Legal briefing | Real Estate | 21 Mar 2018

A global perspective on commercial lease covenants

Overview

The UK’s real estate market attracts significant levels of investment from across the world, and many global corporate occupiers. It is not unusual for one or more of the landlord, tenant or guarantor in a commercial letting to be an entity based outside England and Wales. How easy is it for a UK party to enforce the lease covenants of an overseas counterparty? Are there any other points to note when entering into a lease with a foreign entity? Below are some broad principles to bear in mind when considering dealing with an overseas counterparty.

ENFORCING IN THE UK

There may be no need to take action outside the UK against a non-UK counterparty. Does it have a centre of business or any assets in England and Wales? Did it provide a rent deposit or a UK-based surety or did a UK company give an authorised guarantee agreement (AGA)? If so, enforcement of a judgment may be carried out in the UK and be no more difficult than claiming against a UK counterparty.

ENFORCING PRE-BREXIT

Although the exact procedural rules vary across the globe and sometimes even across districts within one nation, most jurisdictions would agree that because the property in question is located in England and Wales, the courts of England and Wales are the most appropriate forum to hear the substantive case. Most jurisdictions also recognise one or more of the international conventions or agreements regulating the enforcement of an English or Welsh court judgment overseas, including:

  • EU Regulation 1215/2012 (the Recast Regulation) which contains a system for the reciprocal enforcement of judgments between all the EU member states plus Denmark;

  • the Lugano Convention, which is similar to the Recast Regulation and governs jurisdiction and enforcement of judgments between the EU member states plus Iceland, Norway and Switzerland;

  • reciprocal arrangements for enforcement between the UK and various Commonwealth and other jurisdictions;

  • the Code of Private International Law Applicable to Recognition of Foreign Judgments from Non-member States (PIL), which applies to non-EU member states. It is subordinate to any existing international rules, treaties or conventions. It applies when there is no other applicable enforcement regime; and

  • the New York Convention, in respect of international arbitration.

Under these regimes, rather than the merits of a claim being re-heard in an overseas court, a claimant against an overseas counterparty may be able to enforce immediately or may only need to obtain a certificate that the English judgment is enforceable in the relevant jurisdiction before enforcement. Enforcement can then take place through a local enforcement officer.

ENFORCING POST-BREXIT

It is unlikely that the UK will remain a party to the Recast Regulation. The most likely scenario after departure from the EU is that the UK joins the Lugano Convention in its own name to allow recognition of judgments and enforcement with EU members and Iceland, Norway and Switzerland. Jurisdiction and enforcement elsewhere will be governed by existing treaties, PIL and the principle of reciprocal recognition of judgments.

ARBITRATION

Arbitration awards, though they may need to be enforced by local enforcement officers, are widely recognised under the New York Convention and enforceable in most countries. Choosing arbitration for dispute resolution can avoid concerns about jurisdiction.

OTHER CONSIDERATIONS WHEN ENTERING INTO A LEASE WITH OVERSEAS ENTITIES

Bear the following points in mind:

  • Consents under the Landlord and Tenant Act 1988 – the fact that a guarantor or proposed assignee is based abroad is often not a reasonable standalone ground for refusing consent to assign or underlet. However, if the lease sets out a list of circumstances justifying refusal and conditions on assignment under section 19(1A) of the Landlord and Tenant Act 1927, which specifically provides that the landlord can refuse consent to assign to (or accept a guarantee from) an overseas entity, then the landlord would not be acting unreasonably in that case.

  • Insolvency – when a party becomes insolvent in England and Wales, its assets are frozen by a statutory moratorium under Schedule B1 to the Insolvency Act 1986 (IA 1986), which prevents most creditor or third-party actions against it. As a general rule, however, the moratorium does not have extra-territorial effect, so will not restrict the ability of a creditor to take enforcement action against assets of a company located outside England and Wales.

  • Jurisdiction provisions – specify that the lease will be governed by the laws of England and Wales and that the English courts will have jurisdiction. Include details of the parties’ addresses for service in the UK.

  • Opinion letter – the lawyers acting for the UK party to a lease will want to obtain an opinion from lawyers in the jurisdiction in which the overseas party is incorporated, confirming that the overseas party was properly constituted and has capacity to enter into the lease and, if the lease is registrable, supplying appropriate evidence of this for the Land Registry’s purposes; the documents have been properly executed. If the lease is registrable, this usually means confirming that the execution clause complies with the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009 (SI 2009/1917). The letter should also confirm that the overseas party is bound by the obligations in the documents and that a judgment obtained against the overseas party in a UK court will be enforceable in the overseas jurisdiction in question.

PROTECTION IS AT HAND

When entering into a lease or related agreement with a non-UK party, it is often possible to guard against action outside the UK by obtaining UK guarantors and rent deposits. Even if not, enforcement is not necessarily as cumbersome or time-consuming as one might assume.

PROPERTY IN ENGLAND AND WALES – OVERVIEW OF JURISDICTION AND ENFORCEMENT UNDER THE EXISTING REGIMES

 

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