Private Client Briefing Note – Spousal Bypass Trusts

It describes aspects of the basic law relating to companies, partnerships, LLPs, distribution and agency relationships, financing business, taxation, intellectual property rights, e-commerce, freedom of information and data protection, the acquisition of property in the UK, planning, investment business,  competition law, licensing, and employment law. It  should not be relied upon as providing legal advice. Our firm has substantial experience in advising overseas organisations on UK matters and we can offer assistance in detail on any of the topics raised. Please call Toby Stroh, Druces LLP’s head of Corporate & Commercial law for more information.

Doing business in the UK

How much rent do you need to pay on 29 September 2011? You might think that you have to pay £6,767.12. That is the amount of rent that covers the period of 13 days between 29 September 2011 to 11 October 2011: (£190,000 / 365 days) x 13. That certainly seems logical because the break clause requires the rent to be paid “up to the termination date” and because it surely cannot have been intended that you have to pay rent for any time after the lease has come to an end on 11 October 2011.

Unfortunately for you that is not the right answer. The right answer is that the lease contains an obligation to pay a quarter year’s rent, that is to say £47,500, on each quarter day,  so that is the amount that you should have paid on 29 September 2011. The reference to paying the rent due “up to the termination date” is actually a requirement to pay all the rent that is liable to be paid up to that date.

This scenario is a very common one and it never ceases to surprise commercial occupiers of property the first time they come across it. It never ceases to aggravate them either because in reality they are having to pay an amount of rent for a period of time after the lease has come to an end.

Not unnaturally I often get asked whether it is possible to challenge this in Court. My answer is no, because the law is very clearly on the landlord’s side on this issue. Nevertheless a tenant has recently tried to challenge this point in the case of PCE Investors Limited -v- Cancer Research UK and got badly burned in the process.

Having paid a lesser amount of rent for the period 29 September to 12 October, it has found that, in trying to save about £39,712.33, it has made itself liable for the full rent of £190,000 per annum plus all the other associated charges under the lease for the remainder of the contractual term to 27 September 2014, the Judge having ruled that its break notice was invalidated by its failure to pay the correct figure by the termination date. Its total liability for failing to get it right is likely to be more than £517,000 in extra rent to September 2014 and probably the landlord’s costs of the action.

This post emphasises again the pitfalls and bear-traps that lie in wait for tenants to seeking exercise break clauses in leases and follows on from Karen Chapman’s post on break clauses and our briefing note on the case of Avocet Industrial Estates v Merol Limited. The answer for tenants is to speak to a lawyer specialising in landlord and tenant law – and here that means me, Julian Johnstone, Head of Druces LLP’s Litigation & Dispute Resolution team.

In the Budget on 21 March 2012 the Chancellor announced a new 7 per cent rate of Stamp Duty Land Tax (SDLT) for residential property transactions where the chargeable consideration exceeds £2 million. The new rate applies to transactions where the effective date is on or after 22 March 2012, subject to transitional provisions for pre-existing contracts.

Additionally, the Chancellor announced a new higher 15 per cent rate of SDLT for residential property transactions by certain persons (broadly companies, collective investment schemes and partnerships with a member who is a company or a collective investment scheme) where the chargeable consideration exceeds £2 million. The new rate applies to transactions where the effective date is on or after 21 March 2012, subject to transitional provisions for pre-existing contracts.

Exclusions

There are also two exclusions from the higher charge, firstly for companies acting in the capacity of trustee of a settlement and for bona fide property developers who meet the qualifying conditions.

SDLT Annual Charge and CGT Charge Consultations

In addition the Government will be launching two consultations (expected to be published in May 2012). The first will involve the introduction of an annual charge on residential properties over £2 million owned by certain non-natural persons at rates expected to be between 0.3% and 0.7% depending on the property value.

If we assume that a property valued at £2 million will attract a charge of 0.3% then this means the annual charge would be £6,000.

The second consultation will relate to the introduction of a Capital Gains Tax charge on the sale of residential property owned by non resident, non-natural persons. Legislation in respect of each of these consultations will be introduced in Finance Bill 2013 and will come into effect in April 2013. Until the consultation papers are published we will not know the extent of the proposed charges or the scope of their application.

What to do next

Owners of high-value residential property held otherwise than by individuals should consider conducting a review of their portfolios once the consultation papers have been issued, to determine whether any restructuring would be desirable before April 2013 or the mechanisms by which the annual charge could be most efficiently paid.

Nothing in this note constitutes legal advice and it is intended as general guidance only.

If you would like to discuss this topic or any other matters of interest please e-mail us at taxation@druces.com or telephone us on +44 207 7638 9271 and ask to speak to Richard Monkcom or Susan Perry.

Druces LLP Solicitors April 2012

So you check your lease and see that there is a clause allowing you to bring your lease to an end early by serving a break notice and that the date for serving the notice is coming up shortly. You decide it would be in the best interest of the business to take advantage of this. You have plenty of time to serve a notice and the lease tells you what you must and must not do to get it right. It all looks pretty straightforward so you ask your in-house property administrator to get the notice off to the landlord.

Confident that all is well you make plans to leave the building and maybe even sign up to relocate. Your rent is up to date and you are going to make sure you leave the property in good repair when you go.

Out of the blue the landlord refuses to accept that the lease has come to an end on the break date. It turns out your notice is defective or you have not complied fully with the pre-conditions in the lease for the valid operation of your break notice and it is too late to put things right. Your lease is not going to end after all.

We have seen many cases of tenants getting what appears to be a relatively simple process wrong because the law relating to the preparation and service of break clauses and compliance with pre-conditions is so strict. In a recent case, Avocet Industrial Estates LLP -v- Merol, the tenant’s failure to pay £130 of interest arising out of the late payment of rent under its lease was enough to mean its break notice was ineffective, leaving it liable for 5 more years of rent, service charges and other costs.

The consequences of getting a break notice wrong can often be financially very serious – you may have tried to break a 25 year lease at year 10 and suddenly have another 15 years to go. In a weak letting market, landlords do not want to lose income from existing tenants, so many are unlikely to waive their strict contractual entitlements to continue treating a lease as continuing when a break notice has been incorrectly prepared or served.

You might think it is not worth asking a lawyer to review your lease or to serve the break notice for you. However, we know what the potential pitfalls are and we know how to avoid them. Using us could save you a substantial amount of money in rent, service charges and insurance premiums. Money well spent.

Please give me, Karen Chapman, Partner in Druces LLP’s Property team or Julian Johnstone, Partner in Druces LLP’s Litigation & Dispute Resolution team a call if you would like us to help you draft and serve your break notice and advise you as to your lease obligations generally. We can also help you if you are relocating to new premises

The automatic transfer of the employees to the purchaser under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations invariably applied to a business sale out of administration. That remained the case until 2006 when a new regime (TUPE Regulations 2006) came into effect on 6 April of that year. This introduced an element of uncertainty for purchasers, administrators and employees. Fortunately that uncertainty has now been resolved following a clear Court of Appeal Decision in Key2Law (Surrey) LLP -v- De’Antiquis [2011].

Richard Baines, Head of Druces LLP’s Business Turnaround, Restructuring and Insolvency team and Scott Thistleton, a trainee solicitor at Druces LLP consider in detail the issues surrounding the uncertainty and its resolution by the decision in Key2Law in their latest article published in the In-House Lawyer, April 2012 issue

Turnaround, Restructuring & Insolvency briefing note: Administration Sales and TUPE (April 2012)

Arnold J stated in his judgment that the claim by Golden Eye (International) Limited and Ben Dover Productions was one made by a copyright owner and its exclusive licensee and that they had a good arguable case that many of the relevant intended defendants had infringed their copyrights by peer-to-peer file sharing of the films. It was held that the interests of the claimants in enforcing their copyrights outweighed the interests of the intended defendants in protecting their privacy and data protection rights.

The full judgment can be accessed at Golden Eye (International) Limited & Anor v Telefonica UK Limited (2012) http://www.bailii.org/ew/cases/EWHC/Ch/2012/723.html

Still think you all want the same thing?

A Shareholders Agreement can be the elephant in the room.  Everyone involved would like to have one in place, but there’s so much going on that it gets pushed to the bottom of the wish-list as something that’s too time-consuming or expensive to deal with.  Then people start to want different things and that’s when the trouble starts.

If you don’t have a Shareholders Agreement you have to rely on the Companies Act 2006 and the Articles of Association.  You could find out the hard way that something as basic as getting first refusal on the issue of new shares or having the right to appoint a director isn’t covered.  Or you might find that the provisions on share transfer in the Articles of Association make it impossible for you to sell your shares, even if you could find someone who wanted to buy a minority shareholding in a private company with no right of veto over major decisions.

It doesn’t have to be that way.  You’re all the best of friends right now, so now is the time to get it sorted out.  A couple of hours talking to a lawyer who knows what they’re doing and you can agree what you want and how you can take it forwards.  You can then get the Shareholders Agreement and Articles drafted that really work for you, giving you the flexibility you need to run your business and the security of knowing where you stand. 

That lawyer I mentioned, the one who knows what they’re doing.  Turns out it’s me. Check me out on LinkedIn at: www.linkedin.com/in/susanperrylegal or drop me a line on s.perry@druces.com.

Susan Perry is a Senior Associate in Druces LLP’s Corporate & Commercial team. She works with Entrepreneurs and Businesses.

Neil Porteus, Finance Director, The Deep commented “Druces LLP were instrumental in assisting The Deep to secure the last £3m of capital funding to complete its stunning aquarium in Hull and so it is fair to say that we wouldn’t be here today – let alone be 10 years old – without the most invaluable advice of Druces LLP! In the intervening years, Druces LLP have continued to provide advice on a range of issues and we are entirely grateful for their wise counsel.“

Please speak to Richard Monkcom, head of Druces LLP’s Private Client team or Toby Stroh, head of Druces LLP’s Corporate & Commercial team for more information about structured lease finance and our corporate law services

Please contact Susan Perry, Senior Associate in Druces LLP’s taxation team for further information on Stamp Duty Land Tax and the changes imposed by the Budget.