Property and environmental law

Question 1

• There are three ways of holding land in England and Wales:

Answer 1

• Freehold;
• Leasehold; and
• Commonhold

Question 2

• Whoever owns the properties, title will need to be investigated to show:

Answer 2

• the owner has good and marketable title to (i.e., owns or can compel someone to sell) the properties and the properties have the benefit of all necessary rights;
• the properties are not subject to any onerous condition or third-party rights which may affect their marketability; and
• the properties may lawfully be used for the purpose intended.

Question 3

• How might property be acquired?

Answer 3

• Share sale
   On a share sale, the buyer acquires the shares in the target. All properties owned by the company before the sale remain owned by the target. Note, there might be provisions on the title (for freehold) or in the lease (for leasehold) triggering rights of a third party if there is a change of control in the target company.
• Asset sale
   The property, or portfolio of properties, will be transferred to the buyer using the relevant conveyancing procedures (e.g. a TR1 for the transfer of a freehold or the assignment of a lease or a TR5 to transfer a portfolio of freeholds).

Question 4

• A buyer of either shares in a target or each property by way of an asset transfer will want to check:

Answer 4

 the value of the property;
 title to the property is vested in the seller (on an asset sale) or the target (on a share sale);
 the landowner can access the property from the public highway or via a sufficient right of way;
 the passage of pipes and other conduits under the land or under adjoining land;
 any contingent liabilities, such as original tenant liability in leaseholds, currently or previously held (see below);
 any contingent environmental liabilities;
 the local authority consent position in respect of the properties, e.g.:
* all necessary planning permissions and building regulations approvals and certificates have been obtained for development works and/or changes of use (See Elements 1 and 2 in Workshop 10);
* any conditions attached to those planning permissions have been fully complied with; and
* there are no outstanding planning obligations in respect of the properties; and
* the proposed use and (if different) actual use;
* for the existence of any third-party rights adversely affecting the property such as:
o >charges or debentures secured over the property that will need to be released;
o >rights of way over land or rights to light benefiting neighbouring properties which could hinder development plans;
o who is in occupation and how their occupation is governed;
o >boundary issues or disputes;
o >restrictive covenants affecting the property;
o positive covenants the buyer may have to accept responsibility for;
o >options to purchase the land (where a third party has the right to buy the land at a time o their choosing during the option period);
o >rights of pre-emption (where a third party has the right to have the land sold to them if it is offered for sale); and
o >overage agreements (where the buyer of land agrees to pay its seller a further sum of money if an event happens at the property increasing its value);
 that all taxes relating to the property have been properly paid; and
 whether any consent is required for the transaction to go ahead, e.g.:
* >consent(s) from any mortgagee(s) (if required on a share sale where the mortgage is not being discharged);
* >consent in relation to a change of control clause in a lease (on a share sale); and
* >a landlord’s consent to assign (on an asset sale).

Question 5

• Any of the following factors can affect whether a buyer checks for the issues listed above, and if so, how long it might spend on doing so:

Answer 5

• the commercial terms of the deal (is it an asset or a share sale?);
• the number of properties involved e.g., is it one HQ building or a mix of retail shops / flats in a mixed-use development?;
• the timing of the deal;
• the cost implications;
• confidentiality issues (which may be so restrictive as to prevent certain searches, investigations or physical inspections of the properties from being carried out); and
• the nature of the business (e.g., offices or industrial plant) and therefore the appropriate environmental investigations.

Question 6

• How will a buyer find out about title issues?

Answer 6

• In a bilateral acquisition deal, the buyer’s solicitors will send a due diligence questionnaire to the seller’s solicitors. There are examples available on PLC and you can see in those the types of questions the buyer asks about the real estate / property interests owned by the target / seller.

Question 7

• How will a buyer find out about title issues?

Answer 7

• Generally, the seller sets up a data room (most often virtual but it could also be physical). In relation to the property interest(s) being acquired, the data room will contain a range of documents including:
   official copies (of registered freehold and leasehold titles);
   epitomes of title (for unregistered freehold titles);
   copies of leases and associated documents (such as licences to assign, deeds of assignment, deeds of variation);
   search results;
   replies to enquiries the target / seller obtained when it bought the property; and
   a relevant section of the vendor due diligence report.
• Information supplied by the seller’s solicitors in response to the due diligence questions or unearthed by the buyer’s solicitors during a “visit” to the data room could be of such significance that it may change the way in a buyer is advised to structure the transaction.

Question 8

How investigations take place for asset sales?

Answer 8

 Any properties included in the transaction will have to be transferred to the buyer.
 Investigation of title to these properties will generally take place in the same way as a normal conveyancing transaction.
 All the usual investigations, searches and enquiries will be carried out.
 However, depending on the commercial considerations of the deal (e.g., timing, costs, nature of the property interests), good and marketable title may be established by certificates of title or property warranties.

Question 9

How investigations take place for share sales?

Answer 9

• The position is different on a share sale because the properties owned by the target will not change hands.
• This means that the buyer’s solicitors will not be going through the normal conveyancing process.
• Nevertheless, the buyer will still want to be sure that all the usual investigations have been carried out and that the target has a good and marketable title to each of the properties it claims to own.

Question 10

• What makes up a title?

Answer 10

• Sometimes, a landowner acquires neighbouring land which is then merged into one title number. Here, the land shown edged red was originally two registered titles (with the line shown here demarcating the boundary line between the two titles). The owner of one of the plots acquired the other plot and the titles were merged.
• Sometimes, if an entity has been in existence for a while, the property it owns may consist of a several adjacent registered freehold titles which have not been merged because there are separate rights over the titles – most commonly mortgages registered over specific plots of land:
• The land owned by the entity might be a mix of registered and unregistered land. Registered land will be revealed by way of a title number on a search of an index map (SIM) at the Land Registry. That same search (provided the land has been searched against) will show no such title number for unregistered land within the remit of the search.

Question 11

• Three principal methods of investigation and available protection for a buyer acquiring property

Answer 11

• Title investigation
   Solicitor carrying out the work: Buyer’s solicitor
   Protection offered if the information provided turns out to be inaccurate: Negligence / breach of contract claim by the buyer against its solicitors.
• Certificate of title
   Solicitor carrying out the work: Seller’s solicitor
   Protection offered if the information provided turns out to be inaccurate: Negligent misstatement claim by the buyer against the seller’s solicitors.*
   *Note: the seller may agree to give a warranty to the buyer in which the seller confirms the truth and accuracy of the certificate of title; the buyer will also then be able to claim against the seller.
• Warranties in share sale agreement
   Solicitor carrying out the work: Buyer’s solicitor usually drafts the sale agreement (though the warranties are negotiated.)
   Protection offered if the information provided turns out to be inaccurate: Action against the seller for breach of contract if the warranty given is untrue; the seller acknowledges in the agreement that the warranty is true and the buyer is relying on it.

Question 12

Investigation of title by the buyer’s solicitor

Answer 12

• Official copies (for a registered title) or the epitome of title (for an unregistered title) are inspected.
• Pre-contract searches (standard ones such as the Local Search and a Highways search) are carried out.
• Deal-specific searches are carried out depending on the location (e.g., Coal Mining search) are carried out if the location of the property warrants it.

Question 13

• Issues with obtaining pre-contract searches

Answer 13

• There may be situations where the deal has to proceed without the relevant searches. For example:
   Exchange and completion has to happen quickly; searches usually take around 3 weeks to be returned.
   Local authorities may be suffering issues (such as hacking) which mean delays to them returning local searches (delays of between 100 – 171 days have been reported).
   Searches have been obtained relatively recently (often occurs with new build purchases or where the property was acquired recently by the seller).
• The buyer may wish to proceed without the searches or to buy a no search indemnity policy.

Question 14

• Search indemnity policies?

Answer 14

• If a lender is involved, it will normally insist on searches being carried out / recent searches (e.g., of no less than three months old being used) but, depending on the circumstances, may agree to proceed with a search indemnity policy.
• There are different types available on the marked:
   No search indemnity policy: (generally) covers loss sustained as a result of adverse entries which would otherwise have been revealed prior to completion.
   Delayed search indemnity policy: used when a search result cannot be obtained within the time required by the lender (e.g., due to local authority delays)
   Search validation indemnity policy: used when searches provided by the seller are old (e.g., more than six months old)
• The policy usually covers loss of market value to the property and the professional and legal costs associated with a loss event.

Question 15

• The buyer (and its solicitor) will determine the extent and depth of the investigation. This will depend on matters such as:

Answer 15

 the value of the property;
 its significance to the transaction as a whole;
 the fees the buyer is prepared to pay;
 the time available (often limited in corporate transactions); and
 Confidentiality issues (which can prevent usual searches being carried out, especially a physical inspection).

Question 16

Property warranties given by the seller

Answer 16

• A warranty is a statement of fact; property warranties will include statements about the property e.g., “The Properties are the only land and buildings owned, used or occupied by the Company”.
• They are commonly used in practice and generally quick as each firm has its standard set of warranties to use as a starting point.
• They are often requested by a buyer in addition to other forms of protection. They are preferable where the seller occupies the property and can give warranties based on actual knowledge. If any statement made is not true as drafted, the seller can disclose against it in a “Disclosure Letter”. Once the matter is disclosed, the buyer cannot sue for breach of warranty. Any draft disclosures should be passed on to a property specialist to review before contracts for the sale of the shares are exchanged.
• The value of the warranty depends on the financial strength of the seller; this is often critical in helping the buyer decide whether or not to rely on warranties or to get the buyer’s solicitor to investigate title.

Question 17

• Advantages / Disadvantages of the buyer’s solicitor investigating title

Answer 17

• Advantages
   Best form of protection since all problems with the properties should be revealed before exchange and allow the buyer to negotiate the purchase price.
   Buyer’s solicitor has insurance to cover any negligence claim.
• Disadvantages
   Time consuming and expensive – especially if the seller owns many properties or their titles are complicated.
   If confidentiality is an issue, a full title investigation may not be possible (given that most of the information about a property is held in public hands e.g., the local authority). Increased a risk of information about the sale leaking.

Question 18

• Advantages / Disadvantages of using certificates of title drafted by the seller’s solicitor

Answer 18

• Advantages
   Good if the seller’s solicitors carried out an investigation when it bought the property (especially if the acquisition was recent); not much additional work will be needed.
   Good when the sale is being kept confidential as they certificate is based on the seller’s knowledge.
   Good in an auction sale where the same certificate can be given to each bidder; quicker than each one investigating title.
   Seller’s solicitor has insurance to cover any negligent misstatement claim.
• Disadvantages
   Negotiating the form / wording of the certificate can take time (but still likely to be quicker than the buyer’s solicitor undertaking a full investigation of title).
   The information about the property is revealed through qualifications in relation to statements and the buyer’s solicitor has to piece that information together to work out its significance.

Question 19

liabilities on a share sale?

Answer 19

• If property is one of the assets owned by a company, all the rights and liabilities relating to the property remain with the company and affect it in the same way after completion.
• The fact the shares are now owned by a different party is irrelevant.
• A buyer of shares in company which owns a property needs to know what those rights and liabilities might be and how to protect itself from those liabilities.
• If the target is a tenant, the buyer needs to be advised in relation to its liabilities in that regard.

Question 20

• Advantages / Disadvantages of relying solely on property warranties given by the seller

Answer 20

• Advantages
   Speed – they are drafted by the buyer’s solicitor who knows what they want to be warranted and can more easily interpret the results.
   If the seller is honest, knows about the problems and discloses against the warranties the buyer can ask for further information about the disclosures until it gets the full picture.
   Seller may agree to a retention account, so the buyer knows there is money available for a breach of warranty claim.
   If the seller is of substance, in occupation of the properties and has good knowledge of them, they can offer good protection to a buyer.
• Disadvantages
   Only provide the buyer with a remedy after completion.
   Only as good as the person giving them; they are of little values if the seller gets wound up or becomes insolvent.
   There are likely to be “seller protection” clauses in the agreement e.g., de minimis, de maximis, shorter time limits which could prevent the buyer recovering all its losses.
   Claim is made by way of litigation – there are inherent uncertainties in such claims.
   If the seller can prove it disclosed against the warranty, the buyer’s claim will fail.

Question 21

• Original tenant liability under an “Old Lease”

Answer 21

• In a share sale, if the Target has a current (or previous) leasehold interest, it is important to establish if the Target was the original (or subsequent) tenant of a lease entered into prior to 1 January 1996 (an “Old Lease”).
• If the Target was the original tenant of an Old Lease, it remains liable to the landlord for the covenants in the lease, even if it has now sold the lease. That is regardless of how long ago the target sold its interest in the lease and how many assignments (i.e., sales) of the lease there have been since.

Question 22

• Original tenant liability under an “Old Lease”

Answer 22

• If the lease contained an option to extend it, then the Target may be liable for any breach of the tenant covenants during any such extension though the wording of the lease needs to be checked to see if that was the intention of the parties at the grant of the lease.
• Similarly, if the lease term continues after the contractual expiry date due to Part II Landlord and Tenant Act 1954, the lease will have to be checked to see if the parties’ intention was for the Target’s liability to extend beyond the original term.

Question 23

• Original tenant liability under an “Old Lease”

Answer 23

• Additionally, if an Old Lease was assigned to the Target at some point in the past (so it was the tenant of an Old Lease) it will, likely be liable for breaches caused by the current tenant because it will have covenanted with the landlord to perform / be liable for breaches of those covenants throughout the remainder of the term. That liability continues even if the Target has subsequently assigned the lease.
• So, e.g., if the current tenant of an Old Lease has not paid its rent (i.e., is in breach of covenant) the landlord may choose to pursue the Target for payment as the original or (as appropriate) subsequent tenant.
• This is a potential hidden liability which would pass with the Target on a share sale and would de-value it if any claim is ever made by the landlord.
• Thus, the buyer needs to ensure its due diligence questionnaire covers not only the Old Leases the Target is currently the tenant of but also any it has previously been the tenant of.

Question 24

• Tenant liability under a “New Lease”

Answer 24

• The Landlord and Tenant (Covenants) Act 1995 came into force on 1 January 1996.
• Any lease entered into on or after 1 January 1996 is a New Lease.
• Once a New Lease has been assigned (sold), the tenant is released from its obligations in respect of the tenant covenants in that lease. If the Target was such a tenant, it will, therefore, have been released from the tenant covenants.
• However, on an assignment of a New Lease, the Target will almost certainly have been required to enter into an Authorised Guarantee Agreement (“AGA”) with the landlord. In the AGA, the outgoing tenant agrees that, if the incoming tenant / assignee breaches its covenants in the lease, the landlord can pursue the Target directly in respect of the assignee’s breaches under the terms of the AGA. A statutory specified procedure needs to be followed by a landlord claiming under an AGA.
• A copy of the AGA should be provided in the data room – if it is not then you would need to request a copy from the seller. Quite often the AGA provisions are found within the Licence to Assign or the lease itself.
• If the lease gets assigned again, the Target’s liability falls away.

Question 26

• Issues for a buyer becoming a landlord on an asset sale

Answer 26

• If a buyer buys a freehold subject to leases the buyer becomes the landlord.
   If those leases are new leases (i.e., dated on or after 1 January 1996) the buyer/ landlord (subject to some minor exceptions) is bound by the landlord’s covenants in the lease. (s.3(1) and 3(3) Landlord and Tenant (Covenants) Act 1995). If it sells the freehold, it can apply to be released from the landlord’s covenants.
   If those leases are old leases (I.e., dated before 1 January 1996) the landlord is bound by the landlord’s obligations for the remainder of the term of the lease. That is the case even if it sells the freehold.
• The buyer needs to be made aware of those obligations
• Issues can arise for a buyer landlord if, after completion, it:
   wants to remove a commercial tenant with security of tenure; or
   wants to sell a property in multiple occupation (i.e., mixed residential and commercial.

Question 27

• Issues for a buyer becoming a tenant on an asset sale

Answer 27

• issues for a buyer becoming tenant under a lease
• These issues are a consideration for any tenant, regardless of the tenancy being acquired directly by an assignment in an asset sale or indirectly through ownership of the target (as the tenant) changing hands on completion.

Question 28

• Typical chargeable interests for stamp duty land tax include:

Answer 28

 estates;
 interests;
 rights;
 powers; and
 benefits of any obligation, restriction or condition affecting the value of an estate,
 in or over land in the UK.
- Land includes buildings, structures and land covered by water.

Question 29

SDLT elements?

Answer 29

• The buyer’s solicitor submits an SDLT1 form along with the SDLT payment.
• The deadline for paying SDLT is 14 days from the “effective date” i.e., when the contract is “substantially performed”. This is usually the date of completion of the purchase.
• If payment is late, a £100 penalty and / or interest may be payable.
• However, a contract can be “substantially performed” before completion. This occurs if:
   the purchaser, or someone connected to the purchaser, takes possession of the whole, or substantially the whole of the property before completion;
   a substantial amount of the consideration is paid; and
   (for a lease) the first payment of rent is made.
• HMRC considers 90% or more as “substantial”. If the contract has been substantially performed before completion, the date on which it has been substantially performed is the “effective date”.

Question 30

• Stamp duty is levied on documents which fall within one of the specified heads of charge. That includes the documents used to purchase:

Answer 30

 existing shares in a company incorporated in the UK (e.g., a share sale);
 an option to buy shares;
 an interest in shares (e.g., an interest in the money from selling them);
 shares in a foreign company that has a share register in the UK; and
 rights arising from shares (e.g., rights you have when new shares are issued).

Question 31

Stamp duty?

Answer 31

• Stamp duty is payable on the stock transfer form used to transfer ownership of shares / marketable securities. Even if the market value of the shares is higher than the price recorded on the stock transfer form, stamp duty is paid on the amount recorded in the stock transfer form.
• The current rate of stamp duty is 0.5% (rounded up to the nearest £5).
• The deadline for paying stamp duty is no later than 30 days after the stock transfer forms have been dated and signed. This is usually the date of completion of the purchase.
• If payment is late, a £100 penalty and / or interest may be payable.
• Note that a transfer of shares is exempt from stamp duty where the consideration for the transfer does not exceed £1,000.

Question 32

Local authorities’ duty regarding contaiminated land?

Answer 32

• Local authorities are required to inspect and identify areas of “contaminated land” within their remit.

Question 33

What is contaminated land?

Answer 33

• Section 57 EPA 1990 defines “contaminated land” as:
   “any land which appears to a local authority to be in such a condition, by reason of substances in, on or under the land that:
• significant harm is being caused or there is a significant possibility of such harm being caused; or
• significant pollution or controlled waters is being caused or there is significant possibility of such pollution being caused.”

Question 34

• Service of remediation notices?

Answer 34

 Local authorities (usually) have a duty to serve a “remediation notice” on any “appropriate person; the notice requires action to be taken by the person on whom the notice is served to remediate the contamination.
 “Appropriate person” means any person who is “an appropriate person, determined in accordance with s.78F to bear responsibility for anything which is to be done by way of remediation in any particular case.

Question 35

• Class A and Class B liability

Answer 35

• Liability for clean-up falls primarily on those who “cause” or “knowingly permit” a contaminant to be in, on or under the land. Such a person is known as a Class A person.
• If a Class A person of the land cannot be found, then the local authority can serve a remediation notice on the current owner or occupier and require them to remediate the land. Such a person is known as a Class B person.
• Mortgagees in possession (i.e., those who have repossessed property after a loan is not repaid) can also be Class B persons.

Question 36

• Seller’s apportionment of liability

Answer 36

• A buyer of land that is contaminated can be a Class A person if they know the land is contaminated and do not remediate the contamination after a reasonable opportunity to do so. This is because they are “knowingly permitting” the contaminant to be in / on / under the land.
• If a seller who falls within the meaning of Class A:
   makes a payment to the buyer for remediation purposes (e.g., by reducing the purchase price to provide the buyer with money for contaminative clean up); or
   sells the land “with information” (i.e. with sufficient information which would reasonably allow the buyer to be aware of the presence of the contaminant on the land) then, provided the seller has not done anything to misrepresent the situation,
   the buyer bears the liability the seller bore for cleaning up the contaminated land as well as its own liability for “knowingly permitting” the land to be contaminated.

Question 37

• If the search reveals any of the local authority having:
• consulted with the owner or occupier before serving a remediation notice;
• made any entries on its register of contaminated land (s.78R EPA 1990); or
• served any contaminated land notices affecting the property…
• Then…

Answer 37

• Make enquiries of the seller / landlord / borrower (respectively); and
• Take instructions from your client as to further investigations

Question 38

• Buyer options where contamination is an issue

Answer 38

• Make further detailed enquiries of local authority - To obtain details as to the reasoning for its decision
• For radioactive contaminated land: make enquiries of Environment Agency / Natural Resources Wales - To obtain details as to the reasoning for its decision
• Make further enquiries of the seller / landlord / borrower (as appropriate) (‘Seller’) - To find out if the Seller has site specific knowledge or has appealed the remediation notice
• Make full searches of public registers regarding the site / adjacent land - It will help gain an insight into the likely extent / spread / cause of the contamination
• Advise Buyer to get an independent site report from a commercial provider (Phase I is a desktop survey and a site visit; Phase II involves soil samples being analysed) - It will help assess risks involved and likely remedial works needed
• Advise Buyer to obtain an independent valuation – It will help Buyer obtain a price reduction (though note the passing of the Seller’s liability to the buyer discussed above). Note: lender may withdraw the loan offer
• Advise Buyer on use of contractual protections (see below)- It will allow Buyer to pursue Seller if remedial action is taken against the Buyer

Question 39

• Contamination – contractual protections

Answer 39

• Allocation of liability clauses – the parties agree who will be liable for which type of contamination (permitted under the Contaminated Land Guidance)
   Advantages:
• If the parties have agreed to allocate liability between them, the enforcing local authority will honour that agreement.
   Disadvantages:
• Uncertainty: it is not clear how the enforcing authority will interpret and apply the Contaminated Land Guidance.
• Warranties from the seller confirming the land is not contaminated
   Advantages:
• Quick and simple to draft.
• If the buyer has a remediation notice served and must spend money (alongside the seller) in cleaning up, the buyer can recover the sums from the seller.
   Disadvantages:
• Recovery is reliant on the seller having funds to meet the cost of a claim for breach of warranty.
• Conditional contract (conditional on the seller complying with the remediation notice / obtaining a satisfactory environmental survey (which will only be obtainable after compliance with the remediation notice)
   Advantages:
• Quick and (relatively) simple to draft.
   Disadvantages:
• Delays completion of the transaction.
• If the seller runs out of money for remediation, the buyer will not obtain the property (unless it waives the condition but that means buying contaminated land and becoming a Class A or Class B person).
• Seller to acquire an environmental insurance policy
   Advantages:
• Widely available.
• Covers the cost of remediation of undetected and disclosed contamination and related liabilities.
   Disadvantages:
• May contain limitations on what and who they cover.
• Level of excess payable before insurance company pays out may be too high for buyer to agree to.
• Stringent conditions may be imposed.
• Seller has sold “with information” relieving the seller of liability
   Advantages:
• Clarity – the buyer takes on the seller’s liability under the EPA 1990 provided the test set out in the Guidance is met.
   Disadvantages:
• It is not easy to be certain the requirements for the seller to have “sold with information” have been met.
• Reduction in purchase price
   Advantages:
• Simple and clear – the buyer takes on the seller’s liability under the EPA 1990.
   Disadvantages:
• The reduction in price may not be enough to cover the clean-up costs.

Question 40

Your client, (‘Company A’), is proposing to enter into a joint venture with one other party (‘Company B’). The joint venture would be set up as a limited company (the ‘JV Co’). Both parties wish to keep the formation of the JV Co confidential. One of the key assets, and a key driver as to the formation of the JV Co, is a freehold property which is currently owned by a wholly owned subsidiary of Company B (‘Sub B’). The freehold of the Property will be transferred to the JV Co on completion and the JV Co’s operations will be run from the Property.

Which method of title investigation would best keep the formation of, and the acquisition of the Property by, the JV Co confidential while still ensuring the JV Co is protected in relation to all liabilities in relation to the Property?

A full title investigation with a report on title (including obtaining all the pre-contract searches) being prepared.

No title investigation is needed; instead Sub B should provide warranties and a disclosure letter to the JV Co on completion.

A certificate of title being prepared by Sub B’s solicitors along with delayed search indemnity insurance.

A certificate of title being prepared by Sub B’s solicitors along with no search indemnity insurance.

Answer 40

A certificate of title being prepared by Sub B’s solicitors along with no search indemnity insurance.

Correct
Correct. The combination would cover the JV Co against liabilities while not requiring searches to be carried out that may not be confidential. One of the other answers is incorrect because some searches are not confidential, another answer is incorrect because the insurance option is not appropriate, and the final answer is incorrect because warranties with disclosures will not protect against all liabilities. See Title Issues in relation to Properties and Share Purchase: Methods of Title Investigation.

Question 41

Your client, (‘Company A’), is proposing to enter into a joint venture with one other party (‘Company B’). The joint venture would be set up as a limited company (the ‘JV Co’). The business of the JV Co will be owning and running hotels. The hotels are currently owned by several subsidiaries of both Company A and Company B and ownership of all the hotels will be transferred to the JV Co on completion. Due diligence has revealed that most of the hotels are freehold properties but two are leasehold. Details of the leases are:

• A 50-year lease granted to Company A commencing on 29 September 1994, expiring on 28 September 2044 (‘Lease 1’)
• A 25-year lease granted to Company B commencing on 25 March 2008, expiring on 24 March 2033 (Lease 2) (‘Lease 2’).

Lease 1 and Lease 2 together make up the ‘Leases’.

What is the best advice to give to Company A and Company B in terms of their respective liability for the tenant covenants under the Leases once assignment of the Leases has taken place?

Company A and Company B will both be released from liability for the Leases.

Company B will be liable for Lease 2; Company A will cease to be liable for Lease 1.

Company A will be liable for Lease 1; Company B will only be liable for Lease 2 if it enters into an Authorised Guarantee Agreement with its landlord.

Both Company A and Company B will remain liable for the Leases.

Answer 41

Company A will be liable for Lease 1; Company B will only be liable for Lease 2 if it enters into an Authorised Guarantee Agreement with its landlord.

Correct
Correct. Lease 1 is an ‘old lease’ and Lease 2 is a ‘new lease’. An original tenant under an old lease, such as Company A, will remain liable to the landlord even if it has transferred the lease; an original tenant under a new lease, such as Company B, will only remain liable if it has entered into an Authorised Guarantee Agreement. (The other answers get this wrong in three different ways). See Share Purchase: Potential Liabilities as a Tenant under a Lease.

Question 42

Your client, (‘Company A’), is proposing to enter into a joint venture with one other party (‘Company B’). The joint venture would be set up as a limited company (the ‘JV Co’). One of the key assets of the JV Co will be a freehold property (the ‘Property’), valued at £2,000,000. The Property is currently owned by a wholly owned subsidiary of Company B (‘Sub B’). The parties have not yet decided if the Property will be transferred to the JV Co via a TR1 or if all the shares in Sub B will be transferred to the JV Co.

What is the best advice to give to your client in relation to the stamp tax position depending on the decision made in relation to the transfer of the property to JV Co?

If the Property is transferred to the JV Co, the JV Co will pay SDLT on £2,000,000.

If all the shares in Sub B are transferred to the JV Co, the JV Co will pay SDLT on £2,000,000.

If the Property is transferred to the JV Co, the JV Co will pay stamp duty on £2,000,000.

If all the shares in Sub B are transferred to the JV Co, Sub B will pay stamp duty on £2,000,000.

Answer 42

If the Property is transferred to the JV Co, the JV Co will pay SDLT on £2,000,000.

Correct
Correct. SDLT is paid on a transfer of property by the buyer. One of the other answers incorrectly specified stamp duty on a transfer of property, while another answer incorrectly specified SDLT on a transfer of shares. The final answer specified the wrong payer of the stamp duty. See SDLT on Property Purchases and Stamp Duty on Share Purchases.

Question 43

A joint venture (the ‘JV’) set up to carry out a development project is considering which type of contractual structure to use – the traditional method or the design and build method. Which of the following statements would be a correct description of either or both of these methods?

If the JV uses the traditional method, the Sub-contractors will be directly appointed by the JV.

In the design and build method, the Employer will appoint an Employer’s Agent to be an independent party that can oversee the Building Contractor’s work and certify whether practical completion has been reached.

If the JV uses the design and build method, there may be more potential for disputes arising, because the Building Contractor will be the party in charge of both completion of the design and also construction of the development.

In the traditional method, the Architect will be directly appointed by the JV, so the Architect will not be able to certify whether practical completion has been reached.

If the JV uses the design and build method, the Architect and the Design Team will have a direct contract with the JV so there will be no need for collateral warranties.

Answer 43

In the design and build method, the Employer will appoint an Employer’s Agent to be an independent party that can oversee the Building Contractor’s work and certify whether practical completion has been reached.

Question 44

A joint venture (the ‘JV’) set up to carry out a development project is currently negotiating a design and build contract (the ‘Contract’) with a third party building contractor (the ‘Contractor’). Which one or more of the following statements would be an appropriate comment on provisions of the agreement?

At the start of the project, the Contractor will be given control of the building site: the Architect will then oversee the project on behalf of the JV.

The Contract will provide for the Employer’s Agent to certify practical completion: however, no certificate will be granted while there are still latent defects outstanding.

If the JV decides after the start of the Contract that it can find another building contractor to carry out part of the work for less money, it would be standard for the Contract to allow the JV to take the work away from the Contractor and give it to the cheaper firm.

The Contract is likely to include liquidated damages, which would make the Contractor liable for a set amount per day or week of any overrun to completion that is caused by circumstances agreed to be the Contractor’s risk.

Answer 44

The Contract is likely to include liquidated damages, which would make the Contractor liable for a set amount per day or week of any overrun to completion that is caused by circumstances agreed to be the Contractor’s risk.

Question 45

A joint venture (the ‘JV’) set up to carry out a reasonably large development project is currently negotiating a design and build contract (the ‘Contract’) with a third-party building contractor (the ‘Contractor’). Which of the following statements would be an appropriate comment on the monetary provisions of the Contract?

The Contract is likely to include retentions that the JV can make from each interim payment: these are usually equal to 50% of each such payment.

The Contract must provide for interim payments to the Contractor: if it does not, these will be implied into the Contract under statute.

If the JV wants to withhold part of the retentions that are due for payment to the Contractor at practical completion, it will need to serve a compliant ‘pay more’ notice on the Contractor in advance.

If the JV is concerned about the solvency of the Contractor, it could ask the Contractor to provide a performance bond: but this will be an extra expense of the Contract for the JV.

Answer 45

The Contract must provide for interim payments to the Contractor: if it does not, these will be implied into the Contract under statute.