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.
Conclusion
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.
September 21, 2023 – Adverse market conditions and lower valuations are creating litigation risks for commercial real estate (CRE) deal parties, particularly in the office sector. At the same time, opportunities exist for refinancing and a rebound in value where regulations can be eased or adapted to help CRE survive and thrive through the post-pandemic storm.
Market risks and the regulatory response
A significant number of mortgages are maturing in the near-term, requiring refinancing at a time of relatively higher interest rates and lower occupancy. These are factors that tend to reduce valuations. Reduced valuations, in turn, increase the risk of losses and litigation.
Older office buildings are most vulnerable during this period as many tenants seeking to get their employees back in the office are demanding updated spaces.
In response, local governments have started to recognize two fundamental problems with their city centers — there is simultaneously both a lack of housing and a massive amount of unused, unwanted office space. Even so, commercial-to-residential building conversions often gain public support but are more rarely successfully executed.
Significant reconfiguration needed for an office building to meet residential building codes can be exceedingly difficult in an inflationary and rising interest rate environment. In addition, regional banks have struggled of late, limiting a traditional source of funding in the CRE space. As a result of these headwinds, the regulatory and financial hurdles are often too high for conversions to make sense.
But some government officials are taking steps to make a more hospitable market for residential conversions. New York City Mayor, Eric Adams, for instance, has proposed changes to zoning which would allow buildings that were built before 1990, rather than 1961 or 1977 under current laws, to be eligible for conversion. In addition, the city would re-zone manufacturing zones in midtown Manhattan to allow for mixed-use.
A new office of city government experts on city buildings’ regulation would be available to foster conversion projects, furthering the commitment to overcome regulatory hurdles.
A new purpose for C-PACE
On the financing side, there may be pre-existing programs that could be used for residential conversions.
For instance, before the pandemic, certain New York City building owners already faced a significant legal hurdle — preparing for the implementation of Local Law 97 (LL 97).
Under LL 97, there are increasingly rigorous requirements for buildings to reduce their carbon emissions. The first major milestone is in 2024 when buildings must begin to limit emissions based on a certain cap and those limits become stricter over time. To help finance these changes, a local C-PACE (Commercial Property Assessed Clean Energy) program was implemented.
Broadly speaking, C-PACE is long-term, fixed-rate financing available through qualified lenders which operate through municipal programs. The loan is paid back through a tax assessment. Accordingly, it operates as a lien on the property and runs with the property regardless of any transfer of ownership.
Building owners struggling to find funds for conversions could turn to C-PACE to relieve some pressure. C-PACE can only be used for eligible energy efficiency improvements or renewable energy systems but these aging buildings that are candidates for conversion likely need to make changes in any event to comply with LL 97. If those improvements were folded into a larger conversion plan, then C-PACE could be a resource alongside traditional financing.
Valuation and litigation risks
Meanwhile, CRE valuations for offices have been falling.
Under CRE deals where certain events of default trigger re-appraisal of the subject property, the combination of stress in the market and lower values can be a volatile mix. Higher operating costs and vacancies increase the risk of default, which can become the catalyst for a reappraisal that reveals lower valuation. Lower valuation could result in an appraisal reduction amount (ARA) which sets off a battle for control of the loan servicing.
For example, following an event of default, a servicer may obtain a new appraisal that indicates there are unrealized losses. While the exact contractual formula may vary, the ARA may equal the excess of the outstanding principal balance of the loan minus 90% of the adjusted appraised values of the mortgaged properties securing the loan.
If the value of the property has dropped to a certain degree set by the contract, the rights to control the loan’s servicing (collecting principal and interest) and make decisions regarding loan enforcement (modifications, foreclosures) can change hands. These rights are significant at any time and are especially highly prized when a mortgage is in distress as they determine the actions taken to preserve or maximize value.
In distress situations, a special servicer is usually called upon to make major decisions or obtain consents from the controlling certificateholders to intended actions. Special servicers are often involved in overseeing loan modifications to avoid default, granting loan extensions, or pursuing foreclosures and sales.
Generally, the controlling certificateholders are the most junior class that has 25% or more of its initial balance remaining. The junior holder has the most credit risk so they are given decision-making control over the loan.
The goal is for the party with a meaningful economic interest in the loan to enforce the loan for the interests of all. When the value of the loan changes to such a degree the junior class’s stake has been steeply reduced, the control shifts to a more senior holder.
As one would expect, shifting value and control rights are fertile ground for litigation to determine who has the decision-making power to govern the loan servicing and enforcement. The first step to assess this risk is looking to the underlying deal documents and understanding the definitions and operative terms.
In the 2011 case FCCD Ltd. v. State St. Bank & Trust Co., in the Southern District of New York, at issue was whether a triggering event had occurred which shifted control from the subordinate to the senior interest holder. The underlying agreement provided that the servicing rights would be transferred to the senior interest holder if the subordinate interest holder’s prospect of recovery was so diminished it no longer had a sufficient economic stake in the loan.
The court reviewed the agreement to determine the parties’ intent regarding the ARA allocation and found the contract to be unambiguous, resulting in the entire amount of the ARA being assigned to the subordinate interest. As a result, control shifted to the plaintiff.
Similarly, in the 2019 case, In re Trusts Established Under the Pooling & Servicing Agreements, the Southern District of New York court analyzed the text of the Pooling and Servicing Agreement (PSA) and how the voting rights were calculated. The PSA required that certificateholders holding 25% of the voting rights supported bringing an action. Whether a party reached that threshold to bring a cross-claim depended, in part, on the calculation of the ARA.
Attainment of the voting rights threshold was based on a fraction where the numerator was the balance of the relevant class of certificates and the denominator was the overall balance of all certificates. The question raised was whether both numerator and denominator balances should be adjusted by the ARA. The court concluded that the unambiguous language of the contract intended that only the numerator should be adjusted by the ARA.
Based on the ARA balance reduction so calculated, one of the certificateholders did not have the required 25% voting rights to bring a cross-claim.
In contrast, in the 2014 case, LNR Partners, LLC v. C-III Asset Mgmt., the Court of Chancery in Delaware denied the motion for summary judgment because the PSA there was ambiguous as to how the ARA would impact voting rights.
The dispute was between servicers regarding who had the proper authority to be the special servicer. Under the PSA, the controlling class with a certain percentage of voting rights could replace or designate the special servicer.
Plaintiff LNR Partners’ affiliate obtained ownership in the controlling class and attempted to replace C-III as the special servicer with the plaintiff. In response, C-III argued even if the affiliate had a majority interest in the controlling class, it did not meet the requisite voting rights percentage after taking into account the ARA calculation.
If C-III was correct, the affiliate would not be able to vote to designate a new servicer and replace it. The court found the contractual interpretations from both parties on the ARA and voting rights to be plausible. Therefore, the contract was ambiguous and could not be determined on a motion for summary judgment.
Conclusion
Regulation and litigation will likely shape the landscape for commercial real estate in the coming years. Whether it’s a greener more modernized future with more housing in city centers depends on the resilience of the market, the commitment of local officials to foster change through regulation and the efficacy and availability of creative financing.
Joseph Cioffi is a regular contributing columnist on consumer and commercial financing for Reuters Legal News and Westlaw Today.
Joseph Cioffi is a partner at Davis+Gilbert LLP, where he is chair of the insolvency and finance practice. He has transactional, insolvency and litigation experience in sectors marked by significant credit and legal risks, such as, subprime lending and emerging industries. He can be reached at jcioffi@dglaw.com. Nicole Serratore is an attorney at the firm in the insolvency and finance practice and can be reached at nserratore@dglaw.com.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
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.
Landlord’s obligations
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.
Tenant’s obligations
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.
September 20, 2023 – Recent federal regulatory directives are likely to impact loan workouts. We explain more below.
The commercial real estate sector is navigating through a particularly turbulent phase, grappling with factors such as rising interest rates and shifting workforce dynamics. These market forces increase the likelihood that commercial real estate lenders and borrowers will face significant issues in meeting the debt service terms.
With the sharp lessons learned from the Great Financial Crisis of 2008-09 still fresh, commercial real estate lenders and borrowers should anticipate an uptick in exploring loan workouts as an alternative remedy to the draconian remedy of foreclosing on real estate collateral. The adept handling of these workouts is not only pivotal to the mutual success of borrowers and lenders but also bears weight on the overall health of the economy.
The initial phases of a loan workout demand proactive planning and a collaborative approach among all parties, including lenders, servicers, borrowers, guarantors, and sponsors.
For lenders, this situation signifies the urgent need to exercise agility, ensuring that their strategies are attuned to the market’s changing rhythms. Flexibility in renegotiating terms, extending maturity dates, or even reducing principal amounts might become more common as they attempt to strike a balance between recovering funds and supporting borrower customers during these tumultuous times.
Adding to the complexity for lenders is the need to avoid foreclosing too often and then addressing the subsequent regulatory headache of having too much REO (real estate owned by the lender) on the books.
Borrowers on the other hand would benefit from proactive communication with lenders and other affected parties, prophylactically seeking modifications of loan terms or even exploring options such as offering, in the worst situations, a deed-in-lieu of foreclosure to navigate through potential financial pitfalls. While the nuances of every loan and situation are unique, these fundamental strategies remain consistent.
The path to managing loan workouts is fraught with challenges. Given the volatility of the commercial real estate market and the various factors influencing values, arriving at an accurate valuation during an economic downturn is often challenging. As the value of the real estate collateral fluctuates, instances will occur where the outstanding loan dwarfs the current value of the commercial property, whether that is based on the intrinsic value of the real property or the projected income stream from the rents.
Impact of updated banking policy
Navigating the intricate path of managing loan workouts is heavily influenced by federal policy. On June 29, 2023, the four major federal banking regulators (the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Board of Governors of the Federal Reserve System) jointly released a final policy statement concerning prudent CRE loan accommodations and workouts (“The Updated Policy”).
The Updated Policy, which supersedes the guidance issued in 2009 in the wake of the Great Financial Crisis, outlines a comprehensive framework that covered financial institutions must follow in their handling of commercial real estate loan accommodations and workouts. Of course, the Updated Policy continues to emphasize specific risk management, loan classification, regulatory reporting, and accounting considerations.
Critically, it reaffirms that regulators will not penalize banks that have (1) implemented “prudent” CRE loan accommodation and workout arrangements even where modified loans result in adverse classification, and (2) modified loans on reasonable terms with borrowers who have the ability to repay their debts solely because the underlying collateral has declined to values less than the outstanding loan balance.
In a depressed commercial real estate market, the updated policy represents critical statements for both borrowers and their lenders, and provides a measure of good faith discretion in decision making. That said, the Updated Policy makes clear that bank examiners are free (as just one example) to adjust the estimated value of the collateral for credit analysis and classification purposes where underlying facts or assumptions presented by the bank are deemed “irrelevant or inappropriate for the valuation,” and thus the underlying facts (including property values) must support any determination.
More good news is that regulators have crafted a newly added section focusing on short-term loan accommodations for borrowers who are, or may in the near future be, unable to meet their contractual payment obligations during periods of financial stress, allowing far greater flexibility in addressing financial challenges before necessitating more intricate long-term solutions.
One important side note: Borrowers and their advisors should take note of accounting updates that impact how banks treat specific workout situations. As workout professionals well know, the Financial Accounting Standards Board made material changes in 2016 to GAAP affecting how banks determine current expected credit losses (CECL). Critically, the most recent supervisory guidance now formally incorporates those changes, and these changes are a must read for those negotiating modifications in a way that minimizes the impact on the lender in estimating loan losses.
Commercial real estate loan workout strategies
Leverage has changed since the last downturn. Previously, lenders wielded the threat of foreclosure to coerce borrowers into loan modifications or forbearance agreements that favored the lenders. If borrowers balked, then the lenders foreclosed and booked the collateral as REO. That approach became problematic during the Great Financial Crisis. The volume of distressed loans was too great and lenders simply could not foreclose on all commercial real estate loans.
What we’re seeing now is a more nuanced playbook. Borrowers are less cowed by foreclosure. In this era of plummeting occupancy rates and property values, some distressed borrowers made the decision to punt. A search of recent news articles shows several instances where prominent borrowers have just walked away from their loans and given the keys to the properties to the lender. Smart lenders are less draconian in their approach, looking to buoy the borrower in hopes of better future outcomes.
Those taking on the task of commercial real estate loan workouts should be sure to consider the below strategies:
•Enhanced communication and collaboration: Effective communication and collaboration are crucial. Lenders, borrowers, and regulators should engage in open and transparent dialogue involving legal, financial, and real estate experts. This collaborative approach will lead to more feasible solutions through shared insights. Effective communication enables parties to recognize the objectives, underlying motivations, and potential constraints of the other party.
•Data-driven decision-making: Technology (PropTech) and analytics can offer deep insights into property performance, market trends, and borrower financials. A data-driven approach can guide informed decisions during the workout process. Specifically, the use of data can help mitigate some of the challenges of arriving at an accurate valuation during an economic downturn by providing additional insights into the value potential of the asset.
•Flexible workout strategies: Recognize that a one-size-fits-all approach is rarely effective in loan workout scenarios. Customized strategies, designed to address the unique aspects of each case, are imperative. Depending on the circumstances, explore options such as loan modification, refinancing, and partial write-offs.
•Risk management and regulation: In the world of commercial real estate finance, risk is a constant factor. Adhering to regulatory guidelines and compliance is non-negotiable. Financial institutions must ensure strict adherence. Implementing risk assessment tools in advance can aid in evaluating potential outcomes, minimizing risk exposure, and confirming that proposed solutions align with regulatory requisites.
Conclusion
The domestic commercial real estate finance industry stands at a critical juncture. Its actions and decisions can significantly influence the trajectory of the broader economy. By maintaining appropriate strategies and an emphasis on forward-thinking policies, those within the industry will be well-equipped to efficiently handle commercial real estate finance loan workouts.
Ultimately, creative solutions and proactive management of commercial real estate finance loans not only bolster the health of the commercial real estate finance sector but also strengthen the broader economy, promoting strength and stability. Commercial real estate finance loan workouts are not a quick fix. They can be a long and complex process. However, with the right approach, they can be a successful way to resolve financial difficulties and avoid foreclosure.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
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.
Gateways
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.
Other provisions
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.
Conclusion
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.
Consolidating proceedings
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.
Evidence
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.
Time frame
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.
Parallel proceedings
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.
September 12, 2023 – In an absolute blockbuster defamation case, brought by Dominion Voting Systems against Fox News Network, the much-anticipated judicial day of reckoning for a media empire fizzled out like a dud. US Dominion, Inc. v. Fox News Network, LLC, 2021 WL 5984265, at *1 (Del. Super. Ct. Dec. 16, 2021), cert. denied, 2022 WL 100820 (Del. Super. Ct. Jan. 10, 2022), and appeal refused, 270 A.3d 273 (Del. 2022).
Through its complaint Dominion contended that: (i) Fox intentionally provided a platform for guests that Fox’s hosts knew would make false and defamatory statements of fact on the air; (ii) Fox, through Fox’s hosts, affirmed, endorsed, repeated, and agreed with those guests’ statements; and (iii) Fox republished those defamatory and false statements of fact on the air, Fox’s websites, Fox’s social media accounts, and Fox’s other digital platforms and subscription services. Dominion sought punitive and economic damages for defamation per se.
A settlement of gargantuan proportions was achieved with neither a damning public judgment (or vindication) nor a ground-shaking mea culpa to accompany the big check: merely a milquetoast statement in which the defendant kind of, sort of acknowledged wrongdoing, while agreeing to pay out $787.5 million on a claim for $1.6 billion. A statement released by Fox after settlement includes the following language. “We acknowledge the Court’s rulings finding certain claims about Dominion to be false.” (“Fox was resigned to a tough trial. Then, a secret mediator stepped in,” The Washington Post, April 19, 2023)
As a result of the parties’ having utilized this consensual offramp, we, the public, were deprived of the opportunity to observe the solemn process of justice work. We missed our chance to see artist renderings of and listen to reporting on the testimony of Rupert Murdoch, the powerful media mogul who controls Fox News, and fire-stoking TV celebrities, including Tucker Carlson.
Should we, the public, be enraged that we were left with only a hollow sense of satisfaction? Fox ultimately dug well into its deep pockets to pay to Dominion what perhaps was a transformative sum for the latter. Yet, defendant was proven to be no more liable than vindicated as we, the public, are forced to come to our own conclusions as to whether this was justice served or merely a smart business deal.
Yet, what we witnessed here was not a lack of justice within the courts: It was the parties’ monetization of the respective risks and rewards of permitting justice in the courts to be done. It is exactly the calculation that parties to commercial disputes, together with counsel, perform routinely when they engage in mediation.
The public following the news of the court proceedings was largely shocked by the drama of this last-minute settlement. Conversely, the outcome was not a surprise for those of us who work regularly with commercial mediation.
Fox, clearly, was looking down the barrel of a menacing weapon, knowing that a public trial would be ugly: Independent of potential monetary damages for which it might be held liable, it faced the specter of a public airing of its dirty laundry, which, by the tone of the constant drip of information that was finding its way to the public, would have been particularly embarrassing.
Dominion, on the other hand, was pursuing a court judgment of impressive proportions. Although it surely had a chance of winning the entire amount of the judgment that it sought, some US$1.6 billion, it could not bank on winning that amount and, even if it were to win 100% of what it claimed (or more), it surely could bank on Fox’s contesting the damages assessment, as well as liability, on appeal. This, consequently, would delay the payout date, if any, for years to come. Settling for roughly half of what it was seeking, Dominion put into perfectly proportional practice the saying “A bird in the hand is worth two in the bush.”
On the one hand, this was a perfect storm. A rather clearly aggrieved plaintiff with nothing to lose and everything to gain in trial facing off against a cash-laden defendant with everything to lose and nothing to gain were the trial to proceed. Yet, prior to the entry of the mediator, nobody would jump off the precipice. See “Report: Judge “Implored” Fox and Dominion to Settle, With a Vacationing Mediator Stepping in to Close the Deal,” Vanity Fair, April 20, 2023.
On the other hand, this was a typical commercial mediation: after months of reinforced confirmation bias, there comes a tipping point at which the parties take a long, hard look at the risks and rewards of the alternative to settlement (in this case, trial by jury) and agree that there is an alternative that better suits their interests.
One can imagine two factors that conspired to tip the scales in favor of settlement here.
First, as opposed to the parties’ situation a week earlier, this truly was the final opportunity to avoid the public airing of Fox’s alleged abundant dirty laundry. Theretofore, Fox had every incentive to dangle lower numbers under Dominion’s nose in hopes that the fragrance of a meal certain would prompt Dominion to pounce on a lesser sum. Dominion, in turn, knew that Fox’s incentive to settle would progressively deteriorate as the trial began, with Dominion assaulting Fox’s claims of “fair and balanced reporting,” suffering if not death, then serious annoyance by a thousand cuts.
Second, the highly capable and respected mediator Jerry Roscoe, was expertly situated to reconfigure the puzzle pieces, surely by contrasting, in convergent monetary terms, the costs of litigation with the benefits of settlement. (Roscoe works with the same mediation provider as the author, JAMS.)
And Roscoe surely utilized tested mediation practice, as mediators normally remind parties that costs-benefit calculation goes beyond financial measures to include issues of reputation and the very heavy toll that litigation can take on the psyche, work rhythm, and reputation of the parties. Parties must consider whether it is a good business decision to divert resources to litigation that might be allocated to core business development.
There is a classic paradigm that I often break out in detail in trainings that I give to prospective mediators and counsel in mediation. It contrasts the core divergence between externally adjudicated processes, litigation and arbitration, and mediation: a consensual process. Litigation and arbitration depend on application of the objective, factual record as seen by the judge, jury, or arbitrator(s) to a set of laws, often subject to substantial interpretation, that rarely are tailored precisely to the relevant relationship or dispute. These processes are, by definition, backward-looking and remedial.
Additionally, courts and arbitral bodies can err in their analysis. Litigation offers appeals processes to redress error at trial. Yet, appeals do not guarantee that justice be done: only that more than one court will get a crack at applying the already-determined facts to the law as they see it.
It is revelatory to consider that the attenuated nature of a seemingly endless series of court appeals is one of the best selling points for arbitration, a process that, in principle, offers no opportunity for appeal.
Mediation, on the other hand, acknowledges the facts of the dispute and damages suffered, yet redirects the process focus from backward-looking, rights-based to future-looking, interest-based. The mediator reminds the parties that victory in justice frequently is pyrrhic and the cost of achieving the same may be disproportionate to potential benefits.
Commercial mediation all too frequently gets a bad rap. Many litigators blithely declare that mediation does not work, stating that it is appropriate for divorce proceedings, where emotions are at the forefront, rather than in the business-focused realm of facts, figures, and objective adherence to the rules of the game, be they contract terms or legal standards.
To these and other doubters, I proclaim that they are half right: mediation is suitable for divorce proceedings and can address emotions. Yet, that does not make mediation unsuitable for commercial disputes. In fact, the very malleability that renders mediation appropriate for divorce proceedings presages its effective applicability to business disputes; it liberates the parties from the constraint of an externally referenced, determinative system prone to mistake, redirecting them to an internally driven process that elevates their business interests above all.
This allows mediation to be an exercise in resolving disputes by practical, party-driven means rather than by often inadequate, externally imposed rules.
Voluminous testimonies indicate not merely that commercial mediation works, but that it works extraordinarily well. Anecdotal evidence reveals, consistently, that upwards of 70% of commercial disputes that go to mediation settle fully, either during the mediation session or shortly thereafter. Furthermore, for those cases that do not settle, significant progress can be made in narrowing the scope of contention and assisting counsel in clarifying pivotal issues for hearing.
So, we return to where we started: What do the parties to a dispute favor? Commercial mediators keep at the top of their agenda precisely the same principles that surely were front and center in the parties’ minds in the Dominion v. Fox suit: righteous battle versus monetary resolution, uncertainty versus certainty, and the value of time versus the time value of money.
At the end of the day, Dominion and Fox chose the practical solution. Fox assessed the monetary value of avoiding the potential of forever sporting the dreaded scarlet letter (“D” for Defamation), while Dominion took a handsome bird in the hand.
This outcome was to have been expected between a mogul-controlled media empire and a private equity–owned operating company. Each responded to what it knew best: risk management, the value of money, and the time value of money. They, to the chagrin of much of the public, sacrificed a moment of justice for a good business decision, something which happens every day in hundreds, if not thousands, of commercial mediations throughout the world.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
