European Real Estate Finance: Market Update – Q4 2022

Italy

New Italian Insolvency Code

After several amendments and postponements over the last few years, a new Insolvency Code implementing, inter alia, EU Directive 2019/1023 came into force on 15 July 2022. As with other European jurisdictions implementing the directive (see also Swedish and Spanish sections), the new Insolvency Code facilitates the restructuring of distressed companies on a going concern basis. The novelties include:

• the introduction of a warning/alert system, aimed at detecting possible financial instability within a company. Warning signs include (i) payroll liabilities being overdue for at least 30 days amounting to more than half of the total monthly payroll liabilities; and (ii) liabilities to suppliers overdue for at least 90 days in an amount exceeding the amount of non-overdue liabilities;
• the possibility for a company to begin and complete a voluntary out-of-court settlement process with its creditors, supervised by an independent expert and benefiting from temporary safeguard measures;
• a new "restructuring plan" to be certified by the court which allows the company to cram-down creditors within the same class and pay them in derogation of the absolute priority rule and the provisions governing the ranking of creditors; and 
• other provisions facilitating the access to restructuring tools which benefit from reduced consent thresholds and cram-down within the same class of creditors, as well as composition with creditors proceedings preventing key suppliers from terminating business contracts in spite of the non-payment by the company of overdue debts.

Foreign direct investment

As a general rule, foreign investors are not subject to restrictions on investments in real estate assets located in Italy (save for exemptions for certain investments in national security and defence strategic sectors), provided that the reciprocity principle is met.

However, real estate investment may require a preliminary screening by the Italian Government, who retain the right to impose certain conditions or veto them (the so called “golden powers”) if the real estate assets are considered to be critical infrastructures connected to certain sectors – for example, energy, transportation, communications, artificial intelligence, cybersecurity, aerospace financial, credit, insurance, health, pharma or media. 

In the past, the very broad definition of the relevant sectors gave rise to interpretational challenges, resulting in investors often making precautionary filings. As of 24 September 2022, the Italian Government introduced a pre-notification procedure aimed not only at simplifying the authorisation process, but also as a means of providing a preliminarily verification of whether the transaction falls within the scope of application of the golden power. The newly-introduced pre-notification procedure will therefore help reduce uncertainty ad speed up the process.

National Recovery and Resilience Plan

The Italian National Recovery and Resilience Plan ("NRRP"), designed within the framework of the Recovery Fund 'Next Generation EU', is expected to positively impact the Italian market.  Whilst implementation of the NRRP is still in progress, according to the NRRP’s mission, the Italian real estate market should be benefitted as follows:

• transformation of marginalised areas in decay into sustainable areas;
• energy efficiency and refurbishment of buildings;
• modernisation of infrastructure and redevelopment of accommodation facilities and historic areas;
• refurbishment and construction of school buildings and student housing; and 
• completion of the main high-speed rail routes and integration with the regional railways, as well as the modernisation of the logistics system.

Germany

Incorporating a company – made easy (or easier)

The German implementation of the Digitalisation Directive (EU Directive 2019/1151) came into force on 1 August 2022, making it easier for companies to be incorporated in Germany.  It is now possible for a limited liability company (a GmbH) to be incorporated online without the need to visit a notary in person.  Notaries, pushed on by COVID-19, have allowed for secure video communication to be used, rather than requiring attendance at notary offices in person.  This can be incredibly helpful for real estate financing transactions with tight timeframes or where directors and shareholders are travelling.  It should be noted that currently, the legislation only allows the process to be used for limited liability companies being formed on a cash basis, but the legislation will be extended from 1 August 2023 to allow the formation of limited liability companies on a non-cash basis also.

Luxembourg

UK/Luxembourg Double Tax Treaty 

In June 2022, the governments of the UK and Luxembourg agreed to amend their tax treaty, with the amendments likely to take effect in 2023.

One of the most significant changes for our real estate clients is the change to the capital gains tax position.  The UK government introduced Non-Resident Capital Gains Tax in 2019, which subjects non-UK residents to tax on gains realised on the direct or indirect sale of UK real estate.  The indirect sale of UK real estate (through the sale of the proprietor company) attracted tax if the sale of the company derived 75% or more of its gross value, directly or indirectly, from UK real estate.

However, under the terms of the existing treaty, a Luxembourg resident disposing of such a company would be subject to Luxembourg tax only, and the UK tax provisions would, in most cases, not apply.   

The new treaty now allocates taxing rights to the UK (or, as applicable, Luxembourg), on the sale of shares (or interests in a partnership or trust, etc.) deriving more than 50% of their value directly or indirectly from real estate in the jurisdiction in which the real estate is located.  The 75% threshold still applies for the UK domestic regime, but the new tax treaty now dictates the position on which regime applies when.

No grandfathering provisions are anticipated, so the changes are expected to impact both existing and new transactions.  We advise our clients to be mindful of these changes when structuring transactions.

Poland

Changes to the Commercial Companies Code 

Published in April and effective from 13 October 2022, the Polish Commercial Companies Code has been significantly amended.  One of the most interesting points for our readers is the creation of a new notion of "group of companies". Shareholder(s) of a subsidiary may decide, by passing a resolution (which needs three-quarters majority of the votes), whether the subsidiary may participate in this group of companies.

Broadly, under this arrangement, the parent company has the ability to manage the affairs of its subsidiaries through written instructions, if it is in the interest of the "group of companies".  A wholly owned subsidiary may refuse to follow the binding instruction only if its implementation could result in its insolvency or threat of insolvency. A non-wholly owned subsidiary may refuse to follow the binding instruction more generally - if there is good reason to fear that the binding instruction is contrary to its interest and will cause damage that will not be satisfied by the parent company (or another subsidiary within the "group of companies") within two years from the date of occurrence of the damage.  The parent company has the obligation to indemnify the subsidiary for damage caused to it by following the binding instruction unless it is not at fault.  Similar indemnification obligations apply to creditors of a subsidiary, if enforcement against the subsidiary would prove ineffective.

It should be noted that this is an optional arrangement only, and a given group of companies will need to consider whether this route works for them (although public companies are not eligible to participate as subsidiaries in such a group).

Spain

Amendment to Spanish Insolvency Act

In September 2022, the Spanish Parliament approved Act 16/2022 amending the Spanish Insolvency Act to implement EU Directive 2019/1023.  Some of the changes introduced include:

• the introduction of a new pre-insolvency regime. Under this new regime, restructuring arrangements (planes de reestructuración) will replace the current refinancing agreements (acuerdos de refinanciación) and out-of-court payment agreements (acuerdos extrajudiciales de pago).  Such restructuring arrangements (planes de reestructuración) may be implemented at an earlier stage (i.e. when there is “likelihood of insolvency” (probabilidad de insolvencia)). Additionally, cram-down is extended to all creditors and shareholders to the debtor;
• the introduction of a regime related to the sale of business units (unidades productivas).  The new regime foresees the possibility for the debtor to include the sale of individual business units as part of the restructuring arrangement.  It enables the debtor to request the insolvency court to appoint an expert in charge of collecting and analysing the offers received in relation to a particular business unit.  When filing for insolvency, the debtor may also submit a binding offer by a creditor/third party to purchase one or more business units; and 
• the introduction of a new insolvency regime applicable to microenterprises (i.e. those companies with: (i) up to ten employees; and (ii) up to (a) €700,000 in sales; or (b) €300,000 in liabilities).

The amendments are effective from 26 September 2022, other than those amendments related to the new insolvency regime for microenterprises, which shall take effect from 1 January 2023.

Sweden

New Swedish Restructuring Act 

Effective from 1 August 2022, Sweden has also implemented the EU restructuring directive into its national law (see also Italian and Spanish sections for other such implementations).  Under the new regime, a restructuring proceeding can be approved by the court in the case of anticipated insolvencies (as well as actual insolvencies).  The concept of a restructuring plan has also been included, such that a plan can be agreed between a company and its creditors, with the ability to execute cross-class cram-downs across both secured and unsecured dissenting creditors.  

Further details about the regime can be found here.

United Kingdom

Register of Overseas Entities

On 15 March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") received royal assent, with most of the provisions relevant to our clients taking effect from 1 August.  The Act requires overseas entities who own, wish to acquire or sell certain real estate in the UK, to register with Companies House and to provide (and keep up-to-date), information regarding their beneficial ownership.  The intention behind the Act is to provide greater transparency as to who actually owns property and land in the UK.  

The Act applies to all new acquisitions, but also applies to real estate acquired since 1 January 1999 in England or disposals that took place since 28 February 2022.  In the case of new acquisitions, the overseas entity will need to register with Companies House before the land registry will accept their application.  In the latter two cases, the overseas entity has until 31 January 2023 to register with Companies House before the land registry places a restriction on the register preventing any disposals.  In addition to this, there will be criminal sanctions for failure to comply – fines of up to £2,500 a day can be imposed on an overseas entity, along with its officers. Further details are available here.

This new regime has impacted real estate financing transactions from both an operational and timing perspective.  Lenders will require registration formalities to have been completed when they are looking to provide financing.

Ground Rent Reforms

With effect from 30 June 2022, the Leasehold Reform (Ground Rent) Act (the "Act") applies in the UK.  The Act will apply to residential leases of more than 21 years granted after 30 June 2022.  The Act will restrict the payment of ground rent for these leases to a peppercorn (i.e., nil).  Any leases varied after this date, such that they are effectively surrendered and re-granted will also be caught.  However, it will not apply if contracts have been exchanged before that date, even if the grant of the new lease takes place afterwards.

There are certain exemptions for business leases, community housing leases, rent to buy arrangements and home finance plan leases. However, equivalent restrictions are expected to come in force from 1 April 2023 for retirement leases.  The Act gives power to local authorities to impose fines up to £30,000 for each lease if the landlord demands ground rent and does not return payment within 28 days.

Our clients should be aware of these restrictions when negotiating leases (particularly to avoid inadvertently breaches their loan agreements).  

Building Safety Reforms

The Building Safety Act (the "Act") received royal assent on 28 April 2022. The Act has been passed following the review by Dame Judith Hackitt into fire-safety reforms in buildings in the aftermath of the Grenfell Tower disaster. 

The Act has wide-ranging ramifications for the construction of new buildings (both domestic and commercial), including with respect to fire-safety obligations. However, here we wanted to touch on the implications of the Act for leaseholders and freeholders that have been dealing with the remediation cost of cladding issues since the Grenfell Tower disaster. The leaseholder protections in the Act came into force on 28 June 2022. The Act makes it clear that no costs relating to the removal and replacement of external cladding will be recoverable from leaseholders, but rather, will rest with building owners, who will need to look to developers/manufacturers for recovery, as well as the availability of any government funding. There will also be an obligation for building owners to refund any costs leaseholders may have overpaid in the last five years as part of their service charge. 

Both our real estate and lender clients should be aware of this, as a potential cost that will need to be forecast when negotiating the terms of any real estate financing transactions. 

The UK's mini budget and growth plan

A mini-budget was announced in September introducing a wave of tax cuts by the (now former) chancellor, funded through additional borrowings, aimed at boosting the economy. Shortly following the announcement of the mini budget, the UK saw a sharp decline in the pound, the removal of a number of mortgage products following suggestions of inflation and interest rates rising faster than predicted, and emergency (but temporary) measures taken by the Bank of England aimed at stabilising the pound. Whilst this helped, the government was forced to abandon the following planned changes: (i) abolishment of the 45% tax rate; (ii) plans to retain corporation tax at 19% (meaning corporation tax will rise to 25% in April 2023); and (iii) a cut in the basic rate of income tax to 19% (which will now stay at 20%). 

However, certain parts of the mini budget were retained, which are beneficial to our real estate finance clients. Firstly, with immediate effect, there was a cut to stamp duty rates, payable on the purchase of a property. In England, the threshold of how much a property has to cost before stamp duty is paid has been changed from £125,000 to £250,000 (and £425,000 for first time buyers, up from £300,000). The rates in England will now be:

• 0%: £0 – £250,000 (£425,000 for first time buyers)
• 5%: £250,000 – £925,000
• 10%: £925,000 – £1,500,000
• 12%: £1,500,000+

Separately, new investment zones will be introduced across the UK. Sites within these zones will benefit from tax incentives (such as business rates and stamp duty relief) over a period of ten years. A fact-sheet on this is available here.