While most people probably think that if they own a property, they can do what they like with it (within reason), that is not the case.
In fact, most titles to property in Scotland contain title conditions that regulate how the property may be used or managed (called “real burdens”) or provide for access and services (known as “servitudes”).
However, sometimes the terms of a real burden can be unclear or ambiguous, as recent case The Royal London Mutual Insurance Society Limited v Chisholm Hunter Limited and others demonstrates.
What is a real burden?
A real burden is a legal obligation affecting land or buildings, that requires the owner of the land or buildings to do or not to do something, for the benefit of another piece of land or building.
Some examples of real burdens include a restriction on the use of property for a particular purpose (e.g. residential or retail) or, as in the Royal London case, an obligation to contribute towards the maintenance and repair of certain structures or features which the property uses in common with other properties.
How is a real burden created?
A burden is created in a deed which must clearly identify:
- the property which is subject to the burden (the “burdened property”);
- the property which benefits from the burden (the “benefited property”); and
- the terms of the burden.
The owners of the burdened property and the benefited property must sign the deed, which must then be registered against the title to both the burdened property and the benefited property to be effective.
Provided these steps are satisfactorily completed, the burden will then bind the burdened property and benefited property, and be enforceable by the benefited property (as opposed to just the current owners) moving forward.
The Royal London case
In situations where there are multiple owners – for example, in a shopping centre, retail park, or tenement building – it is common for a real burden to provide how the owners are to be responsible for payment of maintenance in common areas.
Royal London owned the shop at 28 Buchanan Street, Glasgow, which is part of the larger building known as Argyll Chambers. Chisholm Hunter and various other parties also owned other properties within Argyll Chambers.
A burden imposing liability on No.28 (as well as multiple other properties which were conveyed by the deed) was created in 1954 for maintenance of “all the common parts of Argyll Chambers”.
Each owner’s liability was to be calculated based on the rateable value of each property as a proportion of the total assessed rental value of Argyll Chambers. This method of allocating responsibility for the cost of common repairs had been used without issue among the owners since 1954.
Royal London had recently acquired 28 Buchanan Street. According to the rateable value method of calculation of liability, they had to pay up to 45% of the total repair liability (which was significantly more than their liability if it had been calculated on the basis of floor area). They raised an action challenging the burden on the basis that:
- the burdened and the benefited properties were not identifiable because, firstly, the descriptions in the 1954 Deed included references to the then property numbers and occupiers of the respective units, and secondly, several units had changed in extent and numbering since then; and
- the liability of each party could not be determined due to the ambiguous wording of the burden.
It is usually the case that a burdened owner must be able to identify from the terms of their title what it is they are obliged to do. Royal London maintained that this burden was unclear and therefore not enforceable.
What was the outcome?
The court did not agree with Royal London’s arguments and dismissed their appeal. Their observations, and reasons for their decision, were:
- The wider Argyll Chambers building was clearly ascertainable on the ground. The properties within it were described by reference to their number and level, which was sufficient to enable the properties to be identified.
- The descriptions in the 1954 Deed were sufficient for conveyancing purposes and the Land Register had had no difficulty in identifying the properties when creating a Title Sheet for each one.
- Changes to the original layout were not unusual in a city centre commercial building of over 100 years old. These changes do not prevent the continued operation of the burden but may necessitate some adjustments to take into account any changes to the extent of each property, which can be carried out by a suitably qualified professional.
- Each owner can confirm their own rateable value (despite the numbering/extent changes), and so the allocation of costs remains determinable. Indeed, the method of calculation had been workable since 1954.
The interpretation of real burdens several decades after they were created can be a complicated matter. In creating real burdens, careful consideration should be given in drafting of the property descriptions and burden, in order to mitigate any pitfalls which may arise in years to come.
When entering into a lease of commercial property the subject of buildings insurance must be carefully considered. From a landlord’s point of view, its primary concerns will be to protect the capital value of its investment and to ensure that adequate funds are readily available to reinstate the property in the event of damage or destruction, with minimal loss to its rental stream. From a tenant’s perspective, it wants the comfort that it will not be responsible for remedying insurable damage and that it will not be required to pay rent for a property it cannot use.
There are many points to consider when negotiating the insurance provisions in a lease. This article will discuss the main issues for both parties and how they are dealt with in a typical commercial lease.
Who will insure?
In a market rent commercial lease, the landlord will almost always insure, being the party with the capital value in the building and generally best placed to arrange the cover. This is even more likely to be the case if there are multiple tenants in the building, as it would be complicated and unwieldy for each tenant to insure their own part. The landlord will be keen to retain control over the policy, ensuring premiums are paid on time and all insurer’s requirements are complied with. The landlord will want sole conduct of making any claims and applying the monies received in repairing and reinstating the building. For these reasons there will usually be a prohibition in the lease on the tenant taking out its own policy.
As the policy taken out by the landlord won’t be in the tenant’s name, it is common practice for the tenant’s interest in the property to be “noted” on the policy and tenants often insist on this. This should result in the tenant being notified by the insurer if any claims are made on the policy or there are any changes affecting the cover or status of the policy. This does not mean that the tenant is joint insured or will have any say in negotiating a claim. Tenants often also try to negotiate an obligation on the landlord to procure that the insurer agrees to waive its rights of “subrogation” against the tenant. If an insurer waives these rights the effect is that they cannot step into the shoes of the landlord and pursue the tenant if any of the damage was caused by the tenant’s negligence.
What should be insured?
Generally the landlord will arrange cover in respect of the building/s, public liability (if there are common parts) and loss of rent. The lease needs to clearly specify what property the landlord is obliged to insure. This could be a single standalone building or a whole shopping centre. A tenant will be keen to ensure that the policy not only covers its premises but also any other parts of the landlord’s estate with which the premises are interdependent, for example common parts of a building, an access road or a car park.
Landlords also invariably insure for loss of rent because in most leases, the rent will be suspended following damage to the property, unless and to the extent that insurance monies are withheld as a result of an act or omission of the tenant. The loss of rent cover ensures that there is no gap in the landlord’s income stream.
The landlord will be obliged to insure the property with a reputable insurer for the full reinstatement cost against an agreed list of risks (called “insured risks”). Definitions of insured risks are relatively market standard (at least in modern leases) but can vary slightly between leases depending on the characteristics or the location of the building and the availability of cover. Usually there is wording to allow the landlord to insure against any other risks which it reasonably considers prudent to insure against.
There will be certain agreed exceptions to the landlord’s obligation to insure. Typically the landlord will not be in breach if the tenant does anything to invalidate the policy or where the policy itself limits cover, for example flood risk may not be available in an area highly susceptible to flooding. Tenants should be wary of “excluded insurance items”, which are parts of the property the landlord could insure against but has excepted from their obligation to, typically tenant’s fixtures and sometimes also plate glass.
First and foremost the tenant will be required to reimburse the landlord for its share of the cost of the buildings insurance policy. In a lease of a whole building this may be the whole cost, or in a multi-let building a fixed percentage or fair proportion will be recovered from each tenant. The tenant will also be liable for the full cost of the loss of rent insurance. These sums are normally called “insurance rent”. In addition to the insurance rent the tenant will also be expected to meet its share of any excess and to reimburse the landlord for any insurance proceeds withheld by the insurer as a result of any wilful act or omission of the tenant.
The tenant will be obliged to comply with all the terms and conditions of the insurance policy and therefore it is crucial that this information is made readily accessible. A breach of this obligation may result in the tenant being required to meet a shortfall in insurance proceeds if the insurers refuse to pay out as a result of the breach. For this reason the tenant will want the landlord to be obliged to supply a copy of the policy and to notify it of any changes in policy requirements or terms of cover during the lease term.
What happens in the event of damage?
If the property is damaged by an insured risk the landlord will be obliged to make a claim under the policy and to spend the insurance money received in reinstatement. A tenant should be wary of wording which only requires the landlord to use the insurance proceeds received in reinstatement, as this may cause an issue if the proceeds aren’t enough. A tenant should, therefore, insist on a provision requiring the landlord to make up any shortfall out of its own funds. The landlord should be obliged to obtain all necessary consents from third parties (for example the local planning authority or a mortgagee). The landlord will want to be relieved of the obligation to reinstate if it is not possible to do so for any reason outside of its reasonable control.
Following damage to the property rendering it unusable or inaccessible, the rent will be suspended for the shorter of the time it takes the landlord to reinstate or the length of the loss of rent cover (typically two or three years). If the property has not been reinstated within the loss of rent period, there is usually a right for either party to terminate the lease. In such circumstances the landlord will be entitled to retain the insurance monies, on account of its capital interest in the property.
What about damage by an uninsured risk?
The property may be damaged by a risk against which the landlord has not insured or had no obligation to insure against. This could be because it was not an insured risk or cover was not reasonably available in the market. Historically leases tended not to deal with such damage, which effectively placed the risk on the tenant, but provisions dealing with uninsured risks are now considered market standard.
In the event of uninsured damage, typically the landlord will be allowed a certain period of time to elect whether it wants to reinstate (at its own cost) or terminate the lease. If the landlord elects to reinstate but doesn’t do so after a prescribed period, that will usually trigger a right for the tenant to break the lease. As with damage by insured risks, the rent is likely to be suspended until the property has been reinstated, but unlike in the case of insured damage, there will be no insurance in place to compensate the landlord for the lost rent.
What other types of insurance should the tenant consider?
Tenants will need to separately insure their contents as such items will not be covered by the landlord’s policy. Tenants may also want (or be obliged to) insure any parts of the property excluded from the landlord’s insurance obligation, such as tenant’s fixtures or plate glass. Tenants should also consider business interruption insurance, particularly after the experience of the pandemic, and indemnity insurance, if their lawyer’s investigation of title revealed potential risks or irredeemable title defects. There may be others depending on the nature of the property and tenant.
Insurance provisions in a lease are a complex area and vitally important for both landlords and tenants. The above is just an overview of the main considerations in a typical commercial lease. We strongly recommend that legal advice is sought to ensure that all relevant issues are considered at the point of drafting.
The Building Safety Act 2022 (“the Act”), which received Royal Assent on 28 April 2022, is being brought into force in stages. The Act aims to reform building safety legislation and hopefully is another step forward to achieving better building safety following the Grenfell Tower disaster in 2017. Developers, building owners/managers, landlords and contractors are among those to be affected by the changes already in place as well as further awaited secondary legislation and guidance to be passed. Here, we have set out a brief overview of the Act and how it may impact commercial buildings. Please note the focus of the Act in this article is on its application in England, although there are provisions that apply to Wales, Scotland and Northern Ireland.
Does the Act apply to ALL buildings?
The focus of the Act is on higher-risk buildings (“HRBs”), which is separately defined. Part 3 of the Act, which focuses on the design and construction stage of buildings, defines HRBs as those which are at least 18 metres in height or with at least 7 storeys, which contain two or more dwellings. Part 4 of the Act is considered during the occupation stage of a building and sets out a minimum height of 18 metres or at least 7 storeys and must contain at least two residential units. Although there is a residential element within the definitions, there is no requirement that such buildings must be purely residential and therefore, mixed-use buildings may fall within the scope if they meet the other criterias in the definition of HRBs.
It is worth noting that care homes and hospitals are included within the definition of HRBs within Part 3 of the Act, however, are excluded from the definition in Part 4 of the Act. This is because such buildings already have high levels of regulations in place relating to their occupation, for example, care homes and hospitals come under the Care Quality Commission and are regulated as workplaces by the Regulatory Reform (Fire Safety) Order 2005. Hotels and secure residential institutions are excluded for similar reasons.
Part 5 of the Act also creates another category of buildings, which is relevant building (“RB”). A RB is a building at least 11 metres in height or 5 storeys and contains at least two dwellings. Mixed-use buildings also come under this category. Different rules therefore apply to different categories of buildings, however, some parts of the Act apply to all buildings.
The new regulator
The Act established a new Building Safety Regulator (“BSR”), who will be part of the Health and Safety Executive. The BSR will be the new building control body for all HRBs under the Act (removing this function from building control approved inspectors/local authority), and developers will therefore face a more onerous building control regime under the new three-stage “gateway” regime. The aim is to ensure that building safety risks are considered at each stage of a new HRB design and construction and refurbishment stage.
The BSA creates a gateway regime for the design and construction of and major refurbishment to all HRBs. There are three gateways that HRBs must adhere to. In brief, gateway 1 applies at the planning stage and is already in force and forms part of the existing planning application process in the Town and Country Planning Act 1990. Satisfaction of gateway 1 involves a developer submitting a fire statement with the planning application, showing fire safety issues have been considered. Gateway 2 applies before construction or refurbishment works of a HRB begins and the BSR must be satisfied that the design meets building regulations and that safety management requirements for the completed building are realistic. The BSR has a 12-week statutory period to review and determine the application. Gateway 3 relates to completion – the BSR approval must be obtained on completion of the building works in the form of a completion certificate. Again, the BSR has a further 12-week statutory period to review and determine the application. A HRB cannot be occupied unless a completion certificate has been obtained from the BSR and the building has been registered. At each gateway, the approval of the BSR will need to be obtained in order to progress to the next stage of work.
The timing of the gateway approvals is important and will need to be factored into some real estate documents such as, agreements for leases and development agreements particularly if buildings cannot be occupied for up to 12 weeks after completion. Important dates such as completion dates, rent free periods, dates of permitted entry will all be determined by sign off from the BSR and the property being registered.
Which buildings need to be registered?
Once a HRB has been constructed and gateway 3 completion certificate has been provided, the building will need to be registered with the BSR. Existing HRBs must be registered with the BSR by 30 September 2023 and failure to do so is a criminal offence. HRBs completed after 1 October 2023 must be registered before the building is occupied.
Accountable person/ principle accountable person
Once a HRB is occupied, Part 4 of the Act imposes obligations on the accountable person (“AP”) to monitor and manage building safety risks. The AP is whoever owns or is obliged to repair the common parts. There may be more than one AP for a building, and they can be an individual, a partnership, or a company. Where a building has more than one AP, a principal accountable person (“PAP”) will be identified and have overall responsibility for the safety of the building. The PAP will be the person who either owns or is legally obliged to repair the structure and exterior of the building. The AP or PAP has an overall obligation to maintain a “golden thread” of up-to-date information about HRBs, which evidence compliance with building regulations. This will ensure that each building owner has the information they need to manage building safety properly and that those responsible for design and construction can be identified and remain accountable throughout the lifecycle of the building.
Part 5 of the Act deals with the recovery of remedial costs of historic defects, which applies to a RB. Generally, landlords are required to undertake to pay for remediation works for a “relevant defect” in a RB. A relevant defect is a defect arising out of relevant works, which are works carried out in the last 30 years (i.e between 28 June 1992 and 27 June 2022) or works undertaken on or after 28 June 2022 to remedy a relevant defect), and which puts people’s safety at risk from the spread of fire or the structural collapse of the building.
Section 122 and Schedule 8 of the Act introduces restrictions on recovery of service charge for remedying defects under “qualifying leases”’ A qualifying lease is a lease for a term of 21 years or more, granted before 14 February 2022 and obliges the tenant to pay service charge. The dwelling must be the tenant’s principal home and the tenant must not own more than two dwellings in the UK. Essentially, the Act sets out a number of financial caps and exclusions on service charge payments for defects in relevant buildings, the aim being to provide additional protection for leaseholders in relation to both cladding and non-cladding remediation works.
If there is a relevant defect, section 123 of the Act gives the First-Tier Tribunal (“FTT”) powers to issue remediation orders, if it considers it “just and equitable” to do so, to a relevant landlord of a qualifying lease. The remediation order does not offer a right of recovery against a contractor, designer or developer who has disposed of the property. In addition, section 124 of the Act gives the FTT powers to issue remediation contribution orders (“RCOs”), which are concerned with the funding of these remedial works. The FTT can make RCOs if it considers it just and equitable to do so if applied for by an interested person. These include the BSR, the Secretary of State, the local authority, the local fire and rescue authority, any person with a legal or equitable interest in the RB or other persons specified in the regulations. If granted, the RCO require payment to be made to a specified person for the purpose of meeting costs relating to the remediation works. The order can be made against corporate entities or partnerships that are landlords, developers of the building or a person associated with the landlord or developer.
- Building industry schemes
Section 126-129 of the Act allows the government to introduce building industry scheme(s), in order to “secure the safety of people in or about buildings in relation to risks arising from buildings or improve the standards of buildings”. The first of these schemes is the “responsible actors scheme”, which requires members to comply with the “developer remediation contract”. The scheme is aimed mainly at major housing developers and other larger developers who have developed or refurbished multiple residential buildings known to have “life-critical fire safety defects”. Eligible developers who do not become members may face consequences for example prohibition from carrying out major development. The definition of major development includes residential schemes that provide 10 or more residential units and also includes commercial development creating at least 1,000 square metres of floor space.
- Building Liability Orders
These provide a mechanism through which the costs of remedying building safety risks can extend to “associated” entities with the company/companies involved with the original build, making them jointly or severally liable. Section 131 of the Act sets out the criteria for determining whether a corporate body is associated. The definition is wide and is going to be a concern on corporate acquisitions as it includes parent companies, a company which subsequently purchases the party responsible for the defect, as well as sister companies. In order for the court to make a building liability order, there must be a “relevant liability” under:
- the Defective Premises Act 1972 (“DPA”);
- section 38 of the Building Act 1984 (“BA”), which is a new cause of action relating to a breach of building regulations causing damage including death or personal injury; or
- resulting from a building safety risk, which is defined under section 130 (6) of the Act.
The Act does not provide restrictions on the types of buildings or building works in respect of which building liability orders can be sought. Liability under the DPA attaches only to works in connection with dwellings but if brought into force, section 38 of the BA is wider and allows claims in respect of any works or buildings. Also, section 130(6) BSA doesn’t specify a type of building.
Section 1 of the DPA enables claims to be made for defective works concerning the construction of dwellings where the work renders the dwelling unfit for habitation. The Act introduces a new section 2A under the DPA, which extends the right to claim under the DPA for any work carried out to an existing dwelling i.e repairs, extensions and refurbishments. This is providing the works are done in the course of business and not by an individual doing work in their own or anyone else’s home. Previously, the limitation period for claims under this section was six years from the date of completion of works, however, the Act amends the DPA to extend limitation periods for claims brought under both sections 1 and the new 2A (as of 28 June 2022) from:
- six years to 15 years for claims that accrue or for works completed on or after 28 June 2022 under sections 1 and section 2A of the DPA; and
- six to 30 years retrospectively for claims that accrued or for works completed before 28 June 2022 under section 1 of the DPA.
- Section 38 of the BA
Part 3 of the Act intends to bring into force section 38 of the BA, which was brought into law in 1984 but never brought into force. This provision allows a claim for compensation to be brought by anyone suffering losses for physical damage (i.e. injury or property damage) caused by a breach of building regulations. Unlike the DPA, the claims are not limited to just dwellings and residential properties and can apply to all buildings in England and Wales. The limitation for these claims is 15 years and there is no 30 year retrospective limit.
Although there appears to be a particular focus on residential construction, the Act will have a significant impact on all buildings. In addition to the specific HRBs definitions contained in Part 3 and Part 4 of the Act, the BSR is required by Section 3(1) of the Act “to secure the safety of people in or about buildings in relation to risks arising from buildings and improving the standards of buildings”. This is not limited to HRBs. Furthermore, some provisions apply to all properties regardless of height or use, for example, the building industry scheme provision under section 126 of the Act covers buildings in general and the provisions in relation to building liability orders.
Buyers/occupiers of buildings will be concerned to discover how the Act might impact them. CPSEs have been updated to include specific enquiries relating to the Act in CPSE 1 and CPSE 6 and since the Act highlights the importance of ensuring that the property meets certain conditions, conveyancers will need to be more vigilant and obtain more information about the building safety measures, compliance with regulations and any ongoing remediations works that may be necessary. Overall, as the Act is constantly undergoing updates, we are expecting further significant amounts of secondary legislation and guidance to be passed and it may take some time to see how the Act is interpreted in practice. Overall, it will be a challenge for the built environment sector to keep up with the changes and it may take some time to see the lasting effects of the Act as a lot can change over the coming years. Ultimately, the hope is that the Act will help residents and occupiers in buildings feel safer and will change the way buildings are designed, constructed, and managed.
At the meeting dated 08.08.2023 and numbered 336 held by The Advertising Board (“Board”) rendered various important decisions regarding Dark Commercial Patterns, which have recently been widely discussed in the field of digital advertising.
With the amendment dated 01.02.2022, Regulation on Commercial Advertising and Unfair Commercial Practices, “using methods that adversely affect consumers will to make a decision or choice by using means such as guiding interface designs, options or expressions regarding a good or service on the internet; or methods aimed at leading to changes, in favor of the seller or provider, in the decision that consumers would normally make under normal circumstances” was considered among the sample practices accepted as unfair commercial practices. Upon this amendment, we observe that dark commercial practices are on the Board’s agenda and the Board has directly ruled against such practices currently. Accordingly, with the announcement published by the Board on 05.09.2023, it was concluded that the commercial practices referred to as Dark Commercial Designs have emerged in ways that significantly disrupt the economic behavior of consumers.
In this article, we have compiled sample decisions regarding some of the practices that were reviewed by the Board and sanctioned on the grounds of dark commercial practices.
1- Decision of “Turkcell Superbox” No. 2023/1216
During the examinations, it was observed that regarding the Superbox service, Turkcell used applications called “banners”, which were designed to attract the attention of consumers as boxes or windows on different websites. Those advertisements and promotions included pricing information of TRY 299 for the 150 GB portable internet service at 4.5G speed. However, as a result of the Board’s examination, it was determined that, in addition to this price, consumers would also be subject to other taxes and financial obligations.
Thus, Turkcell’s Superbox advertisements, which only provided an information regarding fixed price of TRY 299 without any details or exceptions, created a perception among consumers that no further payment would be made and that this amount was all-inclusive as a fixed service fee. As a result of this assessment, the Board decided that Turkcell’s advertisements did not accurately reflect the reality and were misleading and thus violated the relevant legislation, and imposed a suspension the advertisements.
2- Decision of “Markevent” No. 2023/6011
In the examinations conducted by the Board, it has been observed that the firm sells tickets for matches and other organizations in the reviewed website of the firm. However, those tickets have been offered to the consumers at prices considerably higher than the normal sales price. Furthermore, it was also determined that some of the tickets offered for sale on the aforementioned website were for events that did not exist in reality.
Especially regarding the sale of tickets for non-existent organizations, the Board stated that it is an unfair commercial practice for the seller to continue to offer a good or service without informing the consumer despite the fact that the seller is aware of the fact that it cannot be provided within a reasonable period of time. In addition, it has been evaluated that the advertiser adversely influences the consumers’ will to make economic decisions and choices with the notifications provided to the consumers on the ticket purchase page.
As a result of these assessments, the Board decided to impose an administrative fine of TRY 347.128,00 and suspension of unfair commercial practices.
3- Decision of “Blutv” No. 2023/230
Blutv, a digital platform that broadcasts visual content such as movies and TV series, offers consumers different subscription plans with various pricing options. In this regard, when consumers visit the relevant payment page, it is noticed that the annual subscription option with the statement “If you choose an annual subscription, 39,90 TL instead of 69,90 TL per month, 43% discount!” is already selected.
The Board assessed that this practice manipulated the economic behavior of consumers. The Board stated that offering the annual subscription option as selected on the payment page means that consumers are forced to become a party to a contract to which they would otherwise not be a party and to subscribe to the platform for a longer period of time. Considering that this is a practice that negatively affects consumers’ will to make a decision or choice, the Board decided that the mentioned practice is in breach of the legislation and decided to suspension of advertisements.
4- Decision of “Microsoft” No. 2023/233
In the reviewed Microsoft advertisements entitled “Unlocked Now: Take Free Upgrade to Windows 11”, it was observed that the “Get” and “Plan” options were clearly presented to consumers on the screen, but the other option, “Keep Windows 10”, was presented in a way that was more difficult to distinguish than the other options.
In the assessment made by the Board, it was stated that this practice made it difficult for consumers to continue using their current operating system without upgrading it. It was revealed that the advertiser made it more difficult to use the current system in the perception of the average consumer, and that the advertiser negatively affected the consumers’ will to make a decision or choice by making them think that they had to upgrade their operating system to Windows 11 in order to use their computers. Based on these assessments, the Board decided to impose a suspension on the aforementioned advertisements on Microsoft.
The decisions cited above indicate that the Board sanctions commercial advertisements and practices that are likely to mislead, deceive, manipulate consumers, and restrict their freedom of choice, in other words, dark commercial designs, by declaring them to be in breach of the legislation. In order to prohibit these practices and to sanction companies, it is not necessary for consumers to be damaged, and considering the average consumer perception, it is seen that even the possibility of misleading and manipulating the consumer is sufficient for the said commercial practices to be deemed unfair. Considering the growing scope of digital advertising, it is expected that the Board will continue to focus on the issue of dark patterns and will continue to make decisions in favor of consumers without tolerating such practices.
Commercial financing providers that are subject to the New York Commercial Finance Disclosure Law (CFDL) must now make certain disclosures when extending financing offers to small businesses under a new regulation. The regulation, which took effect on Aug. 1, is intended to improve fairness and transparency in the commercial financing process. The new regulation aims to standardize disclosures for certain commercial financing transactions in order to help businesses and individuals better understand and compare the terms of different offers, the DFS said in a Feb. 1 statement upon adopting the regulation. Under the regulation, lenders must give these standardized disclosures to potential borrowers when the financing offer is extended.
The regulation prescribes how lenders should calculate finance charges and annual percentage rates. It also outlines the formatting requirements for disclosures required for various types of financing, including:
- Sales-based financing
- Closed-end financing
- Open-end financing
- Factoring transaction financing
- Lease financing
- General asset-based financing
The new disclosure regulation applies to commercial financing recipients that are principally directed or managed from New York, and providers may rely on the recipient’s written representation with respect to jurisdiction. The CFDL does contain a number of specific exemptions, including commercial financing transactions over $2.5 million and commercial financing transactions that are secured by real property. Financial institutions and persons that make no more than five commercial financing transactions in New York in any 12-month period are also exempt.
For each violation of the CFDL, DFS can levy a civil penalty of up to $2,000 or up to $10,000 for a “willful” violation. Under the CFDL, DFS may seek additional relief, including restitution or a permanent or preliminary injunction on behalf of any recipient affected by the violation. The regulation does allow lenders to correct any good faith errors or inaccuracies within 60 days of discovery.
Although the DFS describes the CFDL as mandating “standardized disclosures,” and the new regulation outlines specific requirements for disclosures (including the order of disclosures and font size), the DFS has not produced any template or guide that commercial lenders can use or rely on as a safe harbor. For the moment, individual lenders and the lending industry must translate the various requirements into the disclosures they plan to use, which could result in significant variations based on how different lenders interpret the requirements in the regulation.
As the new disclosure rules are implemented in the coming months, questions are sure to arise, particularly regarding the DFS’ priorities and how it plans to enforce the regulation. Loeb & Loeb’s Financial Services team is here to discuss any concerns and answer questions.
This article is an extract from GTDT Complex Commercial Litigation 2024. Click here for the full guide.
I am pleased to write this introduction to the seventh edition of Complex Commercial Litigation. A good starting point for looking to the year ahead is to reflect on the past year. The repercussions of Russia’s invasion of Ukraine, together with high levels of inflation across the globe (and increasing central bank interest rates), gave rise to economic and cost of living crises. These developments have impacted business relationships, setting the stage for an increase in commercial disputes and insolvencies.
Sadly, 2022 also saw the death of Queen Elizabeth II, resulting in changes for the legal profession in England. Overnight, ‘Queen’s Counsel’ became ‘King’s Counsel’ and the ‘Queen’s Bench Division’ became the ‘King’s Bench Division’. It has taken a while for practitioners to get used to the new nomenclature.
The crypto market experienced a downturn in 2022, colloquially known as ‘crypto winter’, causing potential liabilities for numerous clients and necessitating legal scrutiny. This has fuelled crypto-asset litigation in gaining traction, shedding light on the real-world implications of intangible assets. The collapse of Three Arrows Capital (a hedge fund which managed assets of more than US$10 billion), followed by the even more spectacular collapse of FTX, from a valuation of circa US$32 billion to insolvency, sparked concerns and created turmoil in the crypto market. These collapses have given rise to several claims in several jurisdictions, notably in the Bahamas and the United States. In relation to FTX, claims are not only against Sam Bankman-Fried (the founder of FTX) and his companies but also against the advisers and intermediaries, who are now the ‘deep pockets’ defendants. It demonstrates how these sorts of corporate collapses can quickly spawn litigation worldwide.
Sanctions authorities have continued to issue sanctions in connection with the Russian invasion of Ukraine, albeit slower than previously. We expect the regulators to focus more on enforcing sanctions than issuing new sanctions, regulations or designating additional individuals or companies.. These developments do cause inevitable disruption to proceedings, and we are all treading very carefully. In the same vein, litigation-challenging sanctions are now starting to work through the system. For example, in London, Eugene Shvidler, a close ally of Roman Abramovich, brought such a claim based upon human rights legislation. That claim failed at first instance, but his lawyers have indicated he will appeal, and it seems unlikely this will be the last such challenge. If any of these claims prove successful, this is likely to lead to much more litigation in relation to sanctions. Additionally, if, as is speculated in some jurisdictions, steps are taken to expropriate assets of sanctions oligarchs, that too will likely result in heavily fought commercial litigation over assets (or their proceeds).
The challenging economic outlook is expected to usher in more corporate insolvencies. Businesses may resort to schemes of arrangement, restructuring plans, or formal insolvency processes, leading to associated litigation. Critical factors include the energy sector and the lasting effects of the pandemic. In this regard, financial pressures increase the motivation and opportunity for civil fraud, leading to a higher likelihood of fraud being uncovered and investigated. The expected rise in insolvencies and appointment of insolvency practitioners will expose such activities, and they will need to use the litigation tools in their armoury in order to recover assets.
Environmental, social and governance (ESG) concerns remain high on the agenda, with mounting concerns regarding greenwashing and deceptive marketing claims. Regulators and activists have prioritised addressing these issues, resulting in public law claims challenging government decisions pertaining to climate policies. Therefore, ESG litigation is definitely going to be an area to watch.
The English courts have recently dealt with what was described as a ‘world first’ claim by a shareholder seeking to use a derivative action procedure to challenge the directors of a listed company (in this case, Shell) for their environmental policies (which it was alleged were inadequate).
The claim was brought by ClientEarth, a campaigning environmental charity which seeks to use the law to bring environmental change. The High Court dismissed the claim through a written procedure, primarily because it is for the company, not the courts, to determine how to run a company, including in relation to environmental and community considerations. The Court also noted that there is (at least currently) no ‘universally accepted methodology’ for judging climate change-related action.
However, that might not be the end of the story because ClientEarth has said it will be appealing the decision. This is an area of focus that is of concern to many people, and it seems likely that we will see more litigation in this area. Even if the derivative action route attempted by ClientEarth is (at least for now) shut off, more challenges are likely, potentially based upon the ever-increasing raft of client-related regulation, which is emerging or creative legal claims brought by imaginative lawyers.
The recent Supreme Court decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal has created disruption in relation to litigation funding in England. The Supreme Court held that some litigation funding agreements (essentially those where the funder is to receive a percentage of damages rather than a multiple of funds advanced) are damages-based agreements within the meaning of UK legislation and, therefore, unenforceable unless they comply with certain statutory requirements (which few, if any, litigation funding agreements would comply with). An immediate consequence is likely to be disputes between funders and funder parties where there is doubt about the enforceability of the existing funding agreements.
More fundamentally, it may also change some of the economics of funding arrangements. It is therefore hoped that there will be statutory intervention to give parties (and funders) greater certainty as to the position. However, the prospects of that before the next election seem slim, and, therefore, the UK funding market will be in a state of flux.
Overall, given the economic and geopolitical turmoil, we expect the forthcoming year to be a busy one for commercial litigation practitioners, and we hope you find this guide of assistance in your endeavours.
Progressing the case
Typical procedural steps
What is the typical sequence of procedural steps in commercial litigation in this country?
In the Mexican legal system, there are several types of commercial trials, the most common being the ordinary commercial trial.
This trial begins with the filing of the lawsuit and the reply by the defendant. After this, a hearing is set for the preparation and to conduct evidence and, if applicable, for the conciliation of the parties if they so decide.
Once the evidence has been filed, the period of allegations is opened, which are the last declarations of the parties before the judge issues a resolution to the procedure.
Once the period of allegation has concluded and the parties submit their briefs, the judge will issue a resolution, which may be challenged through an appeal.
Another procedure is the commercial oral trial, and the general rule is that parties can follow this trial, depending on the amount under dispute.
In these cases, the procedure of the trial is similar to an ordinary trial at the beginning, with the filing of the lawsuit and the response by the defendant. However, the difference is that after this initial stage, there are three hearings that will be conducted by the judge:
- The preliminary hearing in which the parties can reach an agreement and the judge will admit the evidence filed.
- The second hearing in which the parties can expose their final arguments and the evidence will be presented.
- Finally, the judge will issue their final decision in the matter.
Importantly, in these trials, there is no appeal stage, only a constitutional action called an amparo lawsuit before a federal court.
Bringing in additional parties
Can additional parties be brought into a case after commencement?
There is a possibility that third parties who were not originally contemplated in the procedure may appear before it.
One of the most common cases is when a third party appears because the resolution affects them indirectly, and they may even oppose the execution of the resolution, which must be resolved by the judge.
It is essential that the third party has a legal interest in the matter so that it can appear in the litigation.
Can proceedings be consolidated or split?
To avoid contradictory resolutions in certain cases that are related to each other, the accumulation to be decided jointly is possible. It shall be ordered by the judge and may be at the request of the parties or ex officio.
Court decision making
How does a court decide if the claims or allegations are proven? What are the elements required to find in favour, and what is the burden of proof?
The Mexican Constitution establishes that all resolutions issued by the authorities must be based on the applicable law and in accordance with the essential formalities of the procedure.
In this sense, the court must base its resolution strictly on the arguments of the parties, along with the evidence offered by them to reinforce their arguments, and the judge must use the applicable body of law to issue the resolution.
Regarding the burden of proof, as a general rule, anyone who asserts a fact is obliged to prove it. The plaintiff is not obliged to prove negative facts. Some documents have the presumption of validity, which means that the content of the document will be considered authentic unless proven otherwise.
The evidence will be evaluated and assessed by the judge. In either a commercial or civil trial, the judge must evaluate all the evidence that was legally submitted by the parties, analyse their arguments, and then verify whether the claim of the plaintiff is proven or if, on the contrary the defendant proved the defences.
As mentioned, the general rule is that all evidence will be evaluated by the judge in the final resolution, but it is important to note that there are some points that should be considered depending exclusively on the type of evidence submitted.
First, the evidence must be pertinent to the case, and the parties must provide arguments to justify it. Along with this, the evidence must be offered according to the applicable law, since different types of evidence have particular rules; therefore, if the evidence is not submitted in accordance with the law, it can be dismissed.
Moreover, all documents must be filed in Spanish (or in the original with a translation), and if there are international documents, they must be duly apostilled and notarised.
All public documents submitted as evidence will have presumption of validity; this means that their content will be considered as true, and those documents that do not have such nature will not have full value as evidence.
Expert evidence will also have presumption of validity on its content, but it will only be applicable when specialist knowledge is required. Both parties can assign their own experts, but if the experts’ opinions are contradictory the judge will name a third expert. The judge can use any part of the opinions to provide the final decision, so may take elements from all the opinions.
Confessional evidence developed and executed in the trial will be taken into account at the time of issuing the resolution. If the confessional evidence is related to other evidence, its legal value will increase and the judge will consider this evidence in a more forceful way.
Finally, for witness evidence, there are also several rules the judge will take into consideration, and the witness must specify when, where and how the action happened.
To conclude, even though every type of evidence has specific rules regarding execution and evaluation of the judge, its value may depend on the analysis of the judge, and they will use its logical rules as support for the final decision.
How does a court decide what judgments, remedies and orders it will issue?
Judicial decisions will be made taking into consideration the evidence, arguments and facts submitted to the dispute between the parties, and a determination will be made by the judge based on these elements.
The judge can only issue a resolution regarding the request of the plaintiff and the defence. This means that the judge cannot extend the effect of the resolution to something that was not expressly requested by the parties.
The decisions of the judge consist of three elements – precedents, reasoning and orders, and are structured as follows:
- the judge proceeds, identifying the parties;
- an account of the dispute and the litigation between the parties is raised;
- the evidence and arguments of the parties are pointed out and evaluated; and
- the judge issues a resolution based exclusively on the evaluation made between the arguments of the parties and the evidence offered during the development of the procedure.
How is witness, documentary and expert evidence dealt with?
As for documentary evidence, this is either private or public. Private documentary evidence has no legal presumption and is usually related to private documents such as agreements. However, public documentary evidence has a presumption of validity, since it is a document issued by an authority or attested by or through a notary public. This evidence must be accompanied in the initial writ and is evaluated by the judge.
Testimonies in the ordinary commercial trial are conducted in an oral format and before the judge. The witness must be indicated before the court and will be summoned to appear on a specific date and answer the questions prepared by the party that offered the testimony evidence. The party that offered the evidence asks the questions. However, before the witness answers, the judge qualifies and determines if the question is related to the case. If so, the witness must answer. If not, the judge dismisses the question.
Finally, for expert evidence, it is necessary to mention in the suit who will be the expert and his or her expertise, capabilities or academic degrees. The proof should be prepared, establishing the justification of the evidence and providing the questions that will be answered in the expert’s report. The expert will offer his or her opinion; and prior to issuing an expert opinion, the other party may propose an expert.
Oral evidence does not have a higher evidential level, but will be suitable depending on whether strict rules are adhered to for approving the questions. As mentioned, our system is very formalistic, thus the questionnaire should be approved under very general strict rules governing its construction before any oral deposition.
How does the court deal with large volumes of commercial or technical evidence?
The courts are obligated to receive any type of evidence. In some cases, it is possible to file technological and digital media, such as a USB drive, containing the information.
Can a witness in your jurisdiction be compelled to give evidence in or to a foreign court? And can a court in your jurisdiction compel a foreign witness to give evidence?
Our country is part of the Inter-American Convention on the Taking of Evidence Abroad, so it is possible to request the collaboration of a witness in a foreign court, or on the contrary, foreign authorities can request the collaboration of a national witness.
The Convention establishes that a letter of request must be issued, stating the details of the evidence to be disclosed and the information requested. This Convention not only mentions testimonial evidence, but it is also possible to release expert evidence in this manner.
It is also possible to present foreign documents as evidence in the trial, which must be duly legalised or apostilled. By complying with these requirements, the evidence will be fully valid in Mexico.
How is witness and documentary evidence tested up to and during trial? Is cross-examination permitted?
As for documentary evidence, this is either private or public. Private documentary evidence has no legal presumption, and is usually related to private documents such as agreements; on the other hand, public documentary evidence has a presumption of validity, since it is a document issued by an authority or attested by or through a notary public. This evidence must be accompanied in the initial writ of lawsuit and is evaluated by the judge.
Testimonies in the ordinary commercial trial are conducted in an oral format and before the judge; the witness must be indicated before the court and will be summoned on a specific date to appear and answer the questions prepared by the party that offered the testimony evidence. The party that offered the evidence asks the questions. However, before the witness answers, the judge qualifies and determines if the question is related to the case. If so, the witness must answer. If not, the judge dismisses the question. Cross-examination is permitted.
How long do the proceedings typically last, and in what circumstances can they be expedited?
Usually, a traditional commercial procedure can take one to three years to obtain a resolution at the first stage.
This resolution can be challenged through an appeal and then can be challenged through an amparo lawsuit.
Therefore, considering the three stages, it is possible that the whole procedure may take a minimum of 2.5 years up to four to six years in normal cases. Very complex cases can stretch to more than a decade.
Commercial controversies where credit is involved, according to the amount, may be prosecuted through an oral ‘expedite’ procedure or the traditional written way. If it is an oral proceeding, the decision cannot be appealed; namely, a final decision can be expected in approximately one to two years.
Gaining an advantage
What other steps can a party take during proceedings to achieve tactical advantage in a case?
In our legislation, there is a motion called medios preparatorios, which allows means of evidence to be obtained for a subsequent judgment.
The medios preparatorios, or with the recognition of the debt before the judge, give more certainty to the action that is possessed. Nevertheless, this depends exclusively on the circumstances of every case.
It is possible to initiate an administrative procedure to obtain a document that will be filed as evidence.
Likewise, as a medio preparatorio, confessional evidence of the potential defendant may be offered to answer questions related to the possible litigation with the purpose of obtaining more information on the matter.
Impact of third-party funding
If third parties are able to fund the costs of the litigation and pay adverse costs, what impact can this have on the case?
If the defendant reaches an agreement with a third party to cover the costs of litigation, it will have no real impact on the merits of the case, as the third party will not have any participation in the litigation.
Impact of technology
What impact is technology having on complex commercial litigation in your jurisdiction?
The Mexican legal system has been equipped with new technology and it is now possible to present writs, consult legal resolutions and review the judicial file electronically. However, it is necessary to obtain authorisation from the judge, and, in most cases, an additional tool called ‘electronic signature’ is required by the involved parties.
It is reported that the Judicial Authority is working on alternatives to make the use of electronic resources even more efficient, for example facilitating lobbying efforts through electronic means.
Documentary evidence may include chats, conversations and emails; however, it is still necessary to present the evidence in paper form. In some cases, it is possible to submit evidence contained in a CD or USB drive.
Until now, it has not been possible to conduct testimonial evidence or expert opinions by this means. However, in some cases, experts appointed by the parties have been allowed to accept the charge and ratify their technical opinions via video conference.
How are parallel proceedings dealt with? What steps can a party take to gain a tactical advantage in these circumstances, and may a party bring private prosecutions?
It is possible for a dispute to involve several procedures and various venues. Depending on the strategy of the case, the restriction is that the case can have different causes of action.
As annunced a few weeks ago when we discussed all the interesting aspects of commercial offences as an integral part of Serbian penal law, we shall now take a closer look at the first-instance proceeding and some of the most important segments of domestic and foreign legal entities, as well as their responsible persons, should keep in mind in case they are subjected to a commercial offence proceeding. Before jumping into further analysis, we want to remind our readers that we’ve also promised additional guidelines regarding the novelties in the legal system of the Republic of Serbia and it’s definitely not a bad opportunity to check the amazing work of our colleagues during previous months. so you can stay up to date. Moreover, here you can find some pretty perceptive articles concerning various legal spheres prepared by the experts.
General Principles of Commercial Offence Proceeding
As an additional reminder to our readers, in Chapter 1, we have stated that the accusatory principle represents the dominant foundation when conducting the proceeding itself. This means that an independent state authority Public Prosecutor, is authorized to prosecute commercial offenders and initiate the commercial offence proceeding before the competent court. Of course, even though it’s sometimes treated as an exclusive rule in court practice, it comes with an exception, but more of that can be found in our previous article. Another general principle of the commercial offences proceeding is provided under Article 42 of the Commercial Offences Act (Official Gazette of the SFRY, Nos. 4/77, 36/77 (corrected version), 14/85, 10/86 (revised text), 74/87, 57/89 and 3/90, Official Gazette of the FRY, Nos. 27/92, 16/93, 31/93, 41/93, 50/93, 24/94, 28/96 and 64/2001 and Official Gazette of RS, No. 101/2005 (other law), hereinafter: `’Law”). It stipulates that only the competent court in the proceedings instituted and completed in accordance with the Law may impose a fine, a suspended sentence and security measures for the committed commercial offences. Moreover, it should be noted that Article 51 of the Law enables the so-called rule of the joint proceeding – meaning that a joint proceeding shall be initiated and implemented for the commercial offence of a legal entity and a responsible person. Furthermore, the initiation and conduct of proceedings only against a legal entity or only against a responsible person is possible if there are legal reasons for prosecuting only one of them, or if the responsible person is being prosecuted for a commercial offence that has features of commercial offence.
Most legal practitioners would agree that the provision of Article 56 of the Law is the most important one in the section governing the proceeding itself. People of theory might disagree. However, this time, we must put our faith in practitioners given they will take active participation in accusation, defense, and judgment, and not the theorist. The aforementioned provision provides that unless otherwise stipulated by the Law, the following provisions of the Criminal Procedure Code (“Official Gazette of RS”, no. 72/2011, 101/2011, 121/2012, 32/2013, 45/2013, 55/2014, 35/2019, 27/2021 – Decision US and 62/2021 – Decision US), hereinafter: `’Procedure Code”) shall apply to commercial offence proceedings:
- on the general principles.
- on the joinder and severance of proceedings, on the transfer of territorial jurisdiction, on the consequences of non-jurisdiction, and recusal.
- on the Public Prosecutor, on the injured party, and defense counsel.
- on briefs and records, on periods, on the costs of criminal proceedings, and claims for indemnification.
- on rendering and pronouncing decisions, on the service of documents and examination of files, the meaning of legal terms and other provisions.
- on the summons and bringing in the defendant, on search, on the temporary confiscation of objects, on the examination of the defendant, on hearing witnesses, on on-site investigation, and expert analysis.
- on preparations for the main hearing, on the main hearing, on the judgment, and ordinary legal remedies.
- on the reopening of proceedings, on the motion for the protection of legality,
- on the proceedings for the enforcement of security measures, and the proceedings for issuing warrants and notices.
Before we take a closer look at the initiation of the proceeding and its phases, Article 57 of Law strives to simplify the very text of Law thus simplifying its application by stipulating that the injured party shall be a person whose personal or property rights have been infringed upon by a commercial offence; the prosecutor shall be understood as the Public Prosecutor and the subsidiary prosecutor; – the party shall be understood as the prosecutor, the accused legal entity and the accused responsible person; – the term “defendant” is used as the general term for the accused legal entity and the accused responsible person. Considering that we have already elaborated the court jurisdiction in the previous chapter, we think that it is time to `initiate the proceeding’ at last!
Despite being simplified in comparison to a standard criminal procedure, a commercial offence proceeding still represents a field where 80% of defendants opt for formal defense due to the complexity of legislation and procedural rules.
Preliminary proceeding who can report the commercial offence and actions of a competent Public Prosecutor upon submitted report?
Despite the fact that most of the entities mentioned under Article 85 no longer exist and represent a relic of the socialist past, it is important to point out that in accordance with the mentioned article, all government bodies, organizations of associated labor, other self-management organizations and communities shall report commercial offences they have been informed about or they have learned about in some other way. All the mentioned subjects shall provide all the information about the commercial offence and the offender in their offence report, indicating evidence known to them, and shall take steps to preserve identity papers, business records, other documents, and traces of the commercial offence, as well as the objects on which or by means of which the commercial offence was committed and other evidence thereof. Moreover, the competent authorities shall also take into consideration offence reports filed by citizens. A commercial offence report is submitted to the competent Public Prosecutor in writing or orally. Law provides different rules for both modifications of submitting and even prescribing the case of filing the report by phone when the official note must be made.
As is the case in other criminal proceedings, the actions of the competent public prosecutor upon the submitted report depend on the content of the report itself:
- The Public Prosecutor can dismiss an offence report if it indicates that the reported offence does not constitute a commercial offence, that the statute of limitations on prosecution has expired or that there are other legal grounds ruling out prosecution. In such an event, the Public Prosecutor shall notify the submitter of the report and the injured party of the grounds for its dismissal, within eight days of rendering a decision on dismissal. The submitter may file an objection to the directly higher prosecutor against the decision on dismissal of the report, as it usually happens in all penal proceedings in Serbia.
- If the Public Prosecutor believes that there are insufficient grounds in an offence report or in the collected information and data to file the indictment, it shall propose that the competent court take specific investigative actions. If the assigned judge agrees with this proposal, it shall take investigative actions and then submit all the files to the Public Prosecutor. Investigative actions shall be launched immediately and completed as quickly as possible. Once the Public Prosecutor receives the files/ notification from the first-instance court, it shall either file the indictment to the court or render a decision on the dismissal of a commercial offence report.
- Finally, the Public Prosecutor can file the so-called “direct” indictment to the competent court (in accordance with the provisions of the Procedure Code, direct indictment represents a type of indictment act that was not preceded by the conduct of an investigation or investigative action in the case of commercial offences).
Given that the quality of the indictment in most cases depends on the quality of conducted investigative actions, the Law provides this segment of the previous proceeding the most “space” and through 10 extensive Articles stipulates all the rules of conduct, i.e., the rights and obligations of all participants at this stage of the proceeding. In case of initiating the investigative actions, all accused legal entities, their representatives and responsible persons should know that they, as a rule, can attend all investigative actions undertaken by a certain judge or the competent inspection authority.
Preliminary examination of the indictment, Summary Proceeding and the discontinuation of the proceeding
Upon the completion of investigative actions, further proceedings may be conducted only on the basis of the prosecutor’s indictment. The court shall dismiss the indictment if the act the defendant is charged with does not represent a commercial offence, if the statute of limitations on prosecution has expired or if there are other legal grounds ruling out prosecution. If investigative actions have already been taken, the court shall dismiss the indictment if there is not sufficient evidence generating reasonable suspicion that the offender has committed the commercial offence it is charged with. The general rule is that the court shall schedule the main hearing forthwith if it determines that another court is not competent in the specific case, that it is not necessary to conduct additional investigative actions in accordance with the provisions of Article 104, and that there are no legal grounds for indictment’s dismissal. However, the exception comes in the form of the Summary Proceedings a proceeding in the jurisdiction of a single judge where the decision on commercial offence might be rendered without scheduling the main hearing on the prosecution’s proposal. Summary proceedings may be conducted only if the representative of the accused legal entity has already been heard and the accused responsible person has already been questioned during the investigative actions phase. In summary proceedings, a fine of up to RSD 100,000 may be imposed on the accused legal entity, whereas the accused responsible person may receive a fine of up to RSD 10,000.
Another important question of the first-instance proceedings is the discontinuation of proceedings. The court shall discontinue the proceedings against the accused responsible person if the accused responsible person is beyond the reach of government bodies or in the event that the accused responsible person has developed a temporary mental illness or a temporary mental disorder. Prior to the discontinuation of the proceedings, all available evidence of a commercial offence shall be collected. Once the obstacles leading to the discontinuation have been eliminated, the proceedings against the accused responsible person shall resume.
The main hearing and rendering of the decisions on commercial offences
The main hearing represents the phase of the proceeding consisting of the evidentiary proceeding, the parties’ closing arguments and the rendering of the decision. The main hearing commences with the publication of the indictment’s main content. Afterwards, the representative of the accused legal entity shall be heard, and the accused responsible person shall be questioned. In the conviction, the court must state: the act for which the accused legal entity and the accused responsible person are pronounced liable, including the facts and circumstances constituting the elements of a commercial offence; all the regulations on the commercial offence that have been applied; the penalty to be imposed on the accused legal entity and the accused responsible person; the decision on acquittal; the decision on a suspended sentence; the decision on security measures; the decision on the confiscation of proceeds; the decision on the costs of proceedings and the claim for indemnification.
Final thoughts and further promises
Despite being simplified in comparison to a standard criminal procedure, a commercial offence proceeding still represents a field where 80% of defendants opt for formal defense due to the complexity of legislation and procedural rules. Both domestic and foreign legal entities and their responsible persons are aware of the fact that experienced attorneys can help them navigate through the process and provide services directed to the best possible outcomes which all represent the main reason for such a high percentage of formal defense in commercial offence proceedings. In the upcoming period, our team of experts will give their thoughts on proceeding upon ordinary and extraordinary legal remedies, as well as for the three special proceedings governed by Law – for the Confiscation of Proceeds, for the Indemnification for Unjustifiable Conviction, for the Expungement of Conviction and Termination of Security Measures or Legal Consequences of Conviction, and Enforcement of the Decisions that will wrap everything up as a suitable finale to our `’trilogy”.
Interest rates remain high, and for many markets and asset classes, prices have yet to fall. However, there’s at least one way real estate investors can buy a property at the right price in this cycle: Distressed sales.
“It’s a main mechanism for price correction,” said Matthew Scoville, a New York-based attorney and partner at Hunton Andrews Kurth who has represented both lenders and real estate developers. In many cases, distressed sales allow investors to acquire properties that would otherwise not be available. “Opportunities are the name of the game,” he said.
While savvy, buying distressed properties requires a blend of strategic thinking, legal expertise, financial acumen and market awareness. Though the landscape may be complex, the potential for substantial returns exists for those who can navigate the challenges effectively. Engaging with professionals who understand the nuances of distressed property transactions is key to making informed decisions and capitalizing on distressed property.
What is a Distressed Property?
Distressed sales are driven by some type of financial or outside influence that coerces the owner to sell involuntarily, and/or for a price often well below market value.
Forms of distress include:
- Pending foreclosure.
- Bankruptcy sale (when a bankruptcy court approves the sale of a distressed asset).
There are many reasons a property can fall into distress. According to Brian Cohen, a New York-based attorney and partner at Goulston & Storrs, these can include:
- The property is not generating enough cash flow to pay its debt obligations or tax liability.
- The property doesn’t generate enough cash flow to pay tenant improvement allowances or brokers’ commissions.
- Death of a partner in the investment.
All of these are situations where the property owner is unable to meet mortgage payments, maintain the property, or even cover the expenses associated with its operation. A lender is entitled to pursue foreclosure on a property as soon as its mortgage is in default (from either missed payments or having an unpaid balance upon the loan’s maturity date).
How Do You Acquire Distressed Property?
Besides searching for them online, find an experienced real estate broker, real estate lawyer, banker or other professional who will know about potential deals before they’re publicized.
“Real estate is a pretty small community, particularly New York real estate,” Scoville said. “A property might not necessarily be marketed as distressed yet, but it’s on the radars of brokers, law firms and off-the-record brokers as well.”
Traditional ways to acquire a distressed property are:
- At a foreclosure auction held by the lender, or a bankruptcy auction held by a court. The lender will usually offer a credit bid (or the amount of the outstanding debt) and oftentimes will be the highest bidder at auction.
- Acquiring a real-estate-owned (REO) property directly from the lender if it fails to sell at auction.
- Pursuing a short sale, when a lender agrees to sell a property for less than its outstanding debt instead of pursuing foreclosure.
- In some cases, distressed properties are auctioned off under the Uniform Commercial Code (UCC). This process involves selling assets secured by collateral, such as equipment or inventory.
The foreclosure process differs depending on whether a state is judicial or non-judicial. In judicial states like New York, foreclosures can be a more extended and complex process, involving court proceedings that can take years. In non-judicial states like Texas, foreclosures can occur more swiftly without court involvement.
Many investors will acquire a distressed and discounted commercial mortgage note from a lender, and then pursue foreclosure themselves. But this method is not for the faint of heart.
“If you’re coming from a straight transactional background, you’re going to be hopping right into a litigious and potentially highly confrontational situation right off the bat,” Scoville said. “So I think you need to prepare yourself for the fact that there may not be any deals to be had in this. It’s going to be blunt force – enforcing documents and seeing how it goes.”
This approach also requires even more due diligence than usual.
“First, you want to understand, among other things, what kind of security does the lender have?” Cohen said. “I would say the key is to understand the priority of the lien you are going to be taking control of.”
Like all real estate sales, the endeavor to buy distressed properties is deal-specific. It involves navigating through a maze of jurisdictions, collateral types, and legal considerations. As a prospective buyer, you’ll encounter a variety of scenarios, each with its own set of rules and challenges.
When pursuing distressed properties, you’ll encounter terms like equity interest pledges, mezzanine loans and mortgage loans. Let’s break down some of these terms to gain a better understanding:
- Mortgage Loans: Mortgage loans use the property itself as collateral, with the lender having the right to foreclose if the borrower defaults on payments.
- Equity Interest Pledge and Mezzanine Loans: An equity interest pledge involves using equity ownership in the property as collateral, while mezzanine loans are a hybrid of debt and equity financing. Investors providing mezzanine financing have a secondary claim to the primary lender on the property’s assets. Mezzanine loans are used when the primary loan doesn’t cover the full cost of the purchase or project.
- Guarantees and Recourse: Personal guarantees signed by borrowers or guarantors can complicate the investment process. In the event of defaults, investors may need to account for additional financial obligations owed by the borrower.
Distressed property sales require cooperation among many different parties, often with competing interests. “It gets very complicated, very fast,” Cohen said.
“The most important thing I would tell someone venturing into the distressed game is to be the smartest person in the room and to make sure to know everything there is to know about every single position in the capital stack,” he continued.
Unfortunately, many times it’s difficult to inspect a property before it is auctioned. But there are other forms of due diligence on these deals that are paramount. This involves a comprehensive assessment of the property’s legal and financial aspects to mitigate risks and make informed decisions.
- Legal and Loan Document Diligence: Reviewing loan documents, guarantees, and communications between parties is crucial. Understanding the jurisdiction and the specific terms of the loan can impact the timing and success of the foreclosure process.
- Intercreditor Agreements: If you’re acquiring the mezzanine position or subordinate debt on a property, understanding the inter-creditor agreements is essential. These agreements define the relationship between creditors and their priorities during a foreclosure or bankruptcy.
- Property Diligence: Examining the property itself, including its physical condition and potential for value enhancement, is essential.
- Value-Add Opportunities:Consider whether leases can be broken or renegotiated to attract more lucrative tenants.
Like any other real estate deal, leverage is everything in distressed sales — as in the leverage a lender has over a distressed borrower or the leverage different creditors have against each other in a more complicated deal. As an example, Scoville presented a situation in which a subordinate lender may have a chance at recouping some money on a soured mezzanine deal, but the senior lender with priority does not.
“The [mezzanine] is probably going to want something, but the sponsor will be happy with getting off the guarantee liability. That’s your baseline assumption,” he said.
Where We’re Headed
Scoville hasn’t yet noticed huge discounts on distressed commercial loans, because, for the most part, lenders are secured by the collateral properties. But he does believe that, as of late, foreclosures are cleaner transitions than they were in the past.
“The economic assumptions were just so off on some of the [pre-pandemic] deals that were made that there’s no realistic profit in some of [these properties],” he said. “That trend is going to continue as people understand interest rates aren’t going to go down fast and office [space] is going to be challenged in society. It is just a reset. I think you’re going to see that trend continue where developers and [loan] sponsors don’t feel stigmatized as much by saying ‘Hey, the deal doesn’t work. Let’s transition it and you can sell it at your basis and we can be done with it.’”
According to Paragraphs 2 and 3, Article 20 of the Personal Data Protection Act, where a non-government agency uses a data subject’s personal data for marketing purposes for the first time (regardless of whether or not such use is compatible with the purposes for which the data was collected), it should provide a mechanism for the data subject to object to the marketing free of charge and then cease to use his/her personal data for marketing purposes upon his/her objection.
Considering that it is common for non-government agencies to use personal data to promote specific products/services and to seek trading opportunities from data subjects (“Commercial Marketing”), on June 13, 2023, the National Development Council (“NDC”) promulgated the Guidelines on Refusal to Commercial Marketing, identifying the matters that require non-government agencies’ attention before, during, and after data subjects exercise their rights to refuse Commercial Marketing as follows:
1. Before data subjects exercise their right to refuse Commercial Marketing
Where non-government agencies use personal data for Commercial Marketing purposes for the first time, the non-government agencies shall proactively disclose their names and provide data subjects with free, fast, and easy ways (e.g., toll-free numbers, text messages, e-mail addresses, customer service URLs on their website, or an opt-out mechanism in their application) to express their refusal to Commercial Marketing. Non-government agencies should still proactively disclose their names when conducting subsequent Commercial Marketing and are recommended to continue to disclose the information on refusal to Commercial Marketing in a clear and easy-to-understand way and placed in a prominent and easy-to-access position (e.g., disclosing such information on their website).
2. When data subjects exercise their right to refuse Commercial Marketing
Where a non-government agency uses a data subject’s personal data for Commercial Marketing purposes, the data subject has the right to refuse such Commercial Marketing without any reason and at any time; such right to refusal will not be limited to the first time that the non-government agency uses the data subject’s personal data to conduct Commercial Marketing. Non-government agencies shall respect data subjects’ intention to refuse Commercial Marketing and then cease Commercial Marketing based on their will and the scope of their refusal. Unless data subjects indicate otherwise to non-government agencies or change their minds, such non-government agencies shall no longer use their personal data to conduct any Commercial Marketing. In addition, the methods by which data subjects can exercise the right to refuse Commercial Marketing shall not be limited to those provided by non-government agencies, and such non-government agencies shall not refuse to cease Commercial Marketing even though the data subjects did not use the methods to refuse Commercial Marketing provided by them.
3. After data subjects exercise their right to refuse Commercial Marketing
Non-government agencies shall record, update, and compile data subjects’ requests to refuse Commercial Marketing and reply to the data subjects that they have received their requests. At the same time, non-government agencies should inform their personnel and/or commissioned agencies at the earliest that they shall no longer use those data subjects’ personal data to conduct Commercial Marketing.
Besides the abovementioned significant matters, if a non-government agency commissions others to use personal data for Commercial Marketing purposes, such non-government agency should take appropriate supervision measures (such as including clauses regulating Commercial Marketing in the commission contract) to ensure that the commissioned agency handles data subjects’ refusal to Commercial Marketing accordingly.