News

In this section you will find all news relevant to FAF International.

• May 11 2010 - Keeping a weather eye on wind farms

  The UK is legally bound to deliver a reduction in greenhouse gas emissions of 80% by 2050 and at least 34% by 2020, compared with 1990 levels.  As part of these ambitions, which are enshrined in the Climate Change Act 2008, we also have an obligation to hit an EU target of generating 15% of our energy from renewable sources by 2020.

  The major political parties are at idem on these commitments.  Even in their fevered hunt for votes, there's little of any substance separating their respective pre-election promises in this regard.

  For 'renewable sources' read solar, wave and wind power.  According to Renewable UK - the trade and professional body for the UK wind and marine renewables industries - wind has been the world's fastest growing energy source of recent years.  Currently in the UK there are 257* operational wind farms (Whitelee wind farm near Eagelsham in Scotland is presently the largest in Europe); 26* under construction; 199* consented wind farm projects; and 268* in planning.

  The political and legal commitment to delivering renewables (and especially wind power) has already been translated into planning policy. In Scotland, for example, the Scottish Planning Policy published in February this year, sets out a clear directive to local planning authorities. It states: 'Planning authorities should support the development of wind farms in locations where the technology can operate efficiently and environmental and cumulative impacts can be satisfactorily addressed.' In England, the newly appointed Infrastructure Planning Commission, which is an independent body that decides applications for nationally significant infrastructure projects including large scale wind farms, began receiving applications on 1^st March 2010.   It is hoped the Commission's applications process, which involves front-loading of public consultations, will result in a more streamlined and efficient approach to determining planning applications for these projects.

  While the number of planning applications for wind farms continues to rise, so too does the volume of responses and objections.  This situation has driven a noticeable increase in the creation of specialist renewables teams within law firms.

  Risk management

  Solicitors acting for wind farm developers and investors in these projects must offer the full spectrum of risk management advice. And title risks constitute a significant proportion of the overall project risk. An increasingly common method for mitigating these risks is to invest in appropriate legal indemnity insurance. Good title insurance has the added benefits of speeding up a deal and maximising eventual productivity by enabling the installation of turbines in optimal locations that may be affected by title defects.

  There are broadly four categories of title risks pertinent to developers of wind farms. Firstly (and by far the most commonly encountered category of title risk) is lack of easements which are often required to create access and servicing roads; and for the installation of grid connection infrastructure. Secondly, there may be no paper title to a specific area of land required for the location of turbines or, due to changing land topography and boundary features particularly in rural areas, there may be uncertainty as to the current location of legal boundaries described in archaic deeds. Thirdly, titles to rural properties are often burdened by a plethora of manorial rights and exceptions and reservations which benefit unknown parties and are not being exercised but which could create a potential ransom situation if the turbines or infrastructure prejudice the future exercise of these rights. Finally, the site may be burdened by restrictive covenants, which limit use of the land to specific purposes. Restrictive covenant risks are more frequently encountered in single turbine projects undertaken to create energy efficiencies for industrial or commercial ventures located in semi-rural or developed areas.

  Controlling costs and protecting income

  Although these risks are not specific to wind farm sites, it is essential that a title insurance policy which covers risks associated with these projects accurately captures the exposure of the project operator. With investment costs for a 3.0 MW wind turbine ranging anywhere from £1.5m to £2m, it is not surprising that project developers and their investors would prefer to off-load or transfer their title risks entirely rather than simply seek to minimise them.

  A policy must therefore cover not only the value of the turbines but also the idiosyncratic losses of grid connection costs, electrical installations and structural costs associated with renewables projects. Since the average project life is 20 to 25 years, the policy must also adequately cover the exposure for the duration of the life of the turbine and must consider contingent losses arising from premature decommissioning of the turbines as a result of the challenge.

  As the project developer's interest is typically a leasehold interest, care must be taken to ensure that the lessor has the requisite locus to grant the lease and if not that any potential risks are covered off by the policy. Even before the project gets off the ground, developers may face the possibility of judicial review actions, which could result in the project being shelved. Obtaining judicial review cover from a title insurer means that the developer can focus its efforts on project assembly whilst the title insurer defends the judicial review challenge on its behalf.

  Looking ahead

  In the coming years, this relatively new area of law will become increasingly sophisticated and is likely to increase in complexity as technology and designs are enhanced. Title insurance will be an important mechanism for overcoming many of the initial obstacles faced by project developers and it will undoubtedly assist solicitors in this increasingly competitive legal market, to deliver the best possible risk management advice to their clients.

• May 11 2010 - Signed lease agreement not binding

  Introduction

  The German Federal Court of Justice (Bundesgerichtshof) ruled on November 4, 2009 that a commercial lease agreement, which was concluded by the parties for a ten-year-period and which was signed on the behalf of the tenant by one of the two board members (Vorstand) of a public limited company (Aktiengesellschaft), did not meet the written form requirements (the signing director had no right to sole representation) and was therefore concluded for an indefinite period of time, i.e. could be terminated by either party on short notice.

   Outline of the Problem of the Written Form Requirement

  Pursuant to German law, a lease agreement, residential or commercial, entered into for a fixed term of more than one year, has to be in writing. Otherwise, the lease is valid but may be terminated by either party with the statutory notice periods (in case of commercial leases: until the third working day of a calendar quarter year with effect as of the following calendar quarter year, i. e. approx. six to nine months). Even commercial lease agreements concluded for a ten- or fifteen-year-period could be terminated within the statutory period before the lease's contractual end.

  The primary purpose of this regulation is that a purchaser, who acquires a property for which such a long-term lease exists and who will, if the statutory requirements are met, enter into same lease as the landlord, shall be able to gather all necessary information from the written lease agreement.

  Often tenants try to get rid of their contractual obligations based on non-compliance with the written form requirement, even if they themselves had previously caused this insufficiency.

  From the landlord's perspective, in particular from the perspective of an investor (whose protection the written form requirement actually intended), this can lead to the loss of the basis of his investment, since in most cases, the long term income from a lease is the economic reason for the decision to acquire a property (asset deal) or a company which holds a property (share deal).

   What is Written Form?

  Written form means that all material provisions of the lease have to be included in one joint document, and by competent representatives of the parties have to sign them. The lease agreement has to refer to all existing annexes and a sufficient link between annexes and the main lease agreement is required. Later addenda must distinctly refer to the relevant lease agreement.

  Hence, the German Federal Court of Justice ruled that all agreements that shape the content of the lease agreement have to be made in written form. As an example, the German Federal Court of Justice ruled that if the parties orally agree on a change of the maturity (from a quarterly to a monthly payment), this amends an essential stipulation of the agreement and leads to non-compliance of the written form requirement and, therefore, entitles both parties to termination on short notice. According to the German Federal Court of Justice's jurisprudence, a lease agreement can be terminated before its contractual end even if only one annex (out of many) does not meet the written form requirement.

  Additionally, in order to comply with the written form requirement, the time between the offer and its acceptance must not exceed a certain number of days. This obligation tends to cause problems in practice when lessor and lessee do not sign the lease agreement simultaneously, but send it via post. Moreover, the agreement may not be concluded at all, if the delay between offer and acceptance is too long. The jurisprudence of the Higher Regional Courts (Oberlandesgericht) in Germany is not consistent in this matter (it ranges from five days to three weeks; there are even court decisions which qualify this question not at all as a question of written form), investors who rely on a long-term lease should have clarified not only that duly authorised signatories have signed all documents that have been paginated and attached, but also whether the parties of the lease have signed the agreement within a relatively short period of time. They should also have checked whether there have been recent changes in the relevant jurisprudence before acquiring the target with the lease agreements as a major asset.

   Multitude of Decisions in the Last Years on the Subject

  Almost more than any other area of tenancy law, the subject of written-form requirements has been shaped by numerous judgments on a case-to-case basis from the German Federal Court of Justice and the Higher Regional Courts during the last years.

   However, for investors it is not always easy to determine what applies. Some examples:

  • The German Federal Court of Justice has ruled that in case of an Aktiengesellschaft (public limited company) the signatures of all directors in case of joint representation are required or that the single signing director has to clarify that he acts by proxy of the other directors.
  • In case of a GmbH (limited liability company), the German Federal Court of Justice ruled that the signature of a person acting on behalf of the company, but not being one of its directors, could meet the written form requirements (the question of whether the same person has the power to represent the company is not a question of written form, but of the validity of the entire agreement).
  • Conversely, if one individual has signed on behalf of another one (e.g. his or her spouse), this may be in line with the written form requirement according to the German Federal Court of Justice, even if the signing individual does not state that he acts as a proxy. This may also apply to a Personengesellschaft (partnership), whereas in case of a Gesellschaft bürgerlichen Rechts (civil law partnership), all partners have to sign, unless one of them has sole representative powers, in such case, he would need to add a respective note to his signature.

  In summation, close monitoring of the jurisprudence is necessary in order to ensure the long-term peace of mind for real estate investments.

  Sebastian Schmid, Sozius

  Anna Dost, Associate

• May 11 2010 - U.S. Taxpayers - Take advantage of the benefits of section 1031 on your foreign property

  Savvy taxpayers have long used the benefits of IRC Section 1031 to defer capital gains taxes by exchanging real estate located in the United States for other real estate in the United States, even if it is located in another state.  Also, property located in the U. S. Virgin Islands, Guam and the Northern Mariana Islands may qualify in the exchange of domestic properties.  The fundamental requirement of Section 1031 is that the properties involved in the exchange must be held for investment or in connection with a trade or business.

  U. S. taxpayers who own foreign property can also benefit from the tax deferral advantages of Section 1031.  All foreign property is considered like kind to other foreign property.  For example, a U. S. taxpayer who owns property in the Bahamas may exchange it for property located in Bermuda.  Similar to exchanges of domestic real property, the same requirement that the properties must be held for productive use in a trade or business or for investments applies.  Also, the properties do not need to be similar use so you can exchange an apartment building for a rental single family residence or an office condominium.

  The tax deferral benefits of Section 1031 also apply to personal property exchanges.  Airplanes, boats, artwork, livestock, heavy equipment, sports teams, and intangible property such as copyrights and patents, may also be exchanged.  However, the "like-kind" and "like-class" requirements for personal property are much more strict than they are for real estate.  Personal property is like-class if they are in either the same General Asset Class or the same Product Class. There are 13 General Asset Classes.  If properties are not in the same General Asset Class, they may qualify as like-class under the same Product Class.  Product Classes consist of depreciable tangible personal property as listed in the North American Industry Classification System.

  Often, personal property exchanges involve property that is used or held domestically.  The benefits of Section 1031 also apply to personal property that is used or held internationally by U. S. taxpayers.   To determine if personal property is considered domestic or foreign, one must look to the predominant location and use of the property for a two-year period of time prior to the sale of relinquished property and for two years prior to acquisition of replacement property.  For example, a U. S. company may operate one of its airplanes, or a fleet, internationally.

  U. S. taxpayers who own foreign property agree that the international component adds much more adventure and complexity to every transaction.   Potential language barriers and variations in currency are obvious challenges.  Also, the laws and practices of foreign countries are often much different than those in the United States.  This will make it more difficult for you to determine if you are receiving free and clear ownership of a property.  Perhaps only leasehold estates are granted rather than fee simple title.  Some countries prohibit ownership of property by a non citizen.   Title insurance can be obtained to insure title and alleviate many concerns; however, the coverage and the form of the policies are different than in the United States.

  The bottom line is that a 1031 exchange allows U. S. taxpayers, in an exchange of foreign real property or personal property, to re-invest sale proceeds in replacement properties rather than paying capital gains taxes.  This will enable you to accumulate more assets and more wealth!  However, you must be prepared for the challenges that may be presented by dealing with foreign properties.   As always, we urge you to consult with your legal and tax advisors.

• Apr 14 2010 - FAF International gears up German Activity

  FAF International has joined forces with the recently retired MD & Head of London Branch of Westdeutsche Immobilienbank - Klaus Schreiner.

  After a distinguished banking career spanning nearly 40 years, where he has worked with banks across Europe, as well as being the past President of the Association of Property Bankers, a member of the Investment Property Forum and Liveryman of the Worshipful Company of International Bankers, Klaus commented "My background with the German banking sector coupled with the extensive experience in the property finance area makes a convincing partnership with FAF International to promote its insurance products in the German market. We have seen interest that convinces us that a concentrated campaign should bring results. A series of seminars are planned for later this year in Germany. A similar approach is underway in the UK."

  In the last 16 years Klaus has focussed on commercial property lending in the UK and across Europe and has an extensive network of bank and client contacts particularly in the UK and Germany, this will no doubt assist FAF International with our German specific products such as Voidable Lease and Portfolio Insurance.

  German Voidable Lease

  As many as 75% of Germany's commercial leases breach the Written Form Requirements of the German Civil Code. As a consequence of such a breach a tenant could prematurely terminate the lease giving 6 months' notice. Lenders financing an acquisition or refinance will be concerned that a loss of rental income, as a result of a written form defect, could result in a shortfall in the mortgage repayments. Our Voidable Lease Cover avoids the problem of the owner having to approach the tenant to try and "cure" the defect or having to give warranties or other collateral as part of the loan arrangement. It is also far more cost-effective than a bank guarantee, which has to be repaid if the guarantee is called in. Once our cover is in place, it protects the lender against any shortfall in the mortgage repayments resulting directly from a premature termination of the lease, due to a breach of the Written Form Requirements.

  Portfolio Insurance

  FAF International's portfolio insurance insures real estate portfolios against ownership risks and mortgage defects. The insurance is used to supplement legal due diligence and de-risk the process so that the purchase or refinancing of portfolios can be completed more efficiently, at lower cost and with the safety net of an insurance policy standing behind due diligence.

  To find out more about our joint seminars in Germany or UK please click here.

• Dec 15 2009 - Run for Cover - How do you refinance in a collapsing market

  Phillip Oldcorn, Senior Vice President, FAF International

  'The lack of money is the root of all evil.' So said the American writer and satirist Mark Twain, with his characteristic prescience.

  The global crisis we are going through is unique in the severity of the breakdown in relationships and trust between the banks, and the resulting drying up of liquidity. And the lack of affordable debt hurts anyone trying to secure or refinance corporate loans. The speed with which we have descended into this bleak situation has been breathtaking. It was just over 18 months ago that I sat with a banker client of ours, who told me a blue-chip borrower of his, to whom he had made an exceedingly good loan offer, had just come 19th in the bidding war for a property in central London.

  To quote another writer and wit, this time from the other side of the Atlantic, George Bernard Shaw once said that 'both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute.' My company subscribes to the optimistic view - that, despite the gloom, there are ways to help companies whose corporate debt is secured by mortgages on their properties. Over the next weeks, and indeed months, quickly securing new funding will be a recurring headache for many finance directors. But there are ways to reassure banks about property ownership in a few days and avoid either tangible or intangible funding penalties where there is perceived risk.

  Get it together

  For a company that needs to remortgage, its minimum requirement is to ensure that its property affairs will stand up to the bank's due diligence. This means collating up-to-date valuations and ownership documents - although this is easier said than done if the properties have been bought by different holding companies, are mortgaged to different banks or are spread across different international locations. The bank will always want to check values and ownership pedigree itself. But if the portfolio is large, it will usually take a sample for due diligence and make assumptions about the remainder. The bank will then draw its conclusions based on its findings and its general approach to risk - and most banks are becoming increasingly risk-averse.

  Property can be a notoriously illiquid asset when it comes to securing debt. It always helps if the title on a company's mortgaged property can be shown to be in good order.

  Title insurance may seem unnecessary in the mature markets of western Europe, but this is because the term 'title insurance' is a terrible name for a more general product that covers most things concerning legal ownership. Title insurance does cover pure title issues, and in recent years this has reduced the costs of debt and smoothed the eventual exit for some smart investors in central and eastern Europe. It will provide the same function when an Indian title insurance market starts up, hopefully in the first quarter of this year. But in Europe, it provides far more than this basic Risk protection. It can also be extended to cover judicial review to help get contractors on site more quickly - this an be crucial if project financing is running to a tight business plan. Rights-of-light cover provides peace of mind.

  Many deals across Europe experience delays or price adjustments because of common ownership defects, such as issues concerning covenants or easement (the right of others to use the land). A title issue can impact on the ability to trade from a property or on a tenant's right to occupy and continue its business. Consequential loss extensions form an integral part of title insurance. Over the last decade, investors and their lenders have used title insurance to supplement traditional legal services, and it has speeded up the purchase and mortgaging of property portfolios. When Barclays Capital and Citi undertook the €5.4bn (£4.6bn) commercial mortgage-backed securitisation of Deutsche Annington's 164,000 German properties in August 2006, they used title insurance to issue the bond at least eight months earlier than if they had used traditional methods. Without title insurance, the deal would have been sealed just as the financial crisis started. In hard times, the product does not change but the way it is used and the reasons for its use can change. Being able to give a bank insurance over all of a property owner's assets can enable it to secure new debt in a couple of days.

  It may also prevent the bank discounting assets it is unsure of, or that it has not had the time or money to assess properly. This is likely where property records are not readily available or the owner is working with a systemic problem, as is the case with banks' approach to legal ownership issues in central and eastern Europe, and could have a positive effect on loan-to-value ratios. It also applies in Germany if the borrower is mortgaging commercial properties that are leased. The German civil code contains a comprehensive set of rules about how a commercial lease must be constituted if it is to be valid. A common stumbling block is the time lag between landlord and tenant's signatures - anything more than 10 days could mean that the tenant has amended the contract, and that its signature is a counter offer, rather than acceptance of the terms that have presumably been thrashed out over a period of time. The result is the tenant can serve six months' statutory notice to end the lease at any time, regardless of the actual remaining term. The list of potential flaws is long, and some lawyers estimate that the civil code affects as many as 70% of all German commercial leases. However, the bank can insure against the drafting issue resulting in lease terminations that would damage the borrower's ability to service its loan.

  Rest assured

  The insurance may at lease provide the lender with some reassurance. And, in these more risk-aware times, it may prevent it from discounting the cash value of properties with dodgy leases in a bid to maintain loan-to-value ratios. Insolvency experts or buyers of distressed assets can also make use of title insurance. Basic information, often available from public records, can allow the insurer to swiftly offer insurance to buyers of distressed mortgages or property. The buyer will avoid uncertainty over the provenance of the asset they are purchasing, and the previous owner's creditors may achieve a better sale price. In 1999, the Law Society of Upper Canada established a new rule of professional conduct. If property advisers failed to give advice on the availability of title insurance and how deals could be structured to incorporate it, they would be guilty of negligence if their client would have had a gain or recovery against a policy that the adviser should have known about. If similar restrictions are introduced elsewhere, it will provide food for thought for all those with professional or fiduciary responsibilities in the times ahead, where there could be a rush to apportion blame.