravans.
This new law also tackles another
issue. Historically, timeshare packages
included complex drafting that could
easily confuse consumers about what
they would be acquiring on signing a
timeshare agreement. In order to avoid
such confusion, this new law includes
template information brochures that
timeshare companies must use to set
out the terms and conditions of their
products. Under the new law and the
template, the information disclosed by
timeshare companies should include,
at the very minimum, full information
concerning the rights being acquired
and the property that will be affected by
them, the timeshare bylaws governing
the properties, any expenses arising
and information about termination
procedures.
Furthermore the new law requires that
all documents containing information
about the timeshare products, such as
brochures or agreements, should be
drafted in one of the European Union’s
official languages, as chosen by the
consumer. The documents must also
be provided in a permanent format,
including but not limited to paper, and
in a form that will enable consumers to
review the information at any time.
If the information template does
not provide sufficient detail or if the
timeshare company fails to disclose all
the necessary information, consumers
can decide during a cooling-off period
18/02/2013 12:18
residential assets | spain
whether they would like to continue
with the agreement once they have
signed it. The consumer’s right to
withdraw from the agreement had
already been included in the old
Timeshare Law. There was much
confusion, however, as to when the
consumer could invoke the withdrawal
right because its exercise depended
on two different possible scenarios
(namely withdrawal on the grounds of
having reviewed all the information
provided by the timeshare company, or
withdrawal on the grounds of having
incomplete or no information provided
at all). The new law has unified all
possible scenarios into one right of
withdrawal. Consumers may now walk
away from the agreement, without
penalty, within fourteen days of signing
the agreement. The new Timeshare
Law even includes a helpful template
form that a consumer may use to
inform the timeshare company that the
right of withdrawal is being exercised.
Provisions in timeshare agreements that
require advance payment of monies
to timeshare companies before the
cooling-off period expires are now
also strictly forbidden. The definition
of advance payments includes prepayments, granting of guarantees and
escrows, explicit acknowledgement
of the debt or payment of any other
consideration by the consumer to the
timeshare company or third parties.
Finally, and having regard to the fact
that Spanish timeshare products will
be used mostly by foreign consumers,
the new law has attempted to facilitate
the use of procedures that may assist
parties to resolve their disputes.
Express references are made to the
application of the European Union
“Rome I” Regulation that governs intraUnion contractual obligations. These
provisions enable the parties to submit
to any type of arbitration procedure
found in the European Union. Arbitral
proceedings are usually shorter, easier
and less public in Spain but can be very
expensive for the parties, thus they
are almost always used only by big
companies. In order to facilitate access
to arbitral tribunals for consumers a
special procedure has been created
known as the consumer arbitration
system (sistema arbitral de consumo),
which is regulated by the Consumer
Protection Act (Ley General de
Defensa de Consumidores y Usuarios),
by the Royal Decree on Consumer
Arbitration (Real Decreto de Arbitraje
de Consumo) and by the Arbitration Act
(Ley de Arbitraje).
Hopefully with this new regulation,
Spanish timeshare products will
become more attractive to foreign
consumers and provide the country with
a new, much-needed additional boost on
the long road to economic recovery.
ISSUE 11 • 2013 | 17
18/02/2013 12:18
general real estate | asia
THE GREAT
MALL OF CHINA:
CHINA’S MIDDLE
CLASS IS SET TO
DRIVE GLOBAL
CONSUMER
SPENDING
JANICE YAU, HONG KONG
W
hat recession?
“
China was by far
the most active
shopping centre
development
market last year.
”
China’s economic
boom and the
growth of its middle
class have led to a marked increase
in consumer spending. Although the
slowdown in the US and Europe has
cooled the pace of that growth in recent
months, Mainland tourists continue to
travel en masse to Hong Kong in search
of goods they can show off back home.
Retail sales in Hong Kong grew 9.4 per
cent in value and 8.5 per cent by volume
over the course of a year, driven by
Mainland Chinese travellers snapping up
luxury and retail goods. It has become
essential for international brands to
be visible in Hong Kong in order to
create consumer awareness and target
Mainland Chinese buyers. America has
New York. France has Paris. And China
has Hong Kong.
More shopping spaces
Once tourists are exposed to the
brands in Hong Kong they continue
to shop for them back home. Over the
past ten years, retail sales in Mainland
China have been increasing at a very
robust pace and are forecast to grow
at around 10% per year from 2012 to
2015. Evidence of all this shopping is
in the malls – and the development of
new malls. China was by far the most
active shopping centre development
market last year with four Chinese cities
among the world’s top five in terms of
the amount of new space completed.
The industrial city of Shenyang
(population: 8.1 million), the capital of
Liaoning Province in Northeast China,
was the runaway leader with six new
shopping centres totalling over one
million square metres of new space in
2011. In second place was the city of
Wuhan (population: 9.2 million) which
18/02/2013 12:18
general real estate | asia
is the capital of Hubei province and the
most heavily populated city in Central
China, where 574,000 square metres
of new space opened last year, also
located within six shopping centres. In
2011 there were unprecedented levels of
construction and new openings globally,
but especially in China. Moreover, it is
not just local developers trying to attract
international brands. Tesco Property
Limited, the giant hypermarket’s
property arm, has already been involved
in the construction of eight shopping
malls across China with many more to
come, developing retail space not only
for its hypermarket business, but also for
international retailers.
Build it and they will come
New shopping centres play a key
role in attracting international retailers
to emerging countries and cities,
principally because there is a historic
lack of high quality, prime space in
markets like China and India. Even with
all the new developments, prime retail
space remains in short supply. With
the rapid growth of personal wealth,
especially in the middle class, retailers
from all over the world, including
domestic retailers, are eager to increase
their presence in China. Hong Kong has
recently seen big brands such as Forever
21, Gap and Abercrombie & Fitch pay
big money for prominent retail space in
order to launch their flagship stores. It
took nine months of lease negotiations
before Abercrombie and Fitch could
move into the historic Pedder Building
in Hong Kong and displace Shanghai
Tang, who had been the previous tenant
for seventeen years. In order to do so,
it is paying what is arguably the most
expensive rental on the planet at more
than USD 1 million per month for about
2,323 square metres. Gap waited for
an entire skyscraper to be built in order
to secure the right space. Even luxury
brands that have been in Asia for some
time are making a more prominent mark
in Hong Kong. Burberry, for example,
expanded into a larger 5,200 square foot
space – but at a rent 250% higher than
the last tenant paid.
Untapped potential
Those investments – and many
more like them – hint at the enormous
potential for retail sales in China.
Even taking into account the strong
growth in recent years, China still lags
significantly behind most countries in
sales per capita at about US$2,000,
third among the BRIC countries. In
contrast, sales per capita in the US run
at just under US$11,000 and Japan is
the highest at US$13,463. Creating or
increasing brand awareness in Hong
Kong will undoubtedly assist retailers
in gaining access to the Chinese market
and to tug at 1.35 billion purse strings
at a time when consumer spending is on
the increase.
ISSUE 11 • 2013 | 19
18/02/2013 12:18
general real estate | Australia
SIGNIFICANT INVESTOR
VISA: A WORLD OF
OPPORTUNITY FOR
MANAGED FUNDS
WARWICK PAINTER, SYDNEY
I
n May 2012, the Federal
Government announced that it
would introduce a new stream of
visa referred to as the ‘Significant
Investor Visa’, which would provide
high net worth individuals with the
ability to apply for an Australian visa
and ultimately permanent residence
on the basis of a minimum investment
in Australia of $5 million. Applicants
would not be required to satisfy the
innovation points test, which would
otherwise apply under a business
investment or skilled migration
application. There would also be no
upper age limit for applying, providing
a golden opportunity for high net worth
individuals wishing to migrate to and
invest in Australia.
In August this year, the Department of
Immigration and Citizenship announced
more detail about how the Significant
Investor Visa would operate and, in
particular, the conditions that would
apply to a ‘complying investment’. The
new stream of visa officially commenced
on 24 November 2012 with the enactment
of the Migration Amendment Regulation
2012 (No.7) (Regulations). The issue of
the Regulations has finally allowed fund
managers to have detailed information
about the type of managed fund into
which investments can be directed in
order to qualify for the new visa.
The Significant Investor Visa is a new
stream within the Business Innovation
and Investment (Provisional) (Subclass
188) visa and the Business Innovation
and Investment (Permanent) (Subclass
888) visa. Considerable interest in the
new visa is reported to have been shown
by high net worth individuals across
Asia (and in particular China). It is
expected that, with the release of the
Regulations, there will be significant
opportunities for operators of managed
funds investing in complying assets
to take advantage of this interest by
tailoring both existing and new products
to receive the investments that will
follow. With a reported expectation
of up to 700 applicants annually,
this represents a significant pool of
investment funds that will need to be
managed appropriately and within
the conditions provided under the
Regulations.
Additional flexibility for
managed funds
Of particular interest to local fund
managers will be a clarification and
broadening of the conditions originally
announced in August 2012, so that a
‘complying investment’ can be made
into a managed fund where one or more
18/02/2013 12:18
general real estate | Australia
of the following apply:
• The fund is an unregistered managed
investment scheme, provided the
trustee of the fund holds an Australian
Financial Services Licence (AFSL)
• The investment in the fund is made
indirectly through an ‘investor
directed portfolio service’
• The fund is offered only to a limited
number of high net worth investors
and is not ‘open to the general public’.
When the conditions were announced
in August, they included a requirement
for the managed fund to be ‘regulated
by the Australian Securities and
Investments Commission (ASIC)’ and
to be ‘open to the general public’. This
implied the need for a managed fund
to be a registered managed investment
scheme and offered to retail investors
alongside high net worth investors. The
conditions also appeared to require that
the investment into the fund be made
directly or through a family company or
a controlled family trust of the high net
worth investor.
The Regulations now make it clear
that, in order to be a ‘complying
investment’, a managed fund
simply needs to be a ‘managed
investment scheme’ as defined under
the Corporations Act 2001 (Cth)
(Corporations Act), where the operator
that issues the interests in the fund to
investors, does so under an AFSL and
that this is considered to satisfy the
requirement for the fund to be regulated
by ASIC. There is no requirement
in the Regulations for the fund to be
offered to the general public and indirect
investments in the fund through an
investor directed portfolio service are
specifically allowed.
How can the significant
investor visa be obtained?
In order to apply for the Significant
Investor Visa, applicants must:
• Submit an expression of interest in
SkillSelect (an online service that
enables skilled workers and business
people interested in migrating to
Australia to record their details to be
considered for a skilled visa)
• Be nominated by a state or territory
government
• Make investments of at least $5
million into ‘complying investments’
for a minimum of four years.
The New South Wales (NSW)
Government has announced that in
order to be nominated by the NSW
Government visa applicants will be
required to invest a minimum of 30%
(or $1.5 million at the base level of
investment) in NSW Waratah Bonds.
Announcements by the other state and
territory governments in relation to
their requirements for nomination are
expected to be made shortly.
What are ‘complying
investments’?
A ‘complying investment’ consists of
one or more of the following:
• An investment in a government
bond (however described) of the
Commonwealth, a state or territory
• An investment in a managed
fund (directly or through an
investor directed portfolio service)
(summarised below)
• A direct investment by taking an
ownership interest in an Australian
proprietary company that is not listed
on the Australian Securities Exchange
and that operates a ‘qualifying
business’ in Australia (ie passive
speculative or investment business
is excluded), subject to certain
conditions.
Applicants may hold investments
in each of the above complying
investments and may also switch
between the investment options,
provided that they meet certain
reinvestment conditions. It is likely
that the category of managed fund
investment will provide the most scope
for ready and flexible investment
by applicants under the Significant
Investor Visa.
Investments in a managed
fund
In order to be classed as a ‘complying
investment’, an investment in a
managed fund must satisfy the following
conditions:
• The investment is a ‘managed
investment scheme’ (within the
meaning of the Corporations Act)
• The interests are not able to be traded
on a financial market
• No representation has been made
to any member of the managed
investment scheme that the interests
will be able to be traded on a financial
market
• The issue of the interest is covered by
an AFSL.
In addition, the managed fund must
be limited to categories of investment
specified by the Minister in an
instrument in writing. These categories
include the following:
• Infrastructure projects in Australia
• Cash held by Australian deposit-taking
institutions
• Bonds issued by the Federal
Government or a state or territory
government
• Bonds, equity, hybrids or other
corporate debt in companies and trusts
listed on an Australian stock exchange
• Bonds or term deposits issued by
Australian financial institutions
• Real estate in Australia
• Australian agribusiness.
Importantly, the managed fund is not
required to be registered with ASIC.
This will reduce the levels of compliance
required by the fund, make establishing
funds for the Significant Investor Visa
potentially more straightforward and
enable the funds to be managed at a
lower cost. As noted above, this appears
to represent a relaxation and broadening
of the requirements for a managed fund
to qualify as a complying investment,
when compared to the conditions
originally announced by the Department
of Immigration and Citizenship in
August 2012.
The visa operates for an initial term
of four years. However, holders can
extend their visa term if they satisfy
certain requirements (including if they
have held complying investments for
at least four years and continue to meet
the relevant conditions). They will be
allowed to extend their provisional
visa by an additional two years, with a
maximum of two extensions permitted,
bringing the maximum total period on a
provisional Significant Investor Visa to
eight years.
For migrants, the Significant Investor
Visa has a number of advantages
over other types of visa. Successful
applicants will be granted the following
concessions:
• No upper age limit
• No requirement to meet a points test
• A reduced residency requirement of
160 days over four years in order to
qualify for a permanent visa.
From the Federal Government’s point
of view, this new visa will encourage
investment into Australia and boost
growth in key areas including real
estate, infrastructure projects, financial
planning and funds management
and administration. It will provide
fund managers, in particular, with
the opportunity to create new locally
managed funds to market to wealthy
individuals throughout Asia and other
parts of the world. This could well
provide a ‘world of opportunity’ for
Australian fund managers, in particular
those investing in infrastructure, real
estate and agribusiness.
ISSUE 11 • 2013 | 21
18/02/2013 12:18
general real estate | czech republic
CHANGES TO
BUILDING LAW
IN THE CZECH
REPUBLIC
MAREK STRADAL, PRAGUE
“The new
legislation is
detailed and
offers a certain
level of clarity
”
C
zech planning and
construction law is governed
by Act No. 183/2006
Coll., on zoning, planning
and construction (the Building Act).
Although several amendments to the
Building Act have come into force
since its introduction in 2006, major
amendments to the statute and related
law have been made by the government
and Parliament under Act No. 350/2012
Coll. The new law came into force on 1
January 2013. However, any building,
zoning or other administrative procedure
commenced prior to 1 January 2013 will
be governed and decided by reference to
the law in force before the beginning of
this year.
Alongside the amendments to the
Building Act there have been huge
increases in the administrative charges
and fees associated with a variety of
administrative acts and decisions made
by building authorities. Most of the pre1 January 2013 charges have doubled
and new charges have been introduced.
Authorized inspector
One of the most important changes
of particular interest for developers is
the new provision generally known as
the “shortened building procedure.”
This allows a developer to instruct an
authorized inspector who can issue
a building construction certificate. A
certificate has the same legal force as
the standard building permit issued
by the competent authority. In other
words, an authorized inspector´s
certificate removes the need to follow
the building procedure conducted by
that authority. However, the certificate
has legal force only if it is duly
delivered to the relevant authority.
It should be noted that the original
legislation governing the activity of
authorized inspectors had been heavily
criticized due to its impracticality and
its imperfect theoretical foundations.
This led the highest Administrative
Court of the Czech Republic to hand
down several key judgments on
important points requiring interpretation.
By way of a summary of the main
points arising, certificates issued by
authorized inspectors which were
notified to the building authority prior
to 1 January 2013 will not be treated
as administrative decisions and thus
may not be challenged either under
any administrative appeal mechanism
operated by the competent building
authority in the administrative courts.
The only legal remedy available is to
commence an administrative action in
which the building authority will decide
whether or not the certificate establishes
a right to build.
The new legislation is detailed
and offers a certain level of clarity.
However, a developer may not find the
possibility of instructing an authorized
inspector at all attractive due to the
cost of doing so. This is because the
competent building authority has several
ways of intervening in the certificate
approval process.
The following changes are the most
important. The building authority may
decide that certain types of construction
development are not suitable for the
grant of a certificate (in which case use
of the standard building procedure is
18/02/2013 12:18
general real estate | czech republic
mandatory). Any agreement between
the developer and an inspector must
be notified to the competent building
authority without undue delay. Any
express development consents must
still be collected from any persons
and entities normally be involved in
the building procedure just in case
an authorized inspector cannot be
instructed. These consents need to be
attached to the certificate when it is
submitted to the building authority.
The building authority publishes the
certificate for at least 30 days on the
relevant official noticeboard. During
this period, objections may be raised by
any person who would be deemed to
be involved in the building procedure.
Furthermore, the building authority may
itself apply conditions to the certificate
and as a result there is no automatic
right to commence the development
works. Any objection or condition that
is raised suspends the operation of the
certificate. Furthermore, a certificate that
is subject to any objection or condition
needs to be submitted to the appellate
building authority for consideration. The
appellate authority then decides either
that the certificate is valid and binding
or that it is null and void. The right to
construct the building based on a valid
certificate lasts for two years.
Zoning permit
Several types of procedure and
administrative decision apply to
the grant of zoning permits. The
appropriate procedure to use depends
on the nature of the development. As
a result of recent changes, some minor
development zoning permits or zoning
consents will not need to be obtained.
This exemption applies in particular
to newly constructed small buildings
with a maximum surface area of 25
sq. m. which are no more than 5 m.
high and are not located less than 2 m.
from a boundary. Such developments
are subject either to the relevant
building approvals or do not require
any administrative approval. As from
1 January 2013, the new legislation on
zoning and building permits is far more
coherent. In specific cases, the building
authority is entitled to merge the zoning
and building procedures into one single
procedure (following an application
from a developer) and deal with all
aspects of the development.
The legislation imposes additional
administrative requirements on
developers They must obtain the
views of any authorities (other than
the competent building authority)
that are required by law. The same
administrative requirement applies to
seeking the views of the owners of
public infrastructure. Other procedural
changes provide that the building
authority must issue the zoning decision
within 30 days, or 90 days where the
case is complicated. The duration of a
zoning permit is decided by the building
authority and will be valid for at least
two years but for no longer than five
years. Several procedural changes
apply to the decision making process
for zoning consents. Specific types of
development do not need to undergo
the full zoning procedure and may be
approved in a less administratively
demanding way.
Building permit
As indicated above, the list of
developments requiring or not requiring
building approval has been amended.
In particular, distribution power grid
components (excluding buildings)
require zoning approval only. Several
procedural changes have been made to
the legislation concerning developments
that are subject only to notification
requirements (these being small scale
developments and any alterations to
such developments). In contrast to the
pre-1 January 2013 position, however,
the main procedural change is that
where the building authority does not
respond properly to the making of a
notification then there is no longer the
automatic right to develop the property.
A valid development right lasts for two
years instead of 12 months. Should the
competent building authority decide that
the building notification is incomplete
or otherwise improper, the notification
procedure will be replaced by the
standard building procedure for which
an application has to be made.
Miscellaneous
There are minor changes to the
occupancy permit legislation. These
include, for example, new legislation
concerning reviews of the occupancy
consent. Furthermore, there have been
improvements to legislation concerning
the removal of illegally constructed
buildings and to provisions covering
retrospective development approval.
The legislation contains new conditions
that must be met in order to approve the
removal of an illegal building.
ISSUE 11 • 2013 | 23
18/02/2013 12:18
general real estate | germany
TAX ON INBOUND REAL
ESTATE INVESTMENTS
FALKO TAPPEN, FRANKFURT
G
ermany has been a solid
and predictable real estate
investment location for
foreign investors for many
years. The German property market
offers increasing rents and stable returns.
The tax and mortgage rates are low.
Legal protection, the lack of inflation
risk and the fact that the country is not
currently facing a debt crisis, unlike
other European countries, are equally
important drivers in the German market.
All in all, there are many factors that
would encourage investment. If the main
tax traps that lie in the path of buying a
property and considered and avoided,
Germany can to an extent be a tax haven.
Luxembourg is one of the most
important European jurisdictions and is
viewed as a gateway for inbound and
outbound investments. Because of this,
the taxation of dividends and capital
gains is dealt with in the revised Treaty
on the avoidance of double taxation
between Luxembourg and Germany,
dated 23 April 2012. This Treaty was
ratified by the German government on 5
December 2012 and became effective on
1 January 2013.
Real estate transfer tax
(RETT)
Ten of the sixteen German federal
states have already raised the real estate
tax rate to 5% (from an initial 3.5%).
For large scale investments this increase
may create a huge tax liability. As
every purchase of domestic real estate
is subject to real estate transfer tax
investors cannot avoid the tax burden by
implementing an asset deal. Therefore
investors generally prefer share deals.
Different methods apply depending on
the legal form of the real estate holding
company that is acquired. If an investor
buys a German partnership, it must be
careful to ensure that initially it acquires
no more than 94.9% of the shares. If it
fails to do this RETT is triggered. The
vendor will then hold a minority interest
of 5.1% for another five years. After five
years the minority interest can generally
be sold without triggering a RETT
liability. In order to make this structure
work, any changes in ownership in the
five years preceding the purchase of the
company must be declared.
If the real estate holding company is a
corporation, RETT can also be avoided
by acquiring only 94.9% of the shares,
but in contrast to the purchase structure
for partnerships, the minority interest
of 5.1% must be held by the vendor
permanently, or by a third party. In this
case it is important that no shareholding
company ever owns 95% of the shares.
In order to reduce the relatively high
foreign ownership, a RETT-blocker
company (usually in the form of a
partnership) can be interposed to acquire
the 5.1% minority interest in the real
estate holding corporation. The purchaser
then owns 94.9% of the company and the
vendor or third party owns the remaining
5.1%. The effective ownership is thus
about 99.74%. This method requires
the taking of special organizational
precautions because the RETT-blocker
company cannot be treated as a
subsidiary of the investor. If it were so
treated the shares held by the RETTblocker company would be attributed to
the investing company and RETT would
thus be triggered.
The legislator may try to prevent the
use of these RETT-blocker-structures by
including an amending provision in the
Annual Tax Act of 2013 dealing with the
economic ownership of 95% of shares.
This provision has not yet been adopted
but it remains to be seen when or even if
this will happen.
Value added tax (VAT)
In order to review VAT liability, it is
necessary to differentiate between an
asset and a share deal. If the real estate is
sold through an asset sale arrangement,
then the sale can be deemed to be a
transfer of an entire business. In this
case the purchase price is not subject to
German VAT and the purchaser takes
over the legal position of the transferor.
But if the sale is not deemed to be
a transfer of an entire business, the
acquisition of real estate is nevertheless
exempt from German VAT. However, the
vendor has the option to give up the VAT
exemption. Therefore VAT is triggered
and the purchaser can only deduct this
tax burden as input VAT if the property
is rented out subject to VAT (meaning to
businesses that that do not carry on VATexempt activities).
A share deal is not subject to German
VAT if the Luxembourg resident investor
runs any business activity apart from
the mere holding of shares so that the
transaction is deemed to take place in
Luxembourg. This is different to an asset
deal where the transaction is always
deemed to take place in Germany. But if
the investor is a mere financial holding
company (its only activity being to hold
shares), then the acquisition of shares is
in turn taxable in Germany but is exempt
from VAT.
Debt financing
Foreign investors can take advantage
of structures which reduce the domestic
tax base by generating deductible finance
18/02/2013 12:19
expenses in Germany and obtaining
income from these financing transactions
abroad. In this way the income on
investments in Germany is taxed at the
lower tax rate in Luxembourg.
However the German “interest barrier”
regulation is intended to tackle these
cross-border financing structures. This
regulation limits the tax deductibility of
interest payments as operating expenses.
The interest barrier rule applies in
principle only to affiliated groups of
companies which have a domestic
business establishment. Through a legal
fiction, German commercial partnerships,
corporations and all foreign companies
investing directly in real estate constitute
a domestic business establishment.
Only German asset management
partnerships do not constitute a business
establishment, so that the interest barrier
regulation does not apply.
There is however a limit to the
business-related tax exemption. The
limitation on tax deductibility does not
apply if the net interest expense is less
than €3 million. Therefore it is useful
to split up portfolios of real estate
and to transfer the smaller portfolios
to affiliated companies in order for
them to qualify as individual business
establishments.
Trade tax
The avoidance of trade tax is also
very important because the tax burden
can amount to 17.15% of the profit.
Therefore the legal form of the company
needs to be considered. Foreign investors
that invest directly through their foreign
entity in German real estate are not liable
to trade tax. When indirect investments
are made through a German partnership
it is important to take into account that
the partnership is deemed to be only
managing an asset. This means that care
should be taken to avoid the entity being
deemed to be a commercial partnership
or a commercial property trading
partnership. Exercising such care means
that no trade tax is levied. Therefore
it is generally better to invest through
a partnership resident in Luxembourg
because the designation of the entity
does not matter for trade tax purposes.
German resident corporations are
always subject to trade tax as a matter
of law. But if the corporation is only
managing an asset, an extended relief
applies so that no trade tax burden arises.
For both types, strict rules have to be
complied with in order to ensure that
companies are deemed to be only asset
managing companies.
Considering everything mentioned
above, it often turns out that the best
way to invest in German real estate is
by establishing a foreign partnership
which operates as a deemed business.
If use of a German entity is considered
indispensable, then it is generally
advisable to invest through a mere asset
management partnership.
Direct investment
Under the new treaty between Germany
and Luxembourg, Germany has the right
to tax income derived from the direct
use, letting or use in any other form of
immovable property (known as the situs
principle). This is due to the fact that there
is a very close economic link between the
source of the income and the state where
the source of that income is located.
In Germany, institutional investors are
subject to limited corporate income tax
on income derived from letting because it
is treated as business income. This fiction
applies also to the alienation of real
estate. The tax on income from letting
and leasing as well as on capital gains
arising out of immovable property in
Germany is levied by way of assessment.
Investment through a
German asset management
partnership
German partnerships are not covered
by the double taxation treaty, because
they are deemed to be non-corporate
transparent entities. Income generated
by those entities is taxed at partner-level.
Under the rules, partners are treated as if
they were investing directly in real estate.
Income from letting and leasing as well
as any capital gains made by a real estate
partnership is thus subject to taxation
in Germany, because the country has
the right to tax income wherever the
property is located.
The alienation of interests in the
partnership is deemed to be an alienation
of the specific assets of the entity.
Under German tax law, the assets of the
partnership belong to the partners and
interests in partnerships are not treated as
separate assets.
The assets of the partnership are
therefore divided into movable and
immovable property. The sale of the
interest in immovable property is
subject to taxation in Germany. The
other movable assets, such as goodwill,
are taxed in Luxembourg, provided
that the asset management partnership
is not deemed to have a permanent
establishment in Germany.
Investment through a
German corporation
German corporations are covered by the
double taxation treaty because they are
independent taxable entities. Accordingly,
the corporation is liable to tax in
Germany. If investors who are resident in
Luxembourg invest in real estate through
a German corporation they only receive
dividends. The withholding tax rate for
dividends under the new double taxation
agreement is 15%. Where the dividend
is paid by a subsidiary to a parent the
withholding tax rate is only 5% of the
gross amount of the dividends. This
“participation exemption” can be claimed
by companies that are not partnerships
or investment companies and which
directly own at least 10% of the capital
of the distributing company. Under the
old treaty, the participation exemption
also applied to investment companies.
However, has been expressly excluded
under the new double taxation treaty
on dividends paid to those investment
companies.
Previously, under the old double taxation
arrangements, Luxembourg had the sole
right to tax the alienation of shares of a
German real estate corporation. However,
a clause has been introduced in the new
treaty that gives Germany the right to
tax the company’s capital gains (since
the immovable property giving rise to
the gains is situated in Germany), if
more than 50 percent of the amount of
the gains is derived directly or indirectly
from immovable property. The relevant
50% limit, however, refers to the market
value of the relevant shares and not to the
market value of the relevant assets. The
entire profit from the alienation of shares
is taxable and not just the income that is
attributable to the undisclosed reserves of
real estate, but rather the entire profit from
the alienation of shares. Such capital gains
on holdings in Luxembourg are generally
95% tax-exempt in Germany (except
in the case of financial institutions).
Nevertheless the relevant holding now
must file a tax return in Germany, which
was not previously the case.
Room for tax optimization
However, there is an option for
avoiding taxation in Germany.
Withholding taxes and income taxes
liabilities for the parent company can be
completely avoided by using a two-tier
structure in the form of a Luxembourg
holding company structure known as
SOPARFI. The taxation of capital gains
in Germany can only be avoided by not
selling the shares in the German real
estate company, but only the shares of
the subsidiary resident in Luxembourg.
In such a case no chargeable event is
triggered in Germany.
ISSUE 11 • 2013 | 25
18/02/2013 12:19
STUDENT HOUSING A NEW ASSET CLASS IN
GERMANY
FABIAN HINRICHS, FRANKFURT
Student housing as an
asset class in Germany:
background and market
conditions
In the past, student accommodation has
not proved attractive to investors in
Germany. Students have traditionally
been deemed to be difficult tenants with
a relatively low income out of which
to fund rental payments and a tendency
to occupy apartments for a restricted
period of time. Landlords have feared
a high rate of wear-and-tear due to the
frequent changes of occupier, long term
vacancies and low yields when letting
property to students.
These attitudes seem to be in flux in
Germany. Market circumstances have
evolved and investment in student
accommodation projects appears to be
of increasing interest. The number of
students in Germany has been high in
recent years and is expected to increase
further. At the same time, there is
an extreme shortage of apartments
and halls of residence suitable for
student needs. This is exacerbated
by the fact that publicly run student
accommodation is often old fashioned
and in desperate need of refurbishment.
At the end of 2011, 2.2 million students
were registered at German universities
whilst German student accommodation
only offered space for 181,000. The
shortfall was discussed at a round table
meeting held in November 2012 which
was attended by the German Federal
Minister of Transport, Construction
and Planning, by representatives of the
states and municipalities as well as by
representatives of the housing industry
and student unions.
Investors and fund providers have
recognized the opportunities offered by
student accommodation in Germany.
Several smaller closed-end funds
holding single real estate assets designed
as student accommodation have been
set up. In 2011, a €69 million closedend fund was created by a German fund
provider to invest in five apartment
complexes in different cities throughout
the country. Other fund providers are
currently planning to set up funds
(closed-end and special funds) to invest
in student accommodation.
Legal Framework
Whilst it appears that a market for
investing in student housing is only
now beginning to take off, special
tenancy related provisions designed
for “temporary use” of leased property
18/02/2013 12:19
(vorübergehender Zweck) were first
enacted in 1942 (RGBl. I, 712). In 1982,
a clause was introduced for the first time
into the German Civil Code (an earlier
version of Sec. 564b VII BGB) that
expressly referred to student housing.
Nowadays, the special tenancy regime
for student accommodation is set out in
Sec. 549 III BGB.
Definition of student accommodation
German statutory law (Sec. 549 III
BGB) provides that “student tenancies”
only arise if the premises let to a tenant
are located in what is known as a
“student hostel” (Studentenwohnheim).
The special tenancy law provisions
do not apply if single apartments
happen to be let to students and if these
premises could just as well be let to
non-students. It is not only the outer
appearance and equipment of buildings
and apartments or the allocation of flats
within a building that distinguishes
such student hostels from “normal”
apartments. According to a recent
ruling of the German Federal Supreme
Court, a building qualifies as a student
hostel only if it is subject to a letting
reservation system that is designed to
serve students’ needs. For example, the
reservation system must aim to grant
residential accommodation to as many
students as possible and must therefore
provide for a regular changeover in the
occupation of apartments, restricted
short term leases, relatively low rents
and the allocation of accommodation to
students according to set social, general
and objective criteria (BGH, 13 June
2012, VIII ZR 92/11). Where these
conditions are not met, the special Civil
Code provisions do not apply.
Content of special provisions
Under Sec. 549 III BGB, a number of
provisions which generally apply to
residential leases are excluded from
leases covering apartments located in
student hostels:
Rent review
The German Civil Code provides for
several ways in which the rent can be
increased. During the lease, the landlord
and tenant may agree either an increase in
rent or to implement a stepped rent where
the rent is increased automatically after
certain periods of time. Alternatively,
lease agreements may link the rent to
a given index and provide for a rent
review once the index has reached a
certain level. Where the lease agreement
does not contain any provisions on rent
review, the landlord may demand that
the rent is increased up to the benchmark
level in the immediate locality. Under
Sec. 549 III BGB, none of these
provisions apply to lease agreements in
relation to student hostels, with the effect
that any rent review is excluded during
the currency of such leases.
Termination
In Germany, the landlord may
only terminate leases of residential
premises if it has a justified interest
in the termination of the lease.
Usually, the “justified interest” is the
landlord’s intention to use the leased
accommodation for its own purposes
or for those of its relatives. Without
such a “justified interest”, the landlord
cannot terminate a residential tenancy
at all, unless there is an significant
ground (such as the tenant’s failure to
pay rent over a certain period of time).
These provisions again do not apply to
student hostel leases which last only for
a limited period of time.
The notice period to be given by the
landlord for “ordinary” residential
leases is three months. This notice
period is extended by additional
cumulative periods of three months on
the fifth and eighth anniversaries of the
tenancy. Under Sec. 549 III BGB, these
notice periods do not apply to leases
covering student hostels. Moreover,
Sec. 573c BGB provides that parties to
the tenancy agreement may provide for
shorter notice periods for residential
accommodation that is leased for
“temporary use”. This provision allows
landlords of student hostels to insist on
short notice periods (for example one
month) and to evict residents without
giving any reason.
Exclusion of the tenant’s
pre-emption right
German statute provides that a tenant
of residential premises has a right of
pre-emption if a condominium has been
established after the tenancy starts. In
order to ensure the rotation of student
lets the tenant’s right of pre-emption
does not apply to student hostels.
Conclusion
The provisions summarized above
have been designed to respect the
interests of both landlords and tenants
of student hostels. The above provisions
also provide important safeguards for
investors considering student hostels as
an attractive asset class. It might appear
to be a disadvantage that leases relating
to student hostels cannot be subject to
rent review. On the other hand, investors
should consider that an annual rent
review is rare in Germany even if the
lease relates to accommodation other
than student hostels. In this light it
might be thought that any disadvantage
for student accommodation appears
minimal, given that tenancies with
students only run for short periods. This
allows a landlord to demand a higher
rent after a relatively short interval, each
time a new lease is entered into with
a new student. In this context, it may
also be an advantage for the investor
or landlord that lettings to students
may be terminated at very short notice.
This makes it easier for a landlord
to cause properties to be vacated
after a certain period of time without
having to undertake the same type of
costly litigation that is customary for
residential leases in Germany. Finally,
it is important for investors to know
that the sale of single apartments or of
complete student hostels does not trigger
the tenant’s pre-emption rights and this
serves to improve the marketability of
student hostels.
As a result, German statute law
appears to be well adapted to student
accommodation. It is now up to the
investors to really make student housing
an asset class of its own.
“Market
circumstances
have evolved
and investment
in student
accommodation
projects appears
to be of
increasing interest
”
ISSUE 11 • 2013 | 27
18/02/2013 12:19
general real estate | hungary
PERFORMANCE
GUARANTEES IN
CONSTRUCTION DISPUTES TWO RECENT HUNGARIAN
COURT DECISIONS
VIKTOR RADICS, BUDAPEST
U
nconditional first demand
bank guarantees are often
used as performance
guarantees in the
Hungarian construction market and
usually amount to ten percent of the
net contract value. If the construction
project is completed as scheduled, the
developer returns the bank guarantee
to the contractor at the handover stage,
normally in exchange for a maintenance
guarantee.
Unfortunately, many construction
projects face significant technical
difficulties and delays at the handover
stage and the developer-contractor
relationship may often be under serious
pressure by then. Whilst it is always
possible for legal and technical disputes
to be settled at the end of detailed,
thorough and usually time-consuming
court or arbitration proceedings,
enforcement of the performance
guarantee is seen by the developer
as a speedy mechanism to satisfy its
claims against the contractor regardless
of whether the claims are justified
or not. Unfortunately, in some cases
developers try unfairly to take advantage
of the unconditional nature of the bank
guarantee and invoke it against the
general contractor during the financial
completion of the project.
Hungarian legal practice follows
international standards, including the
Uniform Rules for Demand Guarantees
issued by the International Chamber of
Commerce (URDG 458 and its revision
by URDG 758 in 2010). These standards
recognize the fact that a bank guarantee
represents a legal relationship between
the guarantor bank and the developer
that is completely independent from the
legal relationship between the developer
and the contractor. Accordingly, the
bank is not allowed to examine whether
a demand presented by the developer
under the performance guarantee is
justified but must pay the amount
demanded unless the demand is formally
defective (article 19 of URDG 758) or
obviously fraudulent.
In this legal context, contractors
have only limited grounds they can
use to prevent payments under the
performance guarantee in circumstances
where it appears the demand is
unjustified. An objection addressed
to the guarantor bank will not suffice
because the bank guarantee relationship
is independent from the underlying
construction contract. The only
available legal recourse available to
the contractor involves commencing
a formal lawsuit against the developer
and filing an application for provisional
measures which, if granted, would
temporarily prohibit the developer from
presenting a demand to the guarantor
bank, usually until the conclusion of
the lawsuit. Courts have the power to
grant provisional measures either to
preserve the status quo underlying the
legal dispute at hand or to prevent the
claimant from an imminent threat of
damages provided that the advantages to
be gained by the measure supersede the
disadvantages caused.
Hungarian courts have interpreted
the scope of their judicial discretion
extremely conservatively. Court
rulings have placed weight on the
fact that the contractor provides the
developer with the bank guarantee in
full knowledge of its unconditional
nature. In other words, the court has a
tendency to be influenced by the fact
that the contractor accepts the risk of an
unjustified demand when providing the
developer with an unconditional bank
guarantee. Nevertheless, in two recent
cases Budapest courts have granted
provisional measures on an application
by the contractor and have temporarily
prohibited the developer from presenting
demands under the bank guarantee.
In one case, the developer terminated
the construction contract on the basis
of alleged delays by the contractor and
then sought bankruptcy protection from
the claims of the creditors, including a
claim brought by the contractor who was
seeking damages from the developer
based on the unlawful termination of the
contract. Having heard the contractor’s
arguments, the court prohibited the
developer from presenting a demand
under the performance guarantee in
order to preserve the status quo. The
court reasoned that if, at the end of
full court proceedings, the court found
that the developer’s claim could not be
justified, any payment made under the
bank guarantee might be incapable of
recovery from the developer due to the
developer’s bankruptcy.
In another recent case, a serious
dispute arose between the developer and
the contractor as to whether the project
had been completed in accordance
with the specifications contained in
the construction contract and related
technical documentation. The developer
also referred to very significant technical
defects in the facility and threatened
the contractor that it might present
a demand under the performance
guarantee unless both parties could
reach an agreement, in a very short
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general real estate | hungary
“Hungarian
courts have
interpreted the
scope of their
judicial discretion
extremely
conservatively
”
timescale, on the financial aspects
of the completion of the project . On
these facts, the court, in a first instance
decision, prohibited the developer from
presenting a demand under the bank
guarantee. The court ruled that the
status quo should be preserved on the
basis that although the developer had
refused to finalize the formal handover
of the building as required by both
the contract and the relevant legal
framework, the facility had already
been opened to the public and so, in the
opinion of the court, it was likely that
the facility had indeed been completed.
These two recent court decisions
indicate that courts, in some cases,
are prepared to use their discretionary
power to prohibit developers
temporarily from enforcing performance
guarantees. Due to statutory time
constraints, courts are not in a position
to deliver detailed rulings based on
a full examination of the underlying
facts and circumstances but instead
will decide on an initial basis whether
the competing claims of the contactor
and the developer are justified and
what consequences, if any, payment
under the bank guarantee might have
for both parties. Where the contractor
is in a position to prove that a
developer’s claim for payment under
the bank guarantee lacks foundation, a
temporary prohibition on enforcing the
performance guarantee can be sought
from a court. It goes without saying
that even a temporary prohibition
against enforcement of the performance
guarantee can be very important for a
contractor during the stressful period
leading up to the financial completion of
a development project.
ISSUE 11 • 2013 | 29
18/02/2013 12:19
general real estate | middle east
THE NEW SAUDI
MORTGAGE LAW
HELEN HANGARI, DUBAI
T
he long-awaited Saudi
real estate mortgage law
was officially published
in August 2012 and is set
to come into force early in 2013. The
introduction of a mortgage law in Saudi
Arabia is awaited with great expectation
as it is anticipated that it will fuel the
growth of the real estate sector in the
Kingdom. The law is one of the newly
published ‘finance laws’ that should
be carefully monitored by real estate
developers and banks keen to benefit
from the growing Saudi market. In
addition, it is hoped that the new law
will give a much needed boost to real
estate financing in the Kingdom which
in turn will help the growth of non-oil
ventures in the country.
The mortgage law will come fully
into force when the implementing
regulations are issued by the Saudi
Arabian Monetary Agency (SAMA).
The new law, once implemented, will
enable individuals and corporate entities
to buy (or leverage) their properties
with mortgage-backed finance and will
help developers of real estate assets (for
example hotel developers) by making
development financing easier to obtain
or more ‘bankable’. For this to happen,
first the law needs to be backed, by
effective regulation and implementation
and, secondly, the Saudi market needs to
continue to have sufficient liquidity with
banks having an appetite for lending.
Officially titled as the Law on
Registered Real Estate Mortgage (Royal
Decree No. M/49 dated 13/08/1433H),
the mortgage law is a clear step forward
for Saudi Arabia as it introduces more
certainty for banks in terms of the type
of security that they are able to take over
real estate assets in the kingdom. Because
the mortgage law has been anticipated
for a number of years, a large number
of existing financing deals (some dating
back a number of years) in Saudi Arabia
already include provisions requiring
borrowers to grant mortgages over their
real estate assets once the mortgage law
comes into force. Therefore, it is quite
likely that a number of banks in Saudi
Arabia will put those provisions into
effect and, as a result, we anticipate a
flood of applications to register such
mortgages in the months following
the publication of the implementing
regulations.
Creation of a real estate
mortgage
is to be registered under the mortgage
law, by which the mortgagee (that is the
creditor) will acquire a real right over real
property. Registration of a mortgage is
a requirement of the mortgage law and
allows a creditor to have priority over all
other creditors in respect of a real estate
asset.
A registered mortgage will be deemed
to include all associated features of the
mortgaged property, namely all buildings,
plant, structural works and so on whether
existing at the time the registered
mortgage was created or constructed
during the existence of the mortgage.
Unfortunately the mortgage law does
not include criteria or guidance on who
may be a mortgagee. This contrasts with,
for example, the Emirate of Dubai’s
mortgage law which specifies that a
mortgagee can only be a bank authorized
to do business in the United Arab
Emirates by the United Arab Emirates
Central Bank. We do not know if there
will be foreign restrictions placed on
who is eligible to be a mortgagee but it
is reasonable to assume that the general
rules that apply to restrict foreign
ownership of real estate in Saudi Arabia
will apply to mortgagees.
A ‘registered real estate mortgage’
is defined as a mortgage contract that
18/02/2013 12:19
“the mortgage law is a clear step
forward for the Kingdom as it
introduces more certainty for banks
Registration of a real estate
mortgage
mortgage void. It may, however, be the
case that a Saudi court would treat a lack
of registration as contrary to public policy
(as it would most likely not be registered
in order to avoid registration fees) and,
therefore, rule that it is void.
Registration of a real estate mortgage
will be effected in one of two ways,
depending on whether the real estate
asset is already registered or not.
If the real estate asset is registered
under the ‘Realty ‘in kind’ Registration
Law’ issued by Royal Decree No. 6
of 11/02/1423H, the registration of
the mortgage will be done under that
law. If the real estate asset has not
been registered, the registration of the
mortgage does not trigger registration
of the asset under the registration law
and instead the mortgage is registered
by being ‘marked’ as registered at the
competent court or with the competent
notary public. In each case, registration
fees will be payable but details of how
such fees will be calculated have not yet
been released.
In the event that a mortgagee becomes
entitled to enforce a duly registered real
estate mortgage, it will be entitled to
receive the proceeds of sale of the real
estate asset with any other creditors of the
mortgagor ranking behind it. If the sale
proceeds are insufficient to settle the debt,
the mortgagee will have recourse to the
mortgagor’s other assets as an unsecured
creditor. If the proceeds of sale exceed
the debt then the excess will belong to the
mortgagor. The mortgage law envisages
sales arising from enforcement taking
place by way of auction.
Effect of registration
The future
A real estate mortgage will not be
effective against third parties until it is
registered. This arguably means that an
‘unregistered’ real estate mortgage could
still be effective between the mortgagor
and mortgagee as the law does not refer
to a lack of registration rendering the
The publication and imminent
implementation of the mortgage law
is clearly a step forward in terms of
introducing more certainty in respect of
enforceable security interests that can be
granted over real estate in Saudi Arabia.
However, when the mortgage law is
Enforcement of a real estate
mortgage
”
implemented, observers will be keen to
see exactly how it will be implemented
in practice.
In particular, clear processes will need
to be established for the registration
of real estate mortgages including
guidance on:
• Eligibility criteria (if any) for
mortgagees - for example, whether
these need to be authorized Saudi
banks;
• The precise procedure for registration
taking into account whether the real
estate asset is already registered or
not;
• The form a registered mortgage
should take; and
• What supporting documentation may
be required, including original title
deeds (if available), application forms
and identification or authorization
requirements for the mortgagor and
mortgagee.
The coming months will be of
great interest to banks and real estate
developers in the Kingdom and we
expect to see high levels of activity
following the implementation of the
mortgage law.
ISSUE 11 • 2013 | 31
18/02/2013 12:19
general real estate | norway
REAL ESTATE COMPANIES NORWEGIAN TAX TRENDS
BÅRD CHRISTIAN BRAATHEN, OSLO
F
ollowing the Norwegian tax
reform in the period from
2004 to 2006, the real estate
business has adapted and
developed in a direction which now
sees real property being sold through
single purpose real estate companies
rather than by way of a direct sale of
the property. Subsequent legislation
has encouraged this strategy. Market
practice now places greater importance
on the valuation of the company’s tax
position and the buyer generally claims
a reduction in the sales proceeds due
to the tax disadvantages for the buyer
inherent in a share transaction.
The tax reform introduced ways
for investors to adapt and reduce
their overall tax costs in real estate
transactions.
Limited companies in Norway are
taxed as separate taxable entities. The
tax position of the real estate company
will thus in principle be carried forward
and not be affected by the transaction.
1. Norwegian taxation
1.1 Disposal of real property and
amortization
Under the Norwegian Tax Act of
1999, a disposal of property will trigger
a capital gains liability. A capital gain
from the disposal of real property is
taxable at a rate of 28 per cent and a
loss is correspondingly tax deductible.
Both the gain and the loss are taxable
and deductible on a deferred basis on
a declining balance. A minimum of 20
per cent of a gain is taxed annually as
income, while a maximum of 20 per
cent of a loss is deductible each year.
If real property is sold as an asset the
buyer will, for tax purposes, be entitled
to a step-up of the property’s tax base,
subject to tax amortization.
Business property is subject to
amortization at an annual rate of two
per cent, while other buildings and
developments may be amortized by four
per cent annually. Technical equipment
and building installations (for example
lifts, building ventilators and so on)
are subject to amortization at a rate of
10%. All categories are amortized on a
declining balance.
1.2 Disposal of shares - The
Norwegian tax reform of 2004 to 2006
and subsequent tax amendments
From 2004 to 2006 the Norwegian
corporate income tax regime was subject
to substantial amendment.
A participation exemption was
introduced for the disposal of shares.
As a result corporate shareholders, once
they met certain criteria, were allowed
to sell shares with limited capital gains
taxation (effectively 0.84% of the net
gain). This applied to all shareholdings,
including portfolio investments. The
rules do not include any minimum
ownership requirements and thus
apply also to minority shareholders.
Investors in public or private limited
companies, partnerships, self-governed
financial institutions, mutual insurance
companies, share investment funds, and
companies fully owned by government
all fall within the participation
exemption regime.
Originally the participation exemption
included mainly investments in
public and private limited companies.
Subsequently, legislation was amended
to extend these categories to include
investments in partnerships.
Limited capital gains tax was
abolished with effect from 2012 and this
has resulted in share transactions now
being fully tax exempt.
In contrast with the position applying
to a direct sale of property, a sale of
shares will not, however, entitle the
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general real estate | norway
buyer to re-set the real property’s book
value for amortization purposes.
1.3 Stamp duty
A transfer of title in real property in
Norway is subject to stamp duty at a rate
of two and a half per cent. Stamp duty
is calculated by reference to the market
value of the real estate at the time the
title is transferred.
A share transaction will not trigger
stamp duty, as the real estate company
remains the owner of the property.
Furthermore, a company may be
part of a tax neutral restructuring
(for example in the case of mergers
or demergers) without triggering
stamp duty. Consequently, the stamp
duty regulations also benefit a share
transaction, which is not the case for a
direct sale of real property.
1.4 Withholding tax
Norway does not impose withholding
tax (WHT) on capital gains from the
disposal of shares.
Consequently, foreign resident
investors will not be subject to
Norwegian WHT on any capital gain
derived from the disposal of shares in
Norwegian real estate companies.
1.5 Financial assistance
The Norwegian Public and Private
Limited Companies Act respectively,
both include regulations to prohibit
financial assistance in the acquisition
of a limited company. This is
designed both to ensure that the target
company’s funds are not used to finance
the acquisition and to prohibit the
company’s assets from being used as
security for a debt financed acquisition.
However, with effect from December
2007, new regulations were introduced
that allowed single purpose real estate
companies, once certain conditions
had been met, to put the property up as
security in a debt financed purchase.
2. Compensation for the
buyer’s tax disadvantages
2.1 Negotiations
The starting point for the parties’
negotiations on the share proceeds will
normally be the company’s balance
sheet. The property is generally the
company’s main asset and the parties will
agree on a market adjusted value of the
property (as opposed to the book value).
The agreed market value is reduced by
the company’s debts and liabilities, while
the value of other assets that follow the
company is added to the proceeds.
The question of which values, assets
and liabilities should be considered
and included in the adjusted market
value will be one for negotiation. The
agreed and adjusted market value will
normally equal the share proceeds of
the transaction.
However, because the buyer acquires
the company, the buyer will also inherit
the company’s tax position. Thus the
negotiations will normally address
the net present value (NPV) of the
company’s tax position as at the transfer
date. This will often not be equal to the
tax position’s nominal value recorded in
the books. The share proceeds should be
increased if the tax position represents
an actual value to the company, and
correspondingly reduced if it represents
a liability.
The tax position should be valued
separately, and not by reference to
standard criteria.
2.2 Tax assets and liabilities
A tax asset will typically include a
tax loss that has been carried forward.
In Norway a tax loss can be carried
forward indefinitely. However, the
actual value of the loss will depend
upon whether the company, the buyer or
another group company will be able to
make use of the loss.
Since a share transaction will
not result in a re-basing of the real
property’s book value for amortization
purposes, it is normally considered to
be a tax disadvantage to be made good
financially by the buyer. The existing
tax position on the transfer date is
carried forward for future amortization.
Further, the land on which the
building is located cannot be amortized
for Norwegian tax purposes. The
disadvantage of missing the opportunity
to re-base the property’s book value
must thus be reduced to the extent that
value should be allocated to the site.
Other tax issues affecting real estate
companies are also relevant but will not
be addressed in this article.
2.3 The buyer’s tax disadvantage
compensation
Market practice has evolved in recent
years and nowadays a buyer is likely to
claim a reduction in the sale proceeds of
between 7% and 12%, as compensation
for the tax disadvantages to the buyer
arising from using a share transaction as
opposed to an asset deal.
The price reduction will normally be
dependent on whether the real property
is subject to two per cent or four per
cent annual amortization, and also
be influenced by the value of the tax
amortization book value of technical
equipment and building installations.
A simplified example for illustrative
purposes, based on the following
assumptions, provides:
Euro
The real property (incl. the site):
Market value
10,000,000
Tax value
5,000,000
The site (separately)
Market value
2,000,000
Tax value
1,000,000
Tax loss carried forward
Nominal value
5,000,000
Net value of tax loss
carried forward, agreed by
the parties
1,000,000
Tax disadvantage price reduction
Market value of the real
property
10,000,000
- Site (market value)
2,000,000
- Tax loss carried forward
1,000,000
Market value, adjusted
for site value and tax loss
carried forward
7,000,000
Tax value of the real
property
5,000,000
- Tax value of the site
1,000,000
Tax value, adjusted for site
value
4,000,000
Basis for calculation of
tax disadvantage price
reduction
3,000,000
Tax disadvantage
compensation (10%)
300,000
Based on the assumptions above, and a
negotiated and agreed tax disadvantage
rate of 10%, the total compensation
would reduce the share sale proceeds by
€300,000.
As ever, the amount of compensation
is subject to negotiation. An assessment
of all the different tax positions
that affect the real estate company
is required before an accurate price
reduction can be determined.
ISSUE 11 • 2013 | 33
18/02/2013 12:19
general real estate | poland
RENEWABLE ENERGY
IN THE LIGHT OF
PLANNED CHANGES TO
CONSTRUCTION LAW IN
POLAND
PAWEL BIALOBOK, WARSAW
U
nder the Climate and
Energy Package,
adopted by the European
Commission in 2007, the
European Union requires Member States
to take action by 2020 to: (i) reduce
greenhouse gas emissions by at least 20%
(compared to 1990 levels), (ii) increase
renewable energy’s share of the overall
energy market to 20% and (iii) achieve a
20% improvement in energy efficiency.
The EU agreed to reduce the
renewables’ target for Poland from 20%
to 15% due to Poland’s long-standing
reliance on coal to generate electricity.
Attainment of the above-mentioned
objectives will, of course, require
extending the scope of investment aimed
at generating energy from renewable
sources. Any attempt to increase
investment in the renewable energy sector
will, however, be difficult under current
legislation, due to numerous obstacles
facing potential “green” investors.
Forthcoming changes in
energy and constructionrelated legislation
The Polish Ministry of Finance has
been working on the implementation of
the European Parliament and Council
Directive No. 2009/28/EC (“Directive
2009/28”) which underpins the Energy
and Climate Package.
Directive 2009/28 is to be
implemented through three major legal
instruments known as the “energy threepack”(“trójpak energetyczny”). These
comprise the Act on Renewable Energy
Sources, the new Energy Law and Gas
Law and an Implementing Act. The last
of these contains interim and technical
provisions bringing the “energy
three-pack” into force, as well as
amendments to other acts, for example
the Construction Law Act of 7 July 1994
(“Construction Law”).
The most recent legislative proposals
from the Ministry of Finance leave
little room for optimism. A close
reading of the four legislative
instruments mentioned above suggests
that the changes will not encourage
environmentally-friendly investment
but will instead achieve quite the
opposite. In particular, the amendments
to the Construction Law concerning
the development of infrastructure and
facilities using energy from renewable
sources, which will be brought into
force by the Implementing Act,
amount merely to a partial solution to
the issues and will only constitute a
marginal improvement for investment
purposes over the current set of binding
regulations.
Current legal position
Current legislation provides that the
installation of equipment (such as solar
panels) on a building or other form of
construction up to 3 metres in height
does not require a building permit or
even a notification to the competent
authority. Of course, where solar panels
are installed at a height above 3 metres
such a notification will be necessary. If it
is the case, however, that in addition to
the installation of equipment there will
be some form of construction works that
qualify under the Construction Law as
an extension of an existing building, then
such a development will only be possible
after obtaining a building permit.
Furthermore, under current provisions
of the Construction Law, neither a
building permit nor a notification is
required when free-standing solar panels
are installed. The possibility of applying
this provision to photovoltaic cells has
proved controversial. Nevertheless
the General Office for Construction
Supervision has ruled that free-standing
photovoltaic cells may also qualify as
solar panels. As a result, such projects
have now become a practical reality
and do not require the submission of
an application for a building permit or
notification to the authorities.
Proposed amendment
If the changes to the Construction
Law provided for in the Implementing
Act do come into force, then the
interpretation mentioned above will
lose its significance. The amendment
to the Construction Law provided for
in the Implementing Act removes the
obligation to obtain a building permit
for the construction of installations and
facilities where the total installed power
using solar energy is up to 40 kW and
for any construction works involving
the installation of equipment and
installations with a total installed power
using solar energy of up to 40 kW.
It must be emphasized that the solutions
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general real estate | poland
“the biggest
problem for
developers is the
lack of certainty
regarding the
final shape of the
amendments
”
provided in the Implementing Act are
incoherent because, despite the deletions
mentioned above, the provisions in
the Construction Law allowing the
installation of free-standing solar panels
or devices on buildings up to 3 metres
in height without a building permit or
formal notification are left in force.
Against the background of the
prospective changes to the Construction
Law under the Implementation Act, it
should be stressed that the exemption
from obtaining a building permit
(or from making a notification) for
the installation of free-standing
solar panels would only apply to the
installation of free-standing solar
panels where the power does not
exceed 40 kW. The solutions adopted
in the Implementing Act may, however,
lead to problems of interpretation. Will
it be possible to install solar panels
up to 3 metres in height on buildings
without obtaining a building permit or
making a notification (or in the case of
the facilities higher than 3 metres after
obtaining such notification) regardless
of their power rating?
The amendment to the Construction
Law provided for in the Implementing
Act does not introduce any changes to
existing Construction Law requirements
concerning other types of renewable
energy projects, such as wind farms
or biogas plants. But in this respect,
one could hardly have expected
any revolutionary changes to, or a
liberalization of, the requirements
stemming from the Construction Law.
Given the complicated nature of such
developments, it is even difficult to
imagine the possibility of exempting
such projects from the requirement of
obtaining a building permit.
Lack of certainty
At the time of writing in late
December 2012 the biggest problem
for developers is the lack of certainty
regarding the final shape of the
amendments to the Construction Law.
The acts constituting the “energy threepack” and the Implementing Act have
not yet been published by the Polish
parliament and therefore can still be
subject to numerous changes.
Given the lengthy, and so far
unsuccessful process of implementing
Directive 2009/28, Poland is facing
enforcement action brought by the
European Commission which ultimately
could lead to a hearing before the
Court of Justice of the European
Union. In order to enact at least the
most crucial provisions stemming from
Directive 2009/28, a draft amendment
to the current binding Energy Law (or
the “small energy three-pack”) was
published by Parliament in October
2012, which will also enact, inter alia,
amendments to the Construction Law.
It is worth noting that the amendments
provided for in the “small energy threepack” are almost the same as those to
be enacted by the Implementing Act. It
is not known yet which of the “threepacks” will eventually be passed and
published as law.
ISSUE 11 • 2013 | 35
18/02/2013 12:19
general real estate | uk
ONLINE REAL ESTATE
AUCTIONS ARE CLEAR FOR
UK TAKE-OFF
NICHOLAS REDMAN, LONDON
T
he UK’s real estate
auctioneers were among the
first property professionals
to make significant use of
the internet for business. Catalogues,
conditions of sale and legal packs
have been routinely available online
for at least the last 15 years and many
auctioneers allow bidders to submit
bids using the internet for property
being offered for sale in the saleroom.
But few UK real estate auctioneers
hold fully online auctions. This may
well be because the saleroom approach
remains successful. David Sandeman,
Managing Director of auction industry
observer Essential Information Group
comments: “The 2012 data show that the
auction market enjoyed another positive
year, with gains of around five percent
made in lots offered, sold and amount
raised. Commercial property surged
at the end of 2012 as the gavel fell on
an increasing number of high value
lots.” Yet auctioneers have doubted
too whether contracts concluded in an
online real estate auction are valid under
English law, which has imposed rules
as to the form that real estate contracts
must take for nearly 350 years.
The growth of the auction
sector
A number of factors have boosted the
recent growth of the UK auction sector
by enhancing the basic and traditional
attractiveness of real estate auctions in
which a fully binding contract is reached
on the fall of auctioneer’s gavel:
• The Common Auction Conditions
were introduced in May 2002 and are
now used by the vast majority of real
estate auctioneers in the UK. They
both strike a fair balance between
sellers and buyers and regulate the
relationship between the auctioneer
and bidders. They have encouraged a
number of individuals seeking robust
property investments to supplement
conventional pension arrangements to
bid at real estate auctions.
• In addition, many of those seeking
to dispose of UK real estate today
are attracted by the transparency of
public auctions as it enables them
to demonstrate that sales have been
made at a proper price: these include
insolvency practitioners disposing of
the assets of stricken businesses in
the continuing economic downturn as
well as public authorities impelled by
the Coalition government’s policies to
slim down their property portfolios.
Contractual controls
The form of English real estate
contracts is regulated by section 2 of
the Law of Property (Miscellaneous
Provisions) Act 1989. This provides
that such contracts must incorporate all
agreed terms in writing and be signed
by or on behalf of the parties. The courts
apply section 2 strictly. Last year the
Court of Appeal described that statutory
requirement as “merciless”. Real estate
auctions enjoy a limited exemption from
section 2 as it does not apply to contracts
“made in the course of a public auction”.
Public auctions
There is no doubt that the traditional
saleroom approach routinely followed
by auctioneers leads to a “public
auction”. Large auction firms in the
property sector hire hotel ballrooms;
smaller firms may have their own rooms.
All auctioneers ensure that bidders
have the widest possible access to
their auctions by allowing bids in the
traditional way or by leaving a proxy bid
with the auctioneer or, if the auctioneer
allows it, by using the telephone or the
internet. But is an auction run solely
online and accepting only online bids
truly public in a country where one in
five households are not yet connected
to the internet and where outside urban
areas many computer users have only
limited bandwidth?
Making online bids stick
The use of an online auction-based
process to sell English real estate
coupled with electronic signatures could
save auctioneers the expense of keeping
or hiring a saleroom:
• At a traditional property auction
where a lot is knocked down by
the auctioneer in the saleroom,
the auctioneer routinely requires a
successful bidder to complete and sign
a memorandum of sale setting out
key details such as the property, the
parties and the price along with details
of the parties’ solicitors. But the
memorandum merely records rather
than creates the contract. Section 2
removes all formality requirements
for those auction contracts which are
reached, conventionally, on the fall of
the auctioneer’s gavel.
• Sometimes, though, an item is sold
before or after the auction. Here, it
is not easy to show that the contract
has been made “in the course of a
public auction”. So, the memorandum
is crucial as it constitutes the sale
contract and so must demonstrably
comply with the requirements
of section 2 by incorporating by
reference all agreed terms (including
the sale conditions published by the
auctioneer) in writing and by being
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general real estate | uk
“
Saleroom auctions of real estate
in the UK... are considered by many
property players to be a sound
measure of liquidity
”
signed by or on behalf of the parties.
• Those running an online auction
could usefully see themselves not as
conventional auctioneers in some kind
of internet saleroom but instead as
playing a similar role to auctioneers
concluding a contract before or after
an auction and therefore having to
ensure that a memorandum compliant
with section 2 is created at the
moment any such contract is made.
• Such a process will necessarily require
the use of electronic signatures. In the
UK such signatures are rarely used
on documents concluding property
transactions. But section 7 of the
Electronic Communications Act 2000,
which effectively validates electronic
signatures in UK law by making them
admissible in evidence in relation
to questions of the authenticity of
the document to which they were
attached, shows the UK government’s
long-standing desire to boost
e-commerce generally.
Conclusion
Saleroom auctions of real estate in the
UK attract huge amounts of interest.
They offer opportunities for auctioneers
to demonstrate their skills and are
considered by many property players to
be a sound measure of liquidity in the
property market generally. But there is a
way forward for a purely online auction
process: it may not, in fact, constitute a
public auction but that does not matter
as long as any memorandum of sale that
results from it complies with section 2.
ISSUE 11 • 2013 | 37
18/02/2013 12:19
general real estate | USA
LENDERS: BEWARE OF
RESTRICTIONS ON YOUR
RIGHT TO ASSIGN YOUR
LOAN
ANDREW LEVY, JOSHUA SOHN, JERMAINE MCPHERSON, NEW YORK
I. PURPOSE
This article discusses potential pitfalls
lenders may encounter in the face of
loan agreement language purporting
to limit or restrict the lender’s right of
assignment, and ways to address these
issues. The focus of this article is New
York law.
The General Rule
The general rule in New York is that
unless there is an express contractual
restriction on the assignment of a loan,
the lender has the right to assign. It is
typical in loan documents (other than
among multiple lenders in syndicated or
tiered credits) that there is no limitation
on lender assignment. In construction
loans, particularly syndicated ones in
which future advances are an important
part of the business arrangement, it
is not unusual, however, for there to
be limitations on assignments of the
loans without borrower or co-lender
consent. Although, in the run up to
2008, borrowers had the ability, due to
competition among lenders, to negotiate
more restrictive assignment language
than they previously could have.
Some typical limitations on
assignability are:
• Neither party may assign the
agreement, or any right or interest
hereunder, without the consent of the
other party;
• The lender may not assign to any
person all or a portion of lender’s
rights and obligations under the
agreement, and any purported
assignment or participation in
violation of the foregoing shall be
void and of no force and effect; and
• The lender may at any time assign,
transfer or novate any of its rights
or obligations as long as it satisfies
certain stated conditions.
The Importance of The
Restatement (Second) of
Contracts, Section 322
In New York, “courts generally
recognize and enforce a contract
provision prohibiting its assignment”
as well as the right to “contest nonassignability.” Nevertheless, “a
stipulation against assignment may
be waived or modified by a course of
business dealings or by a formal written
instrument.” Furthermore courts in
New York will examine the intentions
found in the contract or agreement
“[w]here there is no public policy or
statutory bar to the assignment of a
particular contract.”
Section 322 of the Restatement
(Second) of Contracts provides for
various remedies when a party violates
an anti-assignment provision. Unless
a different intention is indicated in the
contract, a term prohibiting assignment
does not prevent assignment, but
does allow for damages caused by
the assignor’s breach. Section 322,
however, does not make the assignment
ineffective. The resistance to limitations
on assignability stem from the public
policy supporting alienability and
the negative view of restrictions. The
restriction on assignability is viewed as
creating a personal right in the party for
whose benefit it is given, to be asserted
against the violator only. In order to
void the assignment, the agreement
must contain express language that the
assignment will be void or invalid if
assigned in violation of the agreement’s
terms. Otherwise, the party who stands
to benefit from the contractual restriction
only has a right to damages caused by
the contractually prohibited assignment.
Courts may void an assignment if
the contract or agreement contains
clear, definite and appropriate
language declaring the invalidity of
such assignments A party may seek to
void an assignment or transfer when
the terms of the agreement explicitly
provide that such an assignment is
void. In Stewardship Credit Arbitrage
Fund LLC v. Charles Zucker Culture
Pearl Corporation, the assignees of
commercial loans originated by a nonparty, asserted a variety of causes of
action against the appraisers of the loans
for “fraud, negligent misrepresentation,
professional negligence, breach
of contract, and breach of General
Business Law (GBL) § 239-c.” In
turn, the appraisers moved to dismiss
the assignees’ causes of action. The
appraisers provided appraisal services
for loans made by the originator to
non-party borrowers. The originator
provided loans to the borrowers in
December 2006 and December 2007
under the condition that they pledged as
security “collateral with an aggregate
appraised value” that met specific
determinations. Subsequently, the
originator “assigned its rights and
interest in the Loans, the pledged
collateral and all related documents to
the [assignees], who are direct and/or
indirect assignees of [the originator].”
The appraisers argued that both the
initial assignment to the assignees and the
subsequent assignment were ineffective
in part because the loan agreement
required prior notice to the borrowers
before assignment. The relevant part of
the loan agreement stated that the “[l]
ender may, upon notice to Borrower,
assign to any Person all or a portion of
Lender’s rights and obligations under this
Agreement…[a]ny attempted assignment
or participation in violation of this
Section 13(f) shall be void and of no
force and effect.” The court noted that
the first set of assignments that had been
made without notice to the borrowers
could certainly have been deemed void
because of the specific language of the
loan agreement. Nevertheless, since
18/02/2013 12:19
the originator recognized its error and
made a second set of assignments to the
assignees that included the appropriate
notice to the borrowers as enunciated by
the loan agreement, the previous defects
were cured.
Permitted or Eligible
Assignee Context
As in the previous circumstances, the
form of relief a party may seek in the
permitted or eligible assignee context
depends on the language of the loan
documents. When loan agreements
expressly permit assignments to “‘any
financial institution,’ without restricting
assignments ‘expressly in any way,’
[they do] not prohibit an assignment
to an entity that was not a financial
institution.” Once again, only express
limitations stating that the assignment
is null and void make the assignment
null and void. Elliot Associates, L.P. v.
Republic of Panama exemplifies that an
assignment will not be prohibited in the
permitted or eligible assignee context
unless the loan document contains
express limitations on assignability and
makes clear that the assignment is void
or invalid when assigned improperly.
In Elliot Associates, the original
lenders assigned the debt. Subsequently,
after the original borrower failed to
repay the debt, the assignee brought
a breach of contract action. One of
the counter-arguments raised by the
borrower was that the assignee did not
qualify as a financial institution under
the loan agreement, the relevant part of
which stated that “[e]ach Lender may
at any time sell, assign, transfer … or
otherwise dispose of … its Loans to
other banks or financial institutions.”
Nevertheless, the court held that it
did not matter whether the assignee
qualified as a financial institution
because the loan agreement contained
permissive assignment language and did
not “expressly restrict assignments to
banks and financial institutions.” Thus,
in the permitted or eligible employee
context, a party’s right to void an
assignment is only available if stated
explicitly in the express terms of the
loan agreement.
Damages only remedy
Unless an anti-assignment provision
contains language that the assignment
is null and void, the only remedy for
beneficiaries is to seek damages.
In Lexington 360 Associates v. First
Union Nat’l Bank of North Carolina, the
mortgage borrower brought an action
against the mortgage lender, based on
the alleged breach of a “modification and
estoppel” agreement (an agreement which
modified an existing loan agreement ). The
relevant section of the agreement provided
that the mortgage lender had to “‘use its
best efforts to notify the Borrower of any
contemplated sale or assignment by the
ISSUE 11 • 2013 | 39
18/02/2013 12:19
Lender.’” The mortgage borrower claimed
that the mortgage lender failed to notify it
of the proposed sale of the loan. Since the
relevant agreement did not contain explicit
language that voided the assignment,
however, the mortgage borrower was only
allowed to seek damages.
Lexington 360 Associates also helps to
illustrate that proving damages based on
a violation of an anti-assignment clause
may be difficult. “Where a party has
failed to come forward with evidence
sufficient to demonstrate damages
flowing from the breach alleged and
relies, instead, on wholly speculative
theories of damages, dismissal of the
breach of contract claim is in order.”
Unlike the lower court’s holding, the
appellate court held that the modification
and estoppel agreement did not require
the mortgage lender to identify the
purchaser – the mortgage borrower was
given sixty days notice before the sale
and thus could not demonstrate that it
was damaged in any way.
Special situations
Empresas Cablevision, S.A.B. DE
C.V. v. JPMorgan Chase Bank offers
an interesting factual scenario that
presents a fact-specific exception to the
New York rule requiring clear, definite
and appropriate language to declare
an assignment invalid. In that case,
the borrower applied for a preliminary
order against the lenders preventing
them from effecting a transaction in
which the lenders would sell a 90%
participation in the loan to a third party.
According to the borrower, the transfer
to the third party was to a bank that had
the same ownership as the borrower’s
main competitor. The borrower argued
that the 90% participation was in fact
an impermissible assignment of the
loan without its consent, which was in
violation of the loan documents. The
controlling credit agreement contained
restrictive covenants that limited the
lender’s ability to assign its obligations
and rights without the plaintiff’s written
consent. The credit agreement also
contained limitations on the lender’s
ability to sell participations in the loan,
but the participations did not require the
borrower’s consent. Once the lender
sold the 90% participation to the third
party, it still did not inform the borrower
of the participation. The participation
agreement allowed the third party to
“receive nearly unlimited information
from [the borrower].” In addition, the
participation agreement allowed the
assignee to use the lender to disclose the
borrower’s confidential information.
The court rejected the bank’s attempt
to disguise an assignment of the loan
by structuring the arrangement as a
participation. The court granted the
preliminary injunction because “there
is as a factual matter a strong likelihood
of irreparable harm arising from [the
assignee’s] ability to seek and obtain
[the borrower’s] confidential business
information under the Credit Agreement
and then use it to [the borrower’s]
detriment.” On first reading, Empresas
appears to contradict the New York
requirement of clear, definite, and
appropriate language to void an
assignment. Upon further analysis,
however, it is clear that the court
granted the borrower’s preliminary
injunction because the transaction
created too great a risk of placing the
borrower’s confidential information in
the possession of a competitor and not
because the participation was actually a
thinly veiled attempt to circumvent the
anti-assignment provision.
Practical Considerations
Apthorp Associates LLC v. Anglo Irish
Bank Corporation Limited presents
a recent example of the difficulties
involved in attempting to void an
assignment when the loan documents
do not explicitly allow for such action.
Apthorp Associates LLC (“Apthorp”)
attempted to prevent its lender, Anglo
Irish Bank Corporation Limited (“Anglo
Irish”), from selling its entire interest
in its existing loan in violation of a
provision in the building loan agreement
requiring Anglo to maintain at least a
51% interest in the loan. The existing
loan “consisted of a loan of up to a
maximum principal of $385 million,
and was made in connection with the
acquisition, development and conversion
into condominiums . . . of the Apthorp
Building . . . an historic landmarked
residential building in Manhattan.” The
terms of the agreement did not state
that an assignment in violation of the
assignment restriction was void.
Apthorp eventually voluntarily
dropped the action on 28 November
2011. The significance of this matter,
however, is that Apthorp brought it
in the first instance and sought an
injunction despite the fact that the
contract terms did not provide for the
assignment to be void. Thus, even if the
assignor ultimately prevails and its risk
is limited to damages (which may be
difficult to prove), there is still cost and
uncertainty of litigation associated with
making or receiving an assignment in
the face of prohibitive language.
Given the landscape of the treatment
of non-assignment clauses in loan
documents, when starting to draft
assignment provisions parties must be
aware of whether they want to include
specific language that voids a nonpermitted assignment or whether they are
comfortable enough not to have the “void
and no force and effect” statement. This
will depend in large part on each party’s
awareness of the issue and its negotiating
strength. In addition, a prospective
assignor, who faces claims for damages,
may decide to keep reserve cash proceeds
to cover potential damages or decide
to accept an adjustment in the price it
charges or require an indemnification
from an assignee.
A version of this article has previously
appeared in the New York Law
Journal. This version is reprinted with
permission from the 16 August 2012
issue of the New York Law Journal.
(c) 2012 ALM Media Properties, LLC.
Further duplication without permission
is prohibited. All rights reserved.
18/02/2013 12:19
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