During the last 10 to 15 years an increasing number of Chambers have sought new premises which better suit their needs. In addition to this move to more modern facilities, many have decided that, rather than renting from a third party landlord, Chambers should acquire a property outright.
In a recent edition of the Barrister, my partner Scott Leonard described a structure commonly used to facilitate this type of acquisition – a bare trust / nominee arrangement where legal title is held by one or more trustees (commonly individual members of Chambers, or companies formed for the purpose and operated by members of Chambers), on trust for those members of Chambers who accept responsibility for funding the purchase.
This article considers some of the matters that need to be attended to throughout the lifetime of these arrangements.
It may seem obvious, but it is crucial to keep up to date, detailed accounting records and to have a clear “audit trail” of monies going in and out of the structure.
This is not necessarily as simple as it sounds. These arrangements cannot be treated in the same way as, for example, a company which has its own assets and liabilities – all income and outgoings have to be apportioned directly to the beneficial owners in their relevant shares. A detailed spreadsheet needs be set up at the outset, recording the interests of all participants including their liability for borrowing. This needs to be actively maintained.
In most cases one would expect there to be relatively few, and fairly predictable, movements on a trust bank account, so it can be a fairly mechanical exercise – income will predominantly consist of quarterly rent payments, whilst outgoings will primarily be payments to mortgage lenders, together with more minor costs such as adviser’s fees.
However, records will also need to be updated to deal with more “exceptional” items, for example changes in ownership of shares and related apportionments, or any overpayment of mortgage borrowing by a particular investor. Commonly these accounting functions are outsourced to the trust’s accountants or the SIPP provider.
Separation between landlord and tenant
It is essential to maintain a separation between Chambers as tenant and the Trust as landlord. One of the benefits of acquiring Chambers’ premises is that members become their own landlord. Nonetheless, all dealings between the trust and Chambers must be on arms’ length commercial terms. This is not simply a theoretical legal concern, failing to act in this way is likely to breach pensions legislation (assuming some members have invested through a pension scheme) and could leave the trustees open to a claim for breach of trust.
There are many examples of tensions between the interests of the trust as landlord and Chambers as tenant that may arise over the term of the lease. Examples include:
· The tenants under the lease may be individual members of Chambers (holding the lease for the benefit of all members) who wish to assign the lease to a service company. In considering whether to consent to the assignment the trust will need to protect its position in the same manner as it would do with an unconnected tenant. This may mean that rent deposits and/or personal guarantees are required as a condition of giving consent.
· Rent reviews should be triggered promptly and the revised rent must be a commercial rent supported by an independent valuation. If the rent review clause provides for upward only reviews, this must be adhered to, even if the market rent has fallen.
· In the unlikely event that Chambers concludes that it wishes to move premises and surrender the lease, the surrender terms must be commercial and supported by independent advice. This may result in a surrender premium being payable.
Acquiring shares from departing barristers
The arrangements should be structured in such a way that shares can be compulsorily acquired from those who leave Chambers. Whilst it will not necessarily be appropriate to require a departing member to sell in all circumstances, the trustees should have the right to require a sale, so as to avoid a situation where a large number of the participants are no longer connected with Chambers.
Demographic of investors
Ideally the arrangements will be operated so as to seek to ensure the broadest possible ownership within Chambers (without ownership being compulsory) and avoiding a large proportion of the property being held by a small number of (generally more senior) members.
It is undesirable to effectively exclude junior members by setting the price to buy in at too high a level. Furthermore, if shares in the scheme are too concentrated in the hands of a small number of investors, if those investors leave Chambers or decide to sell their shares around the same time, this could jeopardise the viability of the scheme. If there is insufficient demand to take up those shares it could lead to the sale of the property.
There is no easy solution here. There are operational steps which can be taken to facilitate widespread ownership (for example, giving preference to those with small or no holding in the property when shares are available for transfer), but, particularly if Chambers is relying on certain well-resourced individuals to enable a purchase to occur, it is difficult to escape the economic reality that acquiring property is expensive and higher earners are likely to find it easier to participate.
David Webster, Partner in the Corporate and Commercial Team at Russell-Cooke