Real Estate Finance Update - Considerations when enforcing Jersey security over real estate structures in the current COVID-19 environment

Jersey structures and security

Jersey holding structures are commonly used as a vehicle for holding UK real estate investments and therefore one of the key parts of a typical security package, in addition to a legal charge over the relevant property, is share security over a Jersey ‘propco’ (or Jersey company higher up the structure).  Such security is taken pursuant to a Jersey law security interest agreement, in accordance with the provisions of the Security Interests (Jersey) Law 2012 (SIL).  As no stamp duty is paid on the transfer of shares in a Jersey company (or the units of a Jersey property unit trust (JPUT)) enforcement over the corporate vehicle, rather than over the property, might be a more viable and attractive option than exercising security over the real estate.

A lender looking to exercise its power of enforcement pursuant to a Jersey law security agreement needs to be mindful of the duties it owes to the grantor of such security. Jersey does not have the concept of a receiver or administrator, so a lender has potential exposure which it might not have in an equivalent UK scenario.

Duties of a secured party on enforcement

Under SIL, when a secured party is exercising its power of sale, that secured party owes a duty to:

1. Take all commercially reasonable steps to obtain the fair market value of the collateral as at the time of sale;
2. Act in other respects in a commercially reasonable manner; and
3. Enter into any agreement relating to the sale on commercially reasonable terms.

A similar duty is owed where a secured party seeks to appropriate, rather than sell, the secured collateral (being the shares in the relevant Jersey company (or units in a JPUT)).

Two recent judgments handed down by Jersey’s Royal Court have provided guidance for those parties taking enforcement action as to what actions would discharge the duty to “take all commercially reasonable steps to obtain the fair market value of the collateral as at the time of sale”.

The first case of Re Bayswater Road (Holdings) Limited[1] concerned the sale of shares in a Jersey property owning company. The relevant company was developing a property in the UK but that development had encountered difficulties and was underwater. In welcome news for lenders, the decision by the Court suggests that a secured party is not under any obligation to take steps to enhance the value of collateral.  The Court also noted, with approval:

1. The various marketing campaigns undertaken in an attempt to realise the highest sale price (and which had generated a number of offers at lower prices than that for which the shares were proposed to be sold); and
2. The evidence from Knight Frank (as an independent valuer) that, in their view, a sale at a price higher than that proposed was unlikely.

The second case of Kidd and Ors v All Services Group Holdings Limited and Ors[2] involved the appropriation of shares in a Jersey company.  The Court in this instance criticised the secured party’s reliance on a single report prepared by Deloitte as the basis on which to determine the value of shares in the Jersey company at the time of appropriation. In part this was due to evidence highlighting flaws in the Deloitte report which impacted on the valuation determined by Deloitte. However there was also evidence to suggest the secured party was aware of higher values being attributed to the relevant shares (albeit not formal valuations instructed by the secured party). The Court noted that if a secured party appropriated collateral at a valuation which can be shown to be materially wrong, then it would be arguable that the secured party did not take “commercially reasonable” steps.

What actions should a secured party take?

Obviously there is no single prescribed approach or formula which can be followed or applied. Each case will need to be assessed on its particular facts and merits.

With valuations being even more subjective in the COVID-19 environment, we suggest that a secured party will be under a greater onus to prove that the sale price is reflective of the fair market value. If a sale price is substantially lower than that quoted in valuations, a secured party might encounter more difficulty in proving it met its statutory duty.

Any surplus amounts resulting from a sale after the secured party has been paid should, in most circumstances, be returned to the grantor (subject the priority of payments specified in SIL). Grantors may therefore be looking to scrutinise any enforcement action more closely to ensure that they are not losing out on any potential return of equity.

As such, it would appear sensible for a secured party to obtain more than one valuation, from appropriately qualified experts, to reduce the likelihood of any disputes over value.

Conclusions

While we are certainly in trying times, it’s not all doom and gloom. Retail has opened back up for trading and anecdotal evidence suggests that the allure of Amazon and other online shopping has not completely taken away the experience of shopping in-store. In addition, a number of sectors have weathered the COVID-19 storm reasonably well.

It should also be remembered that the value of the deals for which lenders are conducting security reviews is a drop in the ocean compared to the value of the UK real estate finance market. At the time of writing, lenders also appear to be generally hesitant in taking enforcement action – the comfort obtained from conducting the security review and having the knowledge that they are adequately protected seems to be sufficient for now.

As restrictions (hopefully) continue to lessen and we return to the ‘new normal’ it is hoped that retail continues to increase. However, to the extent that lenders are unable to wait for business to resume, we hope that the above gives some clarity on the steps that should be taken in Jersey.

Appleby is one of the leading corporate and finance practices in Jersey and regularly advises clients on real estate finance deals, along with company administration services through its corporate secretarial services company, Appleby Global Services.  If you would like to discuss the options that may be available to you, please reach out to our team led by Andrew Weaver, James Gaudin and Daniel Healy for legal advice or Gavin Carruthers for company administration support and services.

[1] Re Bayswater Road (Holdings) Limited [2019] JRC 102

[2] Kidd and Ors v All Services Group Holdings Limited and Ors [2019] JRC 221.