MoFoReal: European Real Estate Newsletter (Q1 2023)

• Published date: 02 February 2023
• Subject Matter: Real Estate and Construction, Real Estate, Landlord & Tenant - Leases
• Law Firm: Morrison & Foerster LLP
• Author: Ms Danielle Hirsch, David Spencer and Max Andrew Sternberg

Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities and other developments in MoFo's European Real Estate team. In this edition, we provide an overview of recent case law on appropriation and valuing financial collateral in a commercially reasonable manner, discuss the changes to property disclosure requirements under the Levelling-up and Regeneration Bill and consider important updates in relation to the increased EPC rating required for commercial properties.

As always, we hope you enjoy reading MoFoReal and invite your feedback and suggestions for future issues.

Case law update: important guidance on appropriation and valuing financial collateral

By: David Spencer, Associate, London

The English High Court recently considered the validity of appropriation as an enforcement power and the duty imposed by the financial collateral regulations to ensure that the financial collateral subject to the appropriation is valued in a "commercially reasonable manner", in its judgment handed down in ABT Auto Investments Ltd v Aapico Investment Pte Ltd [2022] EWHC 2839 (Comm).

The case is useful from a real estate finance perspective as it provides a number of lessons to lenders who may wish to consider the appropriation of shares in a property company as an alternative enforcement route to the more usual remedy of receivership or the statutory and contractual powers of sale.

• The appropriation itself was held to be legally valid on the basis that the relevant clause in the share charge (which granted the chargee the power to appropriate the shares) was sufficient to comply with the requirements of the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCARs).
• In exercising the power of appropriation, the chargee must ensure the valuation of the collateral is undertaken in a "commercially reasonable manner".
• There are a number of key considerations to be taken into account when interpreting what a "commercially reasonable manner" means under the FCARs, but it is a fact-sensitive and objective test and there is a range of possibly valid and commercially reasonable procedures open to collateral-takers.
• Collateral-takers' duties do not go beyond the two requirements that the contract contains a proper power for appropriation and that the collateral is valued in a commercially reasonable manner - for instance, there is no need to engage good faith or other equitable duties in conducting a valuation.

For more information about the case...