European Real Estate Finance: Market Update – Q4 2023

Mandatory Updates to Articles of Association

Our clients are reminded of the obligation to update their Belgian articles of association to reflect the new Companies and Associations Code. Companies have until the end of the year to effect this change. In some cases, the new Companies and Associations Code provides some much-needed flexibility and bringing articles in line with the new law allows companies to operate with more freedom – we therefore advise our clients to take advantage of this opportunity, where possible.

One additional point to note is that certain affected companies (particularly some older forms of private limited liability companies) also need to convert their legal form into one of the new legal formats by this date. If a company fails to comply, then on 1 January 2024, the company will automatically be converted into the legal form that best matches with its old form (which may not be suitable for companies in all cases).

Preventive Restructuring: new opportunities for entrepreneurs in difficulties

After many years of waiting, the Act on Preventive Restructuring (Act No. 284/2023 Coll.) came into effect on 23 September 2023. This piece of legislation implements the Directive of the European Parliament and the Council (EU) 2019/1023 of 20 June 2019, as we have noted in many other EU jurisdictions in our other publications (and seen in Luxembourg, below). The aim of this legislation is to introduce an out-of-court form of restructuring for entrepreneurs in financial difficulty, thereby offering a more effective alternative to traditional insolvency proceedings. This restructuring process averts impending bankruptcy based on private-law negotiation. The court only intervenes if the restructuring plan is not accepted.

The main advantages of this process for entrepreneurs include: (i) the choice given to entrepreneurs as to whether or not to participate (this being a voluntary process); (ii) the ability for the debtor to maintain control over their company during the process; and (iii) the fact that such a process only requires a majority agreement (rather than the consent of all parties), making the process more efficient.

Entrepreneurs are entitled to initiate preventive restructuring processes if they have sufficiently serious financial difficulties, defined by the law as: "the operation of the establishment does not produce income sufficient to pay monetary debts which have arisen during the past year within their maturity periods"; although there are some exclusions in cases where the entrepreneur has displayed dishonest intentions in certain instances.

A restructuring plan is created jointly by the entrepreneur and selected creditors. It contains proposals to avoid financial difficulties, such as changes in assets, debts, equity or operational adjustments. The plan must detail the current economic situation of the entrepreneur, the reasons for the difficulties, lists of receivables and the measures proposed to avert further financial problems. The restructuring plan is considered fair if each group of secured creditors is provided with the same or similar security and also receives performance that equals to at least the value of the security. The effectiveness of the restructuring plan depends on the approval of at least a 3/4 majority within each group of creditors. Voting can be replaced by concluding an agreement on the adoption of the restructuring plan in the form of a notarial deed between the entrepreneur and the majority of the affected parties. In some cases, a confirming decision of the restructuring court is required for the restructuring plan to come into effect.

German Transparency Register

Since 2020, foreign companies looking to acquire real estate in Germany, directly or indirectly, were required to register themselves on the Transparency Register. However, since December of last year, the obligations were extended such that foreign companies that were already owners of German real estate were also expected to register themselves.

Such foreign owners were expected to have registered their ownership by June 2023, with sanctions of significant fines (up to EUR 1 million) expected for non-compliance. The German authorities also has the option to list the names of those failing to comply on their website.

Our clients, looking to invest in German real estate, are advised to be aware of such requirements prior to completing any new real estate finance transactions. Lender and borrower clients will also want to ensure compliance with the above requirements for their portfolio matters. 

Negative Interest

On 9 May 2023, the Federal Court of Justice (Bundesgerichtshof – BGH) ruled that no payment of "negative interest" can be demanded by a borrower, even if the relevant interest clause does not contain an explicit interest rate floor. The BGH's decision provides legal certainty for contracts in which no interest rate floor has been agreed.

Nevertheless, in order to avoid disputes, care should be taken in the future to ensure that contracts provide for such a floor. This is particularly important given various interest rate floors are prevalent in the market in practice, for example the so-called EURIBOR floor, which secures the margin for the lender, and the interest rate floor, which merely prevents the overall interest rate from becoming negative. With this ruling, the BGH also clarifies that German loan law does not recognise "negative interest rates" from a conceptual point of view. This also applies to other formats, such as the custody fee, the admissibility of which the BGH will also rule on in the foreseeable future.

Non-possessory pledge

After a long wait, on 15 June 2023, the non-possessory pledge register finally became effective in Italy. The non-possessory pledge is a new type of security in Italy (akin to England's floating charge) that can be established over current and future, tangible and intangible assets used in a business activity. Registration on the newly established register is a condition to the enforceability of the pledge and expires after ten years.

The non-possessory pledge allows the pledgor to retain possession over the assets and dispose of the assets in accordance with the business' needs, whilst, at the same time, extending to newly purchased replacement assets.

UK-Luxembourg Double Tax Treaty

In July, Luxembourg ratified the double tax treaty between itself and the UK. As discussed in our previous briefings (such as here: European Real Estate Finance: Market Update – Q2 2023), whilst the UK had ratified the double-tax treaty in 2022, the ratification process was taking longer in Luxembourg.

One of the most significant changes resulting from this treaty for our real estate clients is the change to the capital gains tax position. Under the new rules, the jurisdiction in which the real estate is located, is now eligible to tax. This means that capital gains tax may be payable on the disposal of shares deriving more than 50 per cent of their value directly or indirectly from real estate in that country. Consequently, Luxembourg investors selling shares in this way will now be expected to pay non-resident UK capital gains tax, which was not the position prior to this double tax treaty coming into effect.

The above provisions are expected to come into effect from April 2024 and no grandfathering is expected. Affected clients should consider seeking tax advice on their structures prior to any contemplated exits.

New Restructuring Regime

On 1 November 2023, the new Luxembourg law of 7 August 2023, on the continuation of businesses and modernisation of insolvency law entered into force.

As discussed in our previous briefings (such as here: European Real Estate Finance: Market Update – Q2 2023), this long-awaited reform implements Directive 2019/1023 to introduce a modern restructuring regime, with out-of-court and court supervised mechanisms to protect companies in distress. The new legislation is expected to provide more flexible and effective measures for businesses under financial stress and their creditors – making Luxembourg an attractive jurisdiction for restructurings.

Additional information can be found here: Luxembourg Reform of Restructuring Procedures.

Register of Ultimate Beneficial Owner

By Royal Decree 609/2023 of 11 July 2023, Spain approved the creation of the ultimate beneficial ownership register (thereby giving effect to an EU Directive). The decree entered into force on 19 September, with the register accessible from 19 October. Subject to certain exceptions, the register will be publicly available and provide information on the ultimate beneficial owners of Spanish legal entities, amongst others. Access to ultimate beneficial owner information is only accessible to persons or entities that can prove a legitimate interest. The publicly available details shall be limited to name, month and year of birth, country of residence and nationality of the ultimate beneficial owner; as well as the nature of their beneficial ownership (i.e. whether such beneficial ownership is due to the controlling ownership or to being the management body thereof).

Initially, the new electronic register will receive the required information from other registries. Such information will need to be provided within nine months of entry into force of the decree. There will be an ongoing obligation to keep the information up-to-date. For those not providing information through those registries, there will be an obligation to update the register personally, within two months of entry into force of the decree, with an ongoing obligation to update the register within ten days of becoming aware of a change.

Register of Overseas Entities: One Year On

As noted in our previous briefing (available here: European Real Estate Finance: Market Update – Q4 2022), the register of overseas entities was launched in August 2022 requiring overseas entities to first register with Companies House, prior to acquiring (or selling) land in the UK. In order to register, details of ultimate beneficial owners or managing officers was required (as applicable).

The Act contains an annual updating requirement (which most overseas entities will be triggering around now), such that each year, registered overseas entities are required to deliver updates on the information previously provided (i.e. confirm the details are still correct or provide new details). If details have changed since the original application, then, as with the original application, verification agents will be needed to independently verify the data being submitted (details of approved verification agents are available from the applicable Companies House website).

Fines can be issued by Companies House for non-compliance or late filings. In addition, the guidance note from Companies House makes clear that the unique overseas entities identification numbers (or OE ID) provided by Companies House at the time of registration will lapse if the requirement is not complied with. Without such ID, a company cannot sell, charge or lease (over seven years) its real estate, which can delay any real estate finance transaction being worked on.

Winding down of IPSX: World's First Real Estate Stock Exchange

Back in 2019, we informed you of the launch of the world's first regulated stock exchange dedicated to trading of commercial real estate – the International Property Securities Exchange ("IPSX"). After only four years, IPSX is being wound up.

Use of the service has been limited over the last four years, with all the listings linked to one of the founding IPSX shareholders. A spokesman for the company noted that it no longer had sufficient financial resources to operate the platform. It was noted that factors such as Covid-19, the war in Ukraine and rising interest rates had all impacted the real estate sector and the value of real estate, leading to a limited uptake of the exchange.

Autumn Statement

Chancellor Jeremy Hunt delivered his Autumn Statement on 22 November 2023, and there were a few points of particular relevance to our clients. Firstly, "full expensing", which allows some investment in new plant and machinery to be entirely written off against taxable profits, has been made permanent. Initially the scheme was expected to end in 2026, but this now permanent capital allowance is intended to help businesses make investments.

Further, the Government is extending the current 75% business rates relief for eligible retail, hospitality and leisure properties for the 2024/25 financial year and there were suggestions that the corporation tax reliefs for research and development were to be simplified from April also.

One final point of note related to the investment zone programme that we have noted in our briefings previously (please see here: European Real Estate Finance: Market Update – Q4 2022). In addition to the 12 sites already on the list, new investment zones were announced for the West Midlands, East Midlands and Greater Manchester, as well as Wrexham and Flintshire. The time period for investments and tax reliefs was also extended from five to ten years.

Building Safety Act

The Building Safety Act is being discussed at length for the various new requirements being introduced. Of particular note was the confirmation provided in July that all new residential buildings in England over 18 metres will be required to have a second staircase, for safety reasons. This has been reduced from the 30 metres previously suggested and is aligned to what constitutes a "higher-risk residential building" under the Act. The purpose for the second staircase has been stated to allow unimpeded access to the building by firefighters and access out of the building by residents. It can also provide a secondary escape route, if needed.

Whilst arrangements for this are yet to be made, borrowers and lenders intending to finance the construction of such projects should consider the impact of this on planning permission applications and developments plans currently in existence. It may be worth planning ahead for these changes if development projects are in the pipeline, to avoid unnecessary costs and delays at a later stage. 

Economic Crime and Corporate Transparency Act

The Economic Crime and Corporate Transparency Act received royal asset on 26 October. It contains numerous sweeping reforms, including amendments aimed at providing enhanced powers to Companies House.

Companies House state that these powers will include: (i) introducing identity verification for all new and existing registered company directors, people with significant control, and those who file on behalf of companies; (ii) broadening the registrar's powers to become a more active gatekeeper over company creation; (iii) improving the accuracy of financial information on the register; (iv) providing Companies House with more effective investigation and enforcement powers; and (v) enhancing the protection of personal information provided to Companies House. The overall aim is to improve the accuracy of the information on registers, thereby playing a significant role in tackling economic crime.

The new identify verification measures are amongst the most substantial reforms and will require verification of data directly with Companies House (with identity documents being required to utilise this service) or indirectly through an authorised corporate service provider (i.e. through the use of an intermediary that verifies the identity of the individual). These changes are likely to not only impose a new process for the affected company directors etc., but also for corporate service providers and law firms (to name a few), who regularly file on behalf of their clients. A staged implementation is expected and as such, it is not clear at what point these enhanced powers will take effect or the exact details of the new processes involved.

Re Avanti Communications Ltd (In Administration) [2023] EWHC 940 (Ch)

In April, the High Court was asked to consider the first major case since the House of Lords decision in Re Spectrum Plus, on the characteristics of fixed and floating charges. In this case, the administrator sought the direction of the courts on whether the charged assets did in fact qualify as a fixed charge before it paid out recoveries to creditors.

The High Court held that the charge was fixed despite the chargor having the ability to deal with the charged assets. The court noted that key factors enabling it to reach this decision were that, under the finance documents, whilst the chargor could deal with the charged asset, it was not permitted to dispose of the assets in the ordinary course of its business. Separately, the relevant assets did not constitute its circulating stock or fluctuating assets, as the assets were not to be sold and replaced over time. In so providing its ruling, the court disagreed with the views of commentators who had interpreted the Re Spectrum Plus case as requiring a total prohibition on dealings in order to qualify as a fixed charge, when it stated that "carefully worded exceptions are not inconsistent with a fixed charge" but need to be "materially and significantly limited".

Ultimately, the case does not move the needle away from the "control" test cited in Re Spectrum Plus, but provides greater certainty around the court's approach towards disposal clauses (which are commonly found in loan agreements for real estate finance transactions).

Mandate Letter Break Fee

In Astra Asset Management UK Ltd v Odin Automotive SARL [2023] EWHC 1465 (Comm), the High Court granted summary judgment against a borrower, finding it liable to pay a break fee to the arranger under a mandate letter, when the borrower declined to proceed with a loan arranged by the arranger.

The judge provided summary judgment in favour of the arranger, partly on the basis of the wording of the mandate letter. The mandate letter required the arranger to "use its best efforts" to arrange a loan to be provided through a loan agreement to be "in form and substance satisfactory to the Arranger". The court held that the borrower had no defence to the claim for a break fee under the mandate letter on the basis that the loan agreement contained terms the borrower thought was unusual, onerous or unreasonable, being a qualification to the drafting of the mandate letter that the court did not consider necessary.