Next Gen Development Lifecycle Series Session 5: Disposal (webinar transcript)

The webinar recording can be listened to at our Real Estate Hub.

KC: Good morning, everyone! My name is Kim Clifford, and I'm a Senior Associate in the Real Estate Disputes Team.  I'd like to welcome you all today to our fifth and final session in the Development Life Cycle Series. Thank you all to those for joining us on to those who've joined all the sessions today, gold stars all around for you. Don't worry if you haven't joined the previous sessions, as the recordings will be circulated after today.  Today the team are going to be focusing on disposals and will be considering the key things to have in mind when you're looking at them. So let's introduce the panel. First of all we have Ben Groves who is Senior Associate in our planning team;  Matt Pearson, a Senior Associate in our construction team; Joanna Fox, an Associate in our environmental team; Laura Burt an associate in our tax team; Neil Thomas, an Associate in finance team. As usual, we're going to follow the same format with time for questions at the end. Please do feel free to e-mail any questions through to the Ashurst NexGen mailbox which will be shown on the bottom of each of the sides. So with no further ado, I'm going to hand over to Ben.

BG:  Thanks so much, Kim. Thank you, good morning everybody. Welcome back to those who came to the last session for those who didn't as Kim said my name is Ben Groves and I am a senior associate in the planning team here at Ashurst and today, I'm going to talk about planning in the context of a disposal.  So general key takeaway and key principle for this is that liability for planning generally runs with the land, be that planning conditions, section 106 obligations.

So, the key thing to take away as a seller is that you will need to make sure that you've got as much information at the outset in relation to the planning position of the property, to make sure that disposal is as easy and painless as possible, because I want to know what the status of the planning in relation to the property is.

So, with that general principle in mind, I'm just going to talk about three general key areas of potential liability for planning and how these might be dealt with in a disposal. I'm also going to talk about them in the concept of two disposals actually both a freehold, but also if you were to lease just part of the property. The reason for this is that the concepts will change slightly. So, it's just worth giving a brief sort of indication of the things you need to think about on the reach.

So, first of all, planning conditions. So unless very, very rare circumstances, planning permissions attached to the property, they are not specific or personal to any particular occupier or tenants. As such, when you sell the property, the buyer will step in and will take the benefit of any planning permission that is there. As you know, planning permissions often come with planning conditions. Therefore, the buyer will want to know what the status of those planning conditions are, have all the conditions being complied with, and will they be complied with up to date disposal? The reason being is that once the buyer buys the site, it will step in and any breach of those conditions would be enforceable against the buyer. So as I said earlier on, this is about providing as much information as you can in the outset. Yet, as all the discharge condition notice is that you have any communications with the council, get those together so that you can provide them in a nice pack to the buyer, to get them happy upfront. 

So just turning quickly to if you were just leasing parts of the property, same general considerations apply. The only other things just need to think about is that if you are leasing part of the property and the conditions, which relate particularly just to that part of the property, you might want to think about passing liability down for those conditions expressly in the lease to the lease holder. Vice versa, if there are conditions attached the property, which relate to bits of the property, which the leaseholder would have no interest in, then you will need to consider having to take that liability under the lease because the leaseholder won't want to be on the line for any breaches of those conditions.

Next one, Planning obligations. When I talk about planning obligations, I mean, section 106 agreements. Section 106 is the part of the Town and Country Planning Act, and if an agreement is entered under Section 106, then the obligations, restrictions, and covenants given in it are binding upon the successes entitled the original party. This happens automatically with no need for any deed of assignment on ovation or anything like that. The buyer will be automatically bound by the obligations and restrictions in that agreement.

So as we said, with planting conditions the buyer wants to know what the current status of those obligations are, so, as a seller, you need to make sure you've got an up to date picture, and that you can evidence compliance with those conditions, obligations, or restrictions. Be it, payment of contributions to the council, or the fulfillment of particular works. In relation to a lease of parts. Again, same general position applies, the lease holder will be a successor entitled to the landlord, so, it will be bound by the obligations within the 106, but just as with conditions. If there are any obligations which relate just the land that's being demised, then as the landlord, do you want to pass the responsibility down for those expressly in the lease and vice versa. The lease holder will not want to be liable for general obligations, which relate to the sites more generally.

And then, lastly, community infrastructure levy. So, this is probably not going to be an issue if you are disposing of site already part of it, post the completion of the underlying development because all your silt should have been paid at that point and there should be no continuing liability associated with that original construction. However, if you're disposing of the site prior to the completion of any construction, then you will just need to think about how the liability sits. You will need the buyer to send an assumption of liability notice to the council and you need to withdraw your liability notice just so that post completion, it is clear that any continuing liability for that original seal sits with the buyer, rather than you, as the seller. In relation to just a lease of part. The only thing to think about here is that if for whatever reason, your lease allows for the leaseholder to do works, which could create additional floor space, then you just need to make it clear that it will be liable for any seal that might become payable, by reason of that additional Floorspace which may be capable of being created.

That's just a quick run through, as I say, the key aspects of planning on disposal. Just bear in mind the general principle is that with planning conditions and things like that, the liability will generally just pass and sits with the land. So as a seller, you just need to make sure that you've got a clear and up to date picture of where you sit with planning conditions and Planning obligations. I will now pass over to Matt to deal with the environmental, or construction even.

MP: Thanks. Thank you, Ben. So some of you probably know me from a couple of weeks ago where I talked about procurement and the different types of ways in which, or sort of methods by which you can procure construction works and the types of contrast involved, and we also talked about the key players. We are going to touch on that a bit today, but in the context of disposal and how we cater for third parties. 

So, when we talk about third party recourse in a disposal context, where we're talking here about your end user; a purchaser, or tenants and obviously, purchasers and tenants don’t have the contractual relationship with the construction parties that you as a developer have. Construction is high risk. Things do go wrong with newly built properties, defects are not necessarily apparent at practical completion. The riskiest period is probably within 2 to 3 years of the build completing. Accordingly, we need to think about the third parties that may suffer as a result, particularly given the reality that as soon as the property is built and will also hopefully be tenanted quickly and likely also, in many cases, sold and in-law, the privacy of contract means if you don't have a contract with the party, then, that contract can’t confer rights on you.

I think just to briefly mention a few things on this slide. So, the obligations to provide a recourse to third parties that will sit within the construction contracts themselves, so the building contracts the appointments to subcontracts et cetera. When we talk about third party recourse this is usually granted by way of either collateral warranty or third-party rights.
And for as long as we will make sure that the agreements for lease in any of that sort of project documents are consistent with the construction contracts on that. If you don't have a contract, if the purchaser/tenant didn’t have a warranty or third-party rights from a construction party then they’d really be looking to make a claim in which is pretty difficult, is nowhere near as easy as just being able to go to your contractor and say look, ‘this is the warranty. I've got from you, you know who I am, you gave me this along with the conditioning. You need to come back and fix it.’

There are the alternatives, as well, you know, if there are particular gaps in a construction package may be due to some insolvency or just inadequacies with what the developers procured. In some instances, developer can be asked in a sale agreement to provide a warranty itself and stand behind any defects for, say, 2 or 3 years or something. It's pretty rare but it does happen. Any incoming buyer and tenants as well, You know, they'll be doing their own surveys, they’ll have their own insurances.

I just included assignment on here as well because where a property is sold by way of an asset sale, where you're not selling the shares in a company that owns the property, it’s sensible and standard to just assign your construction contracts to a purchaser because obviously, you don't need them anymore.

These diagrams are the ones I used a couple of weeks ago. I just really want to just find a visual reminder of the parties involved in construction projects. The parties in the teal color are the development parties, so the employer then filtering down to the construction team.

Those parties in green are third parties. Obviously not all these parties are necessarily relevant to today's session in terms of purchase and tenant, I’ve just put those on there to give you a feel for the types of parties that actually receive warranties and third party rights. 

This slide is the same, but just in reverse, the parties that are in green will be providing the recourse upwards to the purchaser and tenant by way of third party rights. It’s also just worth mentioning that obviously, if you're the developer, so you’re the employer, you must yourself have a direct contractual relationship with the subcontractors beneath the contractor. And accordingly, in most cases the employer will receive third party rights or warranties from all or some of subcontracts involved, that’s not particularly relevant but just to mention.

So let's come on to our topic today which is what third party rights and collateral warranties are and if there is a difference between the two. And the answer is that in terms of the rights that they provide, they achieve the same thing, they're not different. They're just different mechanisms by which you vest rights in the third party. The oldest form, the one that most people have heard of, the traditional one is a collateral warranty and it’s actually a physical contract, its signed and typically is a deed, although not always but typically is a deed. And it will set out, we’ll cover it on the next side when we talk about the key features of a warranty, but essentially it is a statement or a series of statements, but an overall statement, that basically says that, ‘I’m a contractor, I’ve done everything I said I would do in my building contract and you have my warranty here and here are your contractual rights’. Typically, a warranty is signed by all parties, and so the person giving the warranty, so contractor, the beneficiary, the tenant and sometimes also the developer.
Certain parties prefer warranties, some institutional tenants, for example, will always want warranties, banks tend to always want warranties instead of third-party rights. The pro really is that you have a physical contract, something you can readily evidence and it's a standalone agreement. Third party rights are different in that, the rights that we can give to a third party, so purchaser tenant are actually set out in a schedule to the underlying construction contract and what happens is, a third-party rights notice, usually just a one pager, is served on the contractor, or the consultant, or whoever is providing the rights, identifying the incoming tenant or the purchaser of the property. So, providing you full company details, et cetera, and saying, this is so you now know that incoming party has the rights set out in potential for whatever underlying contract? You know, the benefits to this, are that you don't have to get the document signed, you just serve a notice. There are some other administrative issues with it as you might be able to imagine in terms of you actually have to be able to serve the notice. Generally, you need to be able to show that you delivered it, not just served it so it's actually been received. So there can be a few issues like that. The legal basis for it comes in the act but we won’t go into that. But that’s collateral warranties and that’s third-party rights and they achieve the same thing just via a different mechanism.

Probably also just quickly worth just saying that there's also letters of reliance which can be used to provide reliance to third parties such as purchasing tenants, maybe more appropriate for just single reports, rather than a whole set of design and workmanship services.

I was just going to give a really quick walk through the key clauses in a warranty. So, as I said on the previous slide, there will be a general warrant, that in terms of compliance with the contract ‘I’ve done everything that I said I would’. If it’s a designer or somebody involved in workmanship, involved in materials there will be direct series materials provision, just saying that I've used materials that are of sound quality in accordance with EU law, UK law or British standards, et cetera. There'll be a copyright license, that’s quite important because, if you’re a tenant and you've got full repairing and insuring lease or you’re a buyer and you maybe want to modify a floor in a property, you might want to look back on the designs that were involved in the base build and the fitout works, so its useful to have a copyright license in this country as a developer when you pay for works and also as a beneficiary under warranty just because you're paying for something It doesn't mean that you get the instant copyrights to all of those designs that produced by the designers. It's typical for copyrights be retained by the person that's prepared the designs. But with a wide ranging, irrevocable royalty-free license to the developer and purchaser or tenant so you can use it in the future, obviously, with some limitations, you can’t just use it for whatever you might want to in the future.

Professional indemnity insurance relevant particularly for designers that's generally back to back with a building contract, or the appointment, and that's obviously useful. You’ll want to be able to show to a purchaser or tenant, that these, all of these promises are backed by insurance. They'll be assignment provisions allowing the document to be transferred, market standard is two assignments. Obviously, the person who’s signed a warranty doesn’t want to be in a position where potentially, providing reliance to who knows how many people down the line. So people like to know its limited to two. I’ve also just added at the end, step-in rights because even though they're not really relevant on disposal context, it worth just flagging that step-in rights isn’t funding arrangements. Whereby, if something goes wrong with a project, the beneficiary being the bank can issue a notice to contractor or consultant, or has the right to receive a notice itself from a contractor or consultant when something goes wrong with their relationship, with the developer avenue. It basically provides the Bank with the opportunity to step in and take control and say that they can realize the value of the loan and see the development is complete – but that’s just something to flag. 

Just the final points, I would just say, is that as lawyers acting for a developer in disposal, we just have to make sure that, and this actually goes back to when we’re negotiating the contracts themselves. We just need to make sure that the contracts do contain the ability to actually get warranties and third party rights. It's very standard and accepted in the market and you don't really get construction parties saying well we're not going to provide certain parts of your rights or warranties of purchasing tenants but they do often try to water down the definitions of those parties. So, we just need to make sure that, we're bearing in mind the context, what is this building, how many tenants are going to be moving in. So, we don't want to be having too many restrictions on the number of rights, we want to make sure that we can grant warranties or third-party rights to purchase and tenants, and uphold our part, because often a tenant will want a warranty per floor of the building they take. So, we just have to make sure that those sorts of things are borne in mind and also, just in terms of timing, there can be issues with getting warranties fully signed and back for exchange or completion, whatever the requirement may be under a sale contract, or an agreement for lease. So we just need to be careful that we're on the ball there in terms of timings, but that is usually easily managed by lawyers. So hopefully that's been a quick and helpful overview of warranties and third-party rights, I will hand over to Joanna who’s going to talk about environment.

JF:  Thanks, Matt. So, today, I'm focusing on completed developments, but if you are selling on the site before this time, remediation may not yet have been carried out or completed, reducing the contaminated risk of the sites. If the site is greenfield or otherwise has a low contamination risk then some of the considerations that I'm going to talk through today maybe a less importance for brownfield sites.

So we're at the point where you've completed your development and are ready to sell the site on. When you acquired the site, you took steps to diligence the site and negotiate contractual provisions to limit your exposure to historical environmental liabilities. Depending on the condition of the site and its intended use, you may have had to undertake remediation as a requirement for planning permission for the development. Initial remediation should have cleaned the site up to the standard required for the proposed use, but it may have left some residual contamination in situ.

This week our focus is on the steps that you can take to achieve as clean a break as possible from environmental liabilities on disposal of the site. To first return to due diligence, When preparing for the sale of the development, you need to think about what information and documents such as any environmental reports that you may have commissioned for the site as part of the planning process that you should disclose to support the due diligence process. 

As Ben mentioned earlier, in respect of planning, this is something that purchasers are going to want to see. And it's beneficial to work out what you hold, as you may be asked, to give a warranty that you've disclosed all such environmental reports. Purchasers will want to understand, the environmental condition of the site as you did on the acquisition. And they will want to have the benefit of any collateral warranties against those who carried out or verified any remediation works this will help to give them comfort that the environmental risk profile of the site has been reduced to an acceptable level to protect value.

This information will then inform the negotiation of the transaction documents. Most developers will be aiming for a clean break, passing responsibility for historical contamination under the contaminated land regime. And more generally, for example, third party claims to the purchaser. This could be because you accepted a clean break from your seller, which you want to pass on down the chain.

Your expectations of an environmental clean rate should be set out in the heads of terms, and then this will be addressed in the sale contract and should be backed up by an indemnity in some circumstances.

As with any contractual provisions, though, a clean break is dependent upon counterparty strength, and developers should consider residual exposure and whether they need to take an additional measures to protect themselves. And here we're talking about things like if environmental insurance or parent company guarantees. On the flip side, the buyer would likely want to limit the transfer of liability to themselves and may request an indemnity from you. If you agree to give an indemnity, this should be limited in scope, time and the amount where possible to reduce your liability exposure other alternatives to given the by an indemnity is taking out environmental insurance.

Moving on from contaminated land, I wanted to make one quick point on flood risk. So, when preparing for the dispose of the site, you also need to be making sure, that, any flood risk measures undertaken have been included in flood risk assessments and that that is all included in your due diligence package. So, I'm now going to hand over to Laura, and we'll hear her insights from a tax perspective.

LB: Morning everyone and many thanks, Joe. I'm actually not sure what insights but hopefully useful. My name is Laura Burt I'm an associate in the tax department. I want to talk to you today about two key tax considerations on a disposal. Firstly, factors which will affect the seller's tax liability in respect to the sale proceeds. The amount of tax the seller has to pay on the sale proceeds will directly affect the developers' economic return from the development. And therefore, it's important to understand how this is calculated on any available release. The second thing I want to talk about is circumstances where tax can affect the price the purchaser is prepared to pay for the asset either by increasing the purchase price where you're selling tax assets or by decreasing the purchase price, whether as a deferred tax liability.

The first question, What will the seller's tax liability be on the disposal proceeds? We, again, need to talk about the concept of development, and what it means from a tax perspective. As we discussed in the very first session, for those of you that joined us, whilst development is a useful classification from the real estate perspective, it's not a category for tax purposes. From a tax perspective, when we are considering real estate assets, there are broadly two ways in which an asset can be held, either as trading stock, or for the purposes of carrying on an investment activity. Which of these two categories an asset falls into, has profound impacts on how the asset is taxed, particularly on a disposal. What we might think about as a development transaction can fit into either one of these two categories. For example, a person with a trade developing land, will acquire and develop land with a view to selling it for profit. The paradigm example is perhaps, a residential house builder or a construction company. An investor would typically hold land for the long term, with a view to deriving income in the form of rent from the asset. They may also enjoy capital growth on the asset throughout the holding period.

That investor may also be involved in development. For example, they might redevelop a tired office building to something much more high spec to attract new tenant, and increase their rental income. Development is, therefore, not a third category for tax purposes, but rather straddled investment and trading, which category your asset falls into, has an impact on the tax liability on a disposal will mean that your disposal is taxed, either as a trading receipt or as a chargeable gain.

We're going to come on to look at each of these two scenarios in a moment, and I just wanted to highlight that a number of recent legislative changes, including bringing non residents within the charge to UK corporation tax on chargeable gain, in respect of all disposals of UK real estate, from 5 April 2019, have made the distinction between holding an asset as trading stock and holding an asset for investment purposes less marked.

Disposals of UK land, including by non residents financed which is not an individual is now taxed at a headline rate of 19% corporation tax regardless of how the assets held. You might then ask why that distinction is still important. The reason it's still important as we'll come on to see is that there's a significant difference in the way the tax is calculated, including whether any reliefs are available depending whether an asset is held as trading stock or as an investment?

We’re firstly going to look at how tax on disposal proceeds would be calculated for a developer who is carrying with a trade. If we start by looking at the example on the left of the slide, an Asset sale IE a dispose of the property directly by the corporate seller, the seller will be liable to 19% corporation tax on the sale proceeds, less deductible expenditure. Sellers Profit will generally be taxed in line with the accounts prepared in accordance with generally accepted accounting practice. In the context of a commercial development, deductible expenses are likely to include interest costs subject to the corporate interests restriction, which broadly limit tax deductible interest costs to 30% EBITDA.

Other deductible expenses might include cost of site assembly, cost obtaining planning consent, costs of fulfilling any Section 106 agreement, the cost of any community infrastructure. If we look at the share sale on the right-hand side of the slide, IE where a corporate seller selling shares as a Propco which itself is the underlying real estate. If the seller holds the shares in the Propco as a trading asset will be taxed on the sale of those shares in the same way as just outlined for the sale of the asset, IE 19% corporation tax on the proceeds last deductible expenditure. If however, the seller holds the share and its trading subsidiary as an investment asset, they may qualify for relief, from corporation tax on the disposal if a substantial shareholding exemption applies. There are a number of conditions which need to be satisfied for SSE to apply, including satisfying a minimum holding requirement and a minimum holding period. Careful analysis would be required on an individual structure to know if this relief would apply. But I mentioned it here so that you know that it may be available and you can talk to your tax advisor about that.

We're now going to look at taxation on the disposal proceeds of a UK real estate asset held as an investment. Again, if we look at the direct assets itself first the seller, resident or non resident, will be liable to corporation tax on chargeable gains at 19% on the disposal proceeds, less historic cost. Assessing what will qualify as historic costs for these purposes is an entirely different test, whether something is deductible expenditure on a trading disposal, and it generally means the cost of acquisition, i.e. what you pay to acquire the asset, plus any enhancement expenditure carried out on the asset since acquisition. The tasks whether enhancement expenditure can be taken into account for these purposes as well as the expenditures reflected in the condition of the property on a disposal. One final point to flag is that non-resident disposing of commercial property benefit from rebasing to 5 April 2019 market value of their asset so that their base cost will often be this 5th April 2019 market value rather than the historic cost. We now look at the share sale on the right-hand side of the slide. Again, residents and non-residents are liable to corporation tax on chargeable gains on an indirect disposal of UK real estate 19% on the disposal proceeds less historic cost.

I just want to flag three other things to think about when calculating tax on a disposal of an investment asset. Firstly, that release are available to exempt certain investors from UK Corporation tax on chargeable gains, including qualifying institutional investors. Whether a relief will be available is highly fact specific and needs to be considered on a case by case basis. But, just to make you aware, these reliefs are out there. You should think about these and raise these with your tax advisor at the time of a disposal.

Secondly, by the holding structure through which you hold your UK real estate asset includes an offshore funds vehicle there are two elections, which could be made, to mitigate your liability to non-resident capital gains tax -  a transparency election, or an exemption election.

In particular, these elections were designed to mitigate situations where liability to tax arises at multiple levels in the structure, whether either of these elections would be available, or beneficial, is, again, highly fact specific, and should be discussed with your tax advisor. Finally, even when the seller is holding their asset and its investment and considers that UK corporation tax on chargeable gains should apply, there are very wide reaching anti-avoidance provisions, known as the transaction land rules, which could apply to treat any gain you make on a disposal, as if it were a receipt from trading income and it's not necessary to have an anti-avoidance motive for these rule too moves to apply and the legislation is drafted very broadly. Deciding whether these rules apply is likely to be most important whether it's a substantial difference in liability to tax, depending on whether the disposal proceeds are treated as a trading receipt or a chargeable gain.
Finally, just coming on to the second topic I wanted to discuss today, IE, when tax can have an impact on the purchase price. Although capital allowances will be relevant on both an asset sale and a shares sale, tax would normally only have a material impact on the purchase price on a share sale. The purchase price might be increased where the Propco contains valuable tax assets such as carry forward losses or capital allowances. But if the purchaser is prepared to pay to these tax assets will depend on two factors. Firstly, their ability to diligence the tax asset, and concerned that they will be available in the Propco following the disposal. To that end, any third party evidence you can provide just a caps allowances report or accountants reports on tax losses would be helpful to support any claim by you as a seller that these tax assets are available and the purchaser should be paying for them. The second factor, which will be important, is the buyer’s future plans for the property  and whether they will be able to use the tax assets in the Propco to mitigate their future tax liability during that period of ownership. 

Finally, also to note that tax liabilities can have a negative impact on the purchase price, whether as a deferred tax liability in a target. Although this can take a number forms, the most common of these is latent capital gain or whether it's a low cost of stock. We discussed latent capital gain in some detail in the first session, and I'm not going to cover it again here. For anyone that missed the first session, as Kim said, a recording will shortly be available if you want to subject yourselves to that. I just wanted to highlight, again, that to the extent there is a latent capital gain in the Propco, the seller is likely to ask for reduction to the purchase price for a portion of that latent capital gain. In a disposal context, this means that it's important to bear in mind, not only may you bear the economic cost of the latent gain in the Propco as a result of that price reduction. But also, unless you qualify for an exemption, where you dispose of shares as an investment, you will also have to pay corporation tax of 19% on the sale proceeds, less your historic costs as we just discussed. That brings me to the end of my Tax section, And I'm now going to hand over to Neil to talk about some finance considerations. Thank you. 

NT: Hi, everyone, My name is Neil Thomas and I am an Associate in the Real Estate Finance Team at Ashurst. In the next 5 to 10 minutes, we'll have a quick look at what needs to be considered from a finance perspective when you reached exit. By exit I mean your repaying or prepaying a debt that you have secured over your development and procuring a release of all security and obligation to your lender.

It's probably worth noting that you could, for whatever reason, be talking about a partial release security with the underlying debts and balance of security remaining in place. But for our purposes we’ll assume a full exit at the end of the development cycle.

Your exit might be reached for many different reasons. It could be that you are intending to refinance partway through a development. Perhaps you had a loan to fund digout works and you now need to refinance for the main event. It may be that your development has stabilized, reached practical completion. You have a performing assets and accordingly you want to switch your financing from development style loan to an investment style loan, which will be on better terms, or it may be that you want to sell your assets, and scoffer the tidy sum you hopefully made on your development. Perhaps, there are other investment opportunities. The reason for your exit is important in terms of what will be involved from a legal perspective and how we will structure the necessary releases. Factors to consider then, well firstly, how is the repayment or prepayment going to be funded? Are there any other transactions connected with your exit? And if so, what are all that is? What steps are involved? And how do these interplay? What security packages are and are there any overseas elements, also how is the exit actually going to be achieved? And what documentation is relevant.

If you decided to repay or prepay your debt from equity and there's no other transaction hinged, or connected with your repayment or prepayment things are relatively nice and simple. You repay or prepay at a time you agree with your lender and the relief of your security obligations takes effect. Where, however, the repayment for prepayments are being tied into a refinance or sale, things can become more complex.

Purchaser of land and their lender will understandably not want the funds to leave the room without certainty that releases will be achieved and they will have an asset which is clean and clear. On the other hand, your outgoing lender will want certainty that it will receive redemption money before the release. In this jurisdiction, the way we reconcile those interest is via a solicitor’s undertaking, which we'll come on to in a moment. Let's assume you've worked out who the main players are and the broad outline of how your exit will play out, lets then lookout documentation you need to review and prepare. 

Perhaps goes without saying, but to understand what needs to be released and how this is achieved it, you need to look at your loan agreement with your lender. This will usually set out the process that needs to be followed for exit, including the provision of any formal notice to your lender you’re paying and the payment of any fees, costs, and expenses, you might also have hedging agreements in place, the termination of which needs to follow a particular process.

If you are looking at exit, you will inevitably need to know what the security package is, what assets and interests have been secured, and what jurisdictions are involved. If you are prepaying your lender, rather than repaying, the terms of your agreement may stipulate that formal notice is required by way of what’s known as a prepayment notice. Careful consideration should be given to this, since it's usually irrevocable, and there could be undesirable and costly consequences if submitted and the agreed time for exit is not achieved. Your outgoing lender will need to let you know exactly how much is needed for redemption. And, depending on how the financing has been set up and timing, it may be that these figures are not available until very close to the completion of the exit, sufficient coverage may therefore be necessary.

Your lender might have cut off time for which they need to receive funds in order for you to be successfully redeemed by a specific day, and buffers may need to be booked in for that as well. Though in terms of actually achieving the release in this jurisdiction that’s done via a deal release. It will be pursuant to that document that your outgoing lender, or the security agent on behalf confirms release and thereby allows your exit. The scope of the release is very important, it may be that you're not procuring a full release and instead a new release of a single asset, in which case it's crucial that the only outgoing asset is public to the release. If, however, all obligations and security are being released, it's necessary to ensure that that is achieved by the draft date. 

One area of contention is around liability, revival provisions in loan agreements. Depending on the nature of the deal, it could be that the loan agreement has, continuation or restoration clauses or liabilities. For example where security or other dispositions giving rise to a release is avoided or must be restored and insolvency, liquidation, registration or otherwise.
A relief to such survival provisions competes with your interests and the interests of a purchaser and their lender, or any new lender you might have in a refinance context, which will each have legitimate occasion if there is a full release of liabilities and obligations and no risk of restoration.

There's no quick fix for these competing interests and It very much depends on the nature of the deal, the outgoing lender’s views of the risk, of claw backs, what comfort they can be given to mitigate those risks? If your security package includes rate insecurity and poor record, or for whatever reason, that remains in situ confirmation that the floating charge is not crystallized into a fixed charge, also required a letter of non-crystallization. We sometimes see that built into the deed of release itself.

As we're talking about development finance, we will most likely have security registered against the title to the land, land registry, that’s assuming that the asset is situated in England and Wales.

In order to effect the discharge of that security from the title, you’ll need a form DS1 or a DS3, if we're talking about part of the title. It's important to note that the DS1, is not strictly speaking evidence for the release of security, it’s the consent from the lender or the security agent to the  discharge of the security from the title of the land.

As I mentioned, the steps in mechanics in relation to exits and the reaching of application to funds is most typically in this jurisdiction, documented by way of the solicitor’s undertaking. The undertaking may very well completion of all steps taken place on the completion pool, schedule between layers and stakeholders, but this can vary from transactions transaction.
For the most simple of exits, it may be possible to dispense with the undertaking altogether and build a release mechanic into your deed of release. But that's usually reserved for the most simple transaction. Other documents, then, while you may have security risks that companies house, which needs to be and marked and satisfied by form. It's also worth considering whether you have any original share certificates and title documents deposited with your lender that to be returned. So, hopefully, that's a helpful summary of factors to consider from a finance perspective, when you're looking at an exit. 

KC: Great, thank you. We've had some questions come through, And so, we will now turn to those so thank you for sending those through. Ben, I think we've had one that’s probably best for you. The question is, what is the position on a disposal in respect of infrastructure agreements?

BG: Infrastructure, I think I've got a similar question last week. Someone out there who has a particular fascination, for infrastructure agreements, right? So, I'm going to sit on the fence a little bit here, because it's going to be very specific to the type of agreement assume that referring to 278 38 highways, infrastructure agreements, and yeah, it’s going to be quite fact specific. Sometimes, these agreements are entered into the section 106, as such, the obligations within them will pass with the land in the same way that’s just the general way a section 106 will do, sometimes, they won't, and then, it will be very specific on how the the actual agreements drafted to where the liability actually lies, and actually, how far through the works are, whether they've been completed or they're still being undertaken. So, there isn't a sort of a rounded, catch all answer for this one, it will be quite dependent on the infrastructure agreement, how it's drafted and the particular facts of the case. So these we just need to be looked at on a case by case basis.

KC: Great, thanks, Ben. Joanna – From an environmental perspective, how much information do we have to provide to a purchaser?

JF: Yes, thanks whoever raised that question. The starting principle here is buyer beware. So there is no obligation on a seller to reveal information about a site. Having said that a seller needs to be careful not to misrepresent any information, may want to disclose any information to enable that the matter progresses smoothly. For example, you can direct a purchaser to rely on their own searches and inquiries but this can set timetable back if they have to start liaising with the local authority and environment agency and the information that they then do get could be incomplete. And this is often the case when we see purchase solicitors obtaining desk top reports. They often don't pick up on a new, recently development which can help to lower that risk profile. So ultimately, you probably want to strike a balance between providing sufficient information to assist a purchaser without risking making any representations or warranties that might not be accurate. I hope that helps.

KC: Right, Thank you. Looking at the time, I think we've got a little bit more time to squeeze a few more. Neil, there is one question here it good if you could pick up, please? So, if there is a multi jurisdiction security being released, is it possible to put everything into one document?

NT: That's, that's a good question and the answers is sometimes. Sometimes we see releases of, overseas security all built into the one document, which we'll refer to as a global deed of release. And that will usually have different governing rules applying to different government rules in that document. It really does depend on what jurisdictions are involved, and you will need input from agency counsel to see if that’s possible.

KC: Right. Thank you. And then I think we will just squeeze one more, and this one's an interesting one asking for a lawyer's perspective, so Matt we come to you. From a lawyer's perspective, being the person who deals with collateral warranties and third party rights. Which option do you think it's better and why?

MP: Depends on circumstances really, how much time you’ve got, if you’re a bit up against it in terms of the deadline, third party rights are probably better because its within your control, you don’t have to get the document signed. My personal preference if probably for warranties overall, I would say mainly because even if you have to get them signed, with third party rights, you can have additional obligations and agreements for lease or under sale contracts in terms of what sort of evidence you need to provide on notice being served and that kind of thing. So, in some ways warranties are simpler and because once its signed, its signed and that concludes it. I think it really just depends on the circumstances overall, I would say. But I think particularly with a DocuSign and electric signatures rather than wet ink for becoming more commonplace, I think that warranties are perhaps becoming simpler than they once were. 

KC: One of the silver linings of COVID. Right, thank you to the team for those questions. All that’s left to be said is just a thank you to everyone for attending this session and the rest of the series. We hope you found it very useful. As we've mentioned, the recording will be sent out after the session. So please do listen to those and then we just ask, keep your eyes open for our NextGen events in the future. We will be publicizing those soon. So, thanks very much, and have a good day. Thank you.