Market Watch Newsletter - Lockton Companies

Market Watch Newsletter Lockton Real Estate & Construction January 2017

@LocktonREAC

www.LocktonREAC.co.uk

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This edition includes: • Introduction

• Insurance and financing - how to avoid delays

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• Pension or property: what if you could have both?

• UK Chancellor Philip Hammond’s rates reforms necessitate a change in mind-set

• Events - Upcoming events

• Events - Highlights from previous events

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CONTENTS

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Welcome to the latest issue of our Market Watch newsletter

HAVE YOUR SAY If you have any comments on this edition of our newsletter or would like to contribute an article to a future edition, please contact us at LREAC@ uk.lockton.com

While it remains a challenging economic environment, not just in the UK but globally, we should still look to identify the opportunities that exist for our clients and their varied businesses. Even in turbulent times, your Lockton team is at hand to navigate you around the obstacles, and find a clear path that keeps your business secure and safe through the use of practical and innovative solutions. Winter is coming. The recent drops in temperature have highlighted the need for appropriate risk management measures for ice, snow, through to vacant buildings or floods, and our team are here to support and advise you on how to minimise these risks. In this edition we present a twist on the age-old pension-or-property question, by explaining how your company’s assets could in fact help you to bolster your pension fund. We also look at the issue of business rates and the likely effects of the appeal system being scrapped on 1 April 2017. Developers and landlords should watch developments closely to minimise the risk of delays to the mitigation of rates. We also examine why many of the most painful negotiations centre on insurance, and how discussing insurance options at the start of transactions can save much pain later on. Not for the first time, proactivity is key.

I would like to wish all our readers a happy, safe and prosperous New Year. I hope our sector and the broader UK economy will continue to gain in strength, vitality and resilience. If you would like further information on any of the topics covered in this edition, please get in touch with a member of our team at Lockton Real Estate & Construction or email us on [email protected].

NEXT Richard Owen Partner, LLP Board Member Real Estate & Construction Tel: +44 (0)20 7933 2452 Mobile: +44 (0)7776 170 759 Email: [email protected]

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Insurance and financing – how to avoid delays

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Jenny Sargeant Partner, Fladgate T: +44 (0)20 3036 7288 E: [email protected]

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Insurance and financing - how to avoid delays

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Increasingly across the industry we find the most painful negotiations (whether you are a borrower, a lender or their lawyers) centre on insurance. There are a number of reasons for this. But, with an awareness of these issues, insurance can be dealt with in a collaborative way at the beginning of transactions, to ensure that deals proceed at a pace in line with intended timetables.

Insurance contracts are deal-specific Each insurer has its own policy terms and terms of business (with policies tailored to incorporate specific additional provisions called endorsements). Although the LMA (Loan Market Association) real estate facility agreements aim to provide a standard position in terms of insurance requirements, these sometimes do not match the particular policy to which they need to relate. It is crucial for a borrower to send the insurance covenants in the facility agreement to its broker at the outset of a transaction asking for their input. This allows the provisions to be tailored to reflect reality. Sometimes legal terminology simply does not quite match insurance terminology and opening a dialogue with the broker can marry up the two. The standard LMA position requires the following endorsements:

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Composite insurance Borrower and lender are both insured parties but have separate insurable interests and, if the borrower’s interest is invalidated, there is no impact on the lender’s insurance. Lenders prefer composite insurance to joint insurance (where lender and borrower have the same insurable interest) because if a joint policy is invalidated by one party, the other party’s interest also falls away.

2. Non-invalidation clauses These can provide additional protection for a joint insurance policy, If the actions of the borrower do invalidate the policy, then the inclusion of this endorsement will not stymie the rights of the other joint insured party. 3. First loss payee An obligation for the insurer to pay proceeds to a nominated party (ie, the lender). As there are usually cost implications of adding endorsements to a policy, the borrower should discuss the lender’s requirements with its broker early on.

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Insurance and financing - how to avoid delays Property insurance arrangements are often bespoke Where the borrower owns and insures the property it is in control of, varying its insurance to meet a lender’s requirements. However, if the borrower’s landlord or tenant insures, the relevant lease will stipulate the insurance requirements. Sometimes the lease will require the borrower’s interest (and possibly even the lender’s) to be jointly insured on the policy. More frequently there is only a requirement that the lender’s interest is noted (which has no legal effect, although insurers would usually notify the party if a claim occurred). Frequently this is dealt with by tailoring the facility agreement so that insurance requirements are met where the borrower enforces the insurance provisions in the lease against the relevant insuring party. Another way of dealing with this is to obtain a supplemental policy, but cost implications mean this is usually only a requirement for large or high-risk transactions.

Increased negotiation of brokers’ letters

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Brokers’ letters are negotiated far more than in the past. There is an increasing concern among brokers about accepting blanket liability statements, and each broker will want to tailor the brokers’ letter to its particular terms of business. A broker might approach negotiations from the perspective that it does not want to take on liability above and beyond the liability to its own client. Lenders do, however, need the broker to confirm that the insurance policies in place meet the facility agreement requirements, insurance premiums have been paid to date and the broker is not aware of anything that might invalidate the policy. The lender’s security is only as good as the insurance in place if the property is destroyed so insurance requirements are naturally very important to lenders. The LMA introduced a precedent brokers’ letter last year which has helped to simplify negotiations.

What can we do to manage insurance requirements? Managing insurance requirements is all about proactivity: •

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Getting the broker involved early on: -- checking the policy against the facility agreement insurance requirements; -- pricing any additional endorsements that are required; and -- reviewing the lender’s draft brokers’ letter (and if necessary checking this with the broker’s legal team). Ensuring that the lender and its lawyers know at the outset who insures the property and whether the borrower has any control over the policy conditions.

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Pension or property: what if you could have both?

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Elemi Atigolo Partner, Clearwater Wealth Management T: +44 020 7065 2904 M: +44 07847 919 863 E: [email protected]

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Pension or property: what if you could have both? What’s better for funding retirement, pensions or property? The debate was recently reignited when the Bank of England’s chief economist stated a preference for property.

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“It ought to be pension but it’s almost certainly property,” said Andy Haldane, when asked what he thought was the best way to save for retirement. His words drew criticism – the recently departed pensions minister described them as ‘irresponsible’ – though many people would agree with Haldane. But what if you could have both?

Property in a pension If you’re a director or owner of a small business, the company’s assets could help you generate a bigger pension fund faster. This is achieved by holding your business premises within a pension wrapper. Once those premises (including any commercial or agricultural land) are ‘owned’ by the pension, they can be leased back to the business. Significantly, rent paid by the business can go directly into your pension pot. Rent paid into the pension is free of income tax, and there is no tax on capital gains when it is time to sell. The tax breaks mean that business owners can build their retirement nest eggs quicker, especially if tax-relievable contributions are made from income. Another benefit is the new pension freedoms, which include the availability of uncapped income from age 55 and the possibility of mitigating death taxes altogether.

Safety warning Only a self-invested personal pension (SIPP) and a small self-administered scheme (SSAS) can hold commercial property. Many business owners will not have sufficient funds to purchase their premises outright, so they can face the challenge of borrowing money to acquire the property. The rules allow investors to borrow up to 50% of the value of their pension pot to fund the purchase. Once everything is established, there’s also the task of ensuring that rental income is invested appropriately.

Letting cash accumulate in the fund when you consider the derisory rates of interest on offer versus the longer-term potential of a typical balanced portfolio of investments is probably not the wisest move. Remember also that property tends to be illiquid when compared to other investments. It could take months, or even years, to sell the premises at the right price. These are just some of the reasons that directors and owners of small businesses should seek advice from a specialist before taking action.

Height restriction An increasing challenge is the introduction of a reduced lifetime allowance of £1 million in April 2016. Anyone holding substantial wealth in a pension needs to monitor its value, as savings above £1 million will be taxed at 55%, if the amount above this value is taken as a lump sum, or 25% if the amount above the lifestyle allowance is taken as income. The commercial property can hold some attractive benefits for the right type of investor. To achieve the best outcome and mitigate unnecessary tax, however, it is vital that investors seek advice from a financial advisor. To receive a complementary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, please contact Elemi Atigolo who will be pleased to assist.

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UK Chancellor Philip Hammond’s rates reforms necessitate a change in mind-set BACK

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Emily Francis BNP Paribas Real Estate T: +44 0121 237 1227 E: [email protected]

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UK Chancellor Philip Hammond’s rates reforms necessitate a change in mind-set

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‘Business rates’ and ‘rating’ are words that send a shiver down the spine of many landlords, developers and asset managers. It’s a misunderstood area of property that usually brings irksome problems and, since the abolition of empty rate relief in April 2008 (yes, it really is that long ago), one that has become of even greater interest to investors as well as, of course, to occupiers. Economic conditions following the global financial crisis have forced the government to defend the business rates tax base, and to incentivise councils to increase the amount that is raised in their local areas. Business rates fund local authority spending and every penny counts, a consideration that has remained central as UK Chancellor Philip Hammond has continued the ‘reform’ of business rates that was begun under George Osborne.

Ratepayers have pleaded for an appeal system that is simpler, quicker and made more responsive through more frequent revaluations. Three-yearly assessments are felt by many to strike a good balance between responsiveness and business certainty, but so far the government has ignored these beleaguered cries. Instead, what is being delivered is a package of changes aimed at stopping the ‘appeal culture’ that government perceives to be a problem. It wants business to no longer view business rates as a fixed cost that can be reduced on appeal, but instead as a tax. Measures have worked to make the Valuation Office Agency (VOA) more closely aligned with HMRC.

Check, challenge, appeal The appeal system is to be scrapped on 1 April 2017 and replaced by a convoluted three-stage process called ‘Check, Challenge, Appeal’, under which it could take businesses three years to secure a refund if their rateable value has been set too high. Check, Challenge, Appeal is to be administered online through HMRC’s portal, with a heavy onus on the business to confirm facts about the property and

extensive information about tenure and rental information, thereby transferring the responsibility for accuracy from the VOA to the business ratepayer. Ratepayers will face a further blow should their case reach the Valuation Tribunal. Historically, the Tribunal has determined an exact rateable value (RV) that is to the nearest £100, £1,000 or £10,000, depending on the size of the valuation. What is now proposed is that the Tribunal should determine whether or not the current rateable value is within the limits of “reasonable professional judgement”. At present there is no indication as to how this will be measured, but discrepancies of 5% or even 10% have been felt to be within these limits, leaving, in the worst case, businesses’ bills calculated on a rateable value that is 10% too high. We are of the opinion that this approach will deny businesses a correct rateable value. This is a democratic right, conducive to the canons of taxation. Ratepayers must have a correct assessment: nearly right is not good enough and will lead to over taxation. So, how will these changes affect those with interests in property other than a tenant or occupier?

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UK Chancellor Philip Hammond’s rates reforms necessitate a change in mind-set What to expect Developers should expect even longer delays to the de-rating or mitigating of rates on idle stock or buildings that are actively being refurbished or redeveloped. At practical completion, expect the council to be keen to start the notice procedure to bring the completed development into assessment. Asset managers and landlords will incur longer delays in mitigating rates on voids and securing correct rateable values, which of course assist a prospective tenant in forming his rental bid. The changes will require early and proactive strategic advice from a rating surveyor who will be a constant throughout the lifecycle of a building. A further, major change to be aware of is the revaluation of business rates that will be implemented from April 2017, when all commercial premises will receive a new rateable value that is used to calculate their liability. These will be based on rental levels prevailing at 1 April 2015.

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However, the ‘transitional arrangements’ put in place by government mean that those who should see dramatic falls in their bills will have these changes phased in very gradually. RV reductions of 30-40% are common in many areas. However, this ‘gain’ may take three years to be fully enjoyed, or not at all, depending upon which TR scheme the government introduces. Conversely, sectors with rateable values that have risen, such as Central London retail, will see their bills rise at a much faster rate. Transitional phasing is ‘self-funding’ whereby the ‘winners’ in upwards phasing are subsidised by the ‘losers’ in downwards phasing. To use an adage, Barnsley is paying for Bond Street. On a positive note, development may be more viable in many locations outside of London where values have decreased, as rates on new builds assessed from April 2017 should not attract transitional phasing.

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Events

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Upcoming events

Property Issues Seminar Wednesday, 8th February 2017 We are pleased to announce the speakers for the second of our three property issues seminars this year, as follows: • Chris Rofe Lockton Companies LLP “Employee benefits for a new generation’ • Ian Paton and Sam Potts Cluttons “Understand your flood risk – invest to protect your asset”

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• Jack Simmons Cushman & Wakefield “PRS where next?”

Agenda: 09.00 – Registration 10.00 – Presentations 12.30 – Hot buffet lunch In order to secure your place at our seminar and to ensure you don’t miss out, please contact Rebecca Copley on 020 7933 2520 or email [email protected].

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Upcoming events

LOCKTON REAC CHARITY TEXAS HOLD’EM POKER TOURNAMENT Sponsored by AXA and in aid of Lockton Charity of the Year Date: 9th March 2017 Venue: Playboy Club, 14 Old Park Lane, London, W1K 1ND Time: 6:00pm to 11:30pm

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For more information and to reserve your space, please contact Rebecca Copley on 020 7933 2520 or by email LREAC@ uk.lockton.com.

From this event alone, over the past nine years we have raised over £70,000 for charities such as Help for Heroes, Macmillan Cancer Support, Whizz-Kidz, Alzheimer’s Society, Great Ormond Street Hospital and The Brain Tumour Charity. With the generous support from you, these charities have been able to continue their essential work by providing individuals and families with the support that they need. This year we plan to add to the total by inviting you to come and play at our annual, fun filled, poker tournament on Thursday 9th March 2017.

If you think lady luck is on your side, why not come along and prove your poker skills. If you have never played before, have no fear, there will be a chance to practise before the tournament starts; and who knows, with beginners’ luck you may even win a part of the prize pot which totals £3,500!! There are only 70 playing seats available with an additional 30 spectator spaces, and since we have had numerous enquiries about this event already, don’t delay! Get in contact today to reserve your place.

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Upcoming MIPIM 2017 events

14th - 17th March 2017 Palais des Festivals, Cannes, France

The following members of our team will be attending MIPIM in March. If you wish to make contact or arrange a meeting, please use the details below:

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Please contact a member of our team for professional advice on your real estate and construction requirements.

Richard Owen, Partner Member of LLP Board

Steve Bracey Partner

Tel: +44 (0)20 7933 2452 Mob: +44 (0)7776 170759 [email protected]


Mark Rose Partner

Steve Rust Partner



David Hayhow Partner

Paul Feldman Partner



Jonathan Hackett Senior Vice President Tel: +44 (0)20 7933 2781 Mob: +44 (0)7507 808175 [email protected]

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Highlights from recent events BACK

Property Issues Seminar Wednesday, 19th October 2016 We are pleased to announce the speakers for the second of our three property issues seminars this year, as follows: Our guests clearly enjoyed the presentations given by guest speakers: Simon Jenner (Battersea Power Station Development Co.), Forbes MacPherson (Stanhope Plc) and Luke Wainwright (CORE). Our sincere thanks to them for their support and contribution. Three well-received presentations were given on the redevelopment of Battersea Power Station, the transformation of BBC Television Centre and the new building at 10 Fenchurch Avenue. We would like to thank the presenters for their valuable time in preparing and delivering these presentations.

Claims Code Seminar Thursday, 10th November 2016 The presentations were kindly provided by guest speakers: Doug Edwards and James Fee (VPS), Julian Strutt and Nick Black (VRS Vericlaim). Presentations given enhanced our knowledge on risks to your vacant property potential issues in the event of a claim at a vacant property, and were warmly received.

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Highlights from recent events BACK

Lockton LREAC Community Project Day Thursday, 20th October 2016 Members of the Lockton Real Estate & Construction (LREAC) team took part in their annual charity voluntary day at Homerton Adventure Playground in Hackney. Sixteen Partners and Senior Vice-Presidents in LREAC spent the day digging, sawing, repairing, painting and building to ensure this amazing playground remains a fun and safe environment for local children. Richard Owen, Partner at Lockton, said: “While it was very challenging to achieve the maximum we could in the time we had, it was a very enjoyable and rewarding experience. This is a fabulous haven for local children and it is clear how much it means to them. We are truly delighted to play our small part and support the volunteers at Homerton. We feel a sense of reward and purpose knowing that the revamped playground will help to improve the wellbeing of local children.”

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Market Watch Newsletter BACK CONTENTS - January 2017 www.LocktonREAC.co.uk

This newsletter does not purport to be comprehensive or to give legal advice. While every effort has been made to ensure accuracy, Lockton Companies LLP cannot be held liable for any errors, omissions or inaccuracies contained within the document. Readers should not act upon (or refrain from acting upon) information in this document without first asking further specialist or professional advice. A division of Lockton Companies LLP, authorised and regulated by the Financial Conduct Authority. A Lloyd’s broker. Registered in England & Wales at The St Botolph Building, 138 Houndsditch, London, EC3A 7AG. Company No. OC353198

@LocktonREAC