Acquiring Chambers Premises

By Scott Leonard, partner in the Corporate and Commercial team at Russell-Cooke LLP

Sets are also increasingly recognising that their premises can play an important role in their branding and many see modern, high specification meeting rooms and other client facilities as essential in this context.

As a result, there has been a trend over the last decade or more for Chambers to seek new premises which better accommodate their needs.  Having made the decision to move, the next question is whether to lease new premises from a third party landlord or for Chambers itself to acquire a property.

Many have concluded that they would prefer to be their own landlord.  Not only does this allow for a greater degree of control over the premises but it also provides members with an opportunity to invest in commercial property at potentially attractive rates of return.

Purchasing a property can be a challenging process from getting consensus for the purchase in the first place, to determining the appropriate structure to use and the logistics of the move.  This article looks at the preliminary decision-making process, suggests a typical structure that might be used and discusses some of the associated issues that will need to be considered.

THE DECISION TO PURCHASE

There are two distinct issues that need to be considered when deciding whether to purchase a property.

The principal consideration is for Chambers as an entity.  Is there a commercial rationale for Chambers moving from its current premises (with all the associated costs and disruption) and, if so, is the premises under consideration suitable for Chambers’ needs (both currently and taking into account any future expansion)?

If that test is passed, the next question is whether the property concerned stacks up as an investment proposition, taking into account the potential rental yield and prospects for future capital appreciation.

If the response to both questions is positive, the next question is whether there is sufficient appetite amongst the members to fund the purchase. Somewhere between 30 to 50 per cent of the purchase costs will need to be raised from members’ own resources (with the balance being borrowed from a bank).  Occasionally the project will fall at this hurdle with members reluctant to commit to a property investment of this type.

A SUGGESTED STRUCTURE

A bare trust is a popular structure for purchasing Chambers property.

Using this structure, the property is purchased by two or more trustees (who can be individuals or companies), who hold the property on a bare trust for the members of Chambers who have contributed to the purchase price, in shares proportionate to their contributions. The trustees borrow part of the purchase price from a bank with the borrowing being secured by a first legal charge over the property.

The property is leased to Chambers at a commercial rent supported by a professional valuation. Each investor is entitled to their proportion of the rental income, which may be used to discharge their share of any borrowing. Each investor also indemnifies the trustees against their share of all trust expenses.

The bare trust is tax transparent and has no separate legal personality. A trust deed regulates the relationship between the trustees and the investors.  Amongst other things, the trust deed will deal with the sale and purchase of shares in the property and set out what happens in relation to their share if a member leaves Chambers.

PENSIONS

The tax transparency of a bare trust makes it attractive to hold a share in the property through a self-invested personal pension scheme (“SIPP”).

The main advantage of doing so is that all rental income and capital gains (on disposal of the share) will be tax free in the SIPP. Using a SIPP can also assist members with raising the necessary funds, either by transferring an existing pension fund to their SIPP or by making a pension contribution. The net pension contribution will be boosted by tax relief at 20% which is reclaimed by the SIPP (with higher rate tax relief being claimed on the investor’s tax return, if applicable).

The structure is flexible enough to accommodate both SIPP and non SIPP investments. In fact an investor can hold part of their share in a SIPP and part in their personal capacity and may even transfer units between the two (on commercial terms and subject to compliance with the other requirements of pensions legislation).

There are annual limits on pension contributions and a lifetime limit on the size of an individual’s pension funds. There are also restrictions on the maximum amount which a SIPP may borrow. Whilst attractive for many, investing through a SIPP may not be suitable for all and it is important that members take independent financial advice for deciding to do so.

BORROWING

Finding a lender who understands Chambers’ requirements, is able to offer competitive terms and move quickly enough to meet the transaction timetable is essential.

Naturally Chambers’ existing bankers will often be the first port of call, but they are not always the best option and it is prudent to talk to a number of potential lenders to establish what terms are available in the market and get a feel for which bank is best equipped to deal with a transaction of this type.

Commonly lenders will propose that Chambers moves its banking to them as a condition of the loan. However Chambers are often reluctant (for good reason) to disrupt their banking arrangements and most banks are prepared to treat the property purchase in isolation if pushed.

The bank will be looking to ensure that the property represents adequate security and that the loan repayments can be comfortably serviced from the rental income. This will be “stress tested” to ensure that there is adequate rental cover should interest rates increase over the term of the loan.

In deciding upon the lender, clearly the interest rate, arrangement fee and other fees charged will be significant factors. However it is also important to seek a commitment from the bank to a lengthy loan term, ideally 10 or 15 years to reflect the term of the lease. Banks will often seek a right to review the facility after a relatively short period of say 2 or 3 years. This should be resisted if possible as refinancing can be a costly and time consuming process.

VAT

VAT is another potentially thorny issue.

Commonly the property to be acquired has been opted to tax and the purchase price is therefore subject to VAT. In order to recover the VAT, the trust will need to opt the property to tax and register for VAT.  This will also mean that the trust is able to recover any VAT which it incurs in connection with the purchase and any subsequent refurbishment.

The registration process itself is an administrative task and not unduly burdensome.  However, if VAT is payable there are two knock-on consequences. The first is that Stamp Duty Land Tax is payable on the VAT element of the purchase price in addition to the price itself (tax on tax!).  Secondly, although the VAT may be reclaimed it will need to be funded in the short term, which causes a cash flow issue which needs to be addressed.

CHAMBERS INDEMNITIES

As Chambers will be entering into a lease with potentially significant rental and other liabilities over the term, it is a good idea for Chambers to review the arrangements in place for discharging Chambers’ costs and indemnifying those (often the Head of Chambers) assuming liabilities on behalf of Chambers.

This is likely to involve a review of the Chambers’ constitution to ensure that the indemnity arrangements are adequate and holding a Chambers’ meeting to approve the lease terms. It is not uncommon for Chambers to put in place specific indemnity arrangements in respect of liabilities under the lease, in addition to the standard constitutional arrangements.

CONCLUSION

Many Chambers have taken the plunge and purchased premises and for most it has been extremely successful, providing modern new facilities, a healthy investment return and the flexibility of being their own landlord. An essential element of a successful purchase is to ensure that the move works both for Chambers as a practice and also quite separately as an investment proposition (although of course property values can and do fall, and those participating must accept that risk).

By ensuring that all member of Chambers contribute to their use and enjoyment of Chambers (through their contribution to the rent) and that investors receive a commercial return on their investment, Chambers can ensure that everyone, including members who do not own a share in the premises and investors who have left Chambers, is treated fairly and that Chambers enjoys the benefits of the move for many years to come.

Scott Leonard is a partner in the Corporate and Commercial team at Russell-Cooke LLP and has advised many Chambers in connection with their property purchases.

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