Real Estate Quarterly – Flash Back 2017 and Flash Forward 2018
This quarterly newsletter aims to keep you informed about the main legal and tax items of the past and coming year in relation to your business.
We hope this will be useful to you.
Best wishes for 2018 and we will be happy to welcome you at our annual Real Estate seminars or to meet you at MIPIM.
Download your own copy in PDF format, or view the document below.
Real Estate Quarterly – Flash Back on 2016 and Flash Forward to 2017
This quarterly newsletter aims to keep you informed about the main legal and tax items of the past and coming year in relation to your business and to provide you with the detail of our coming seminars.
We hope this will be useful to you.
Best wishes for 2017 and we will be happy to welcome you at our annual Real Estate seminars or to meet you at MIPIM.
Download your own copy in PDF format, or view the document below.
Real Estate Quarterly – Q3 2016
Click here to read the Real Estate Quarterly Q3 or view the document below.
Real Estate Quarterly – Lease reform initiatives in the Flemish Region
The special law of 6 January 2014 concerning the 6th State Reform, which entered into force on 1 July 2014, transferred the legislative competences regarding commercial lease, residential lease and agricultural lease to the Regions. Pursuant to this transfer, commercial lease, residential lease and agricultural lease have become regional matters. However, until the adoption of a specific regional regulation occurs, current federal tenancy law continues to apply. The Flemish Region has already taken two initiatives to reform the existing commercial lease regime.
New Decree on short-term retail leasing. On 8 June 2016, the Flemish Parliament adopted a new Decree on short-term retail leasing. The Decree reflects an economic reality: many (young) entrepreneurs want to make use of empty premises to test the viability of a retail concept before making large investments (e.g. pop-up stores).
Practice however shows that owners of vacant commercial premises are often unwilling to rent their premises to entrepreneurs for a short period. This reluctance is mainly due to their fear that the short-term lease will be requalified as a commercial lease, which is subject to the mandatory provisions of the Commercial Lease Act. These provisions include a minimum term of 9 years and the tenant’s right to request 3 renewals of 9 years each. Landlords often do not want such a pro-tenant lease regime, while (young) entrepreneurs do not want to conclude agreements for 9 years. Having this in mind, the new Decree proposes an alternative to a commercial lease.
Generally speaking, the Decree applies on (i) leases of (parts of) immovable premises, (ii) which are leased for the operation of a retail or craftsmen activity, (iii) with direct contact between the tenant and the public and (iv) which are concluded for a term which is equal to or less than 1 year (i.e. a short-term lease). The Decree contains, among others, the following provisions:
- the short-term lease automatically ends on its expiry date; the tenant is not entitled to renew the short-term lease. The short-term lease agreement can however be extended under the same conditions if the parties agree so provided that the total duration may not be more than 1 year. Failing this, the short-term lease agreement is deemed to be concluded for 9 years, starting from the date on which the short-term lease initially entered into force;
- assignment of the short-term lease and sublease are prohibited;
- the tenant can terminate the short-term lease at any time, by giving one month’s notice by means of registered post or by bailiff’s writ;
- the tenant is entitled to carry out works that are useful for its business provided that (i) the cost of the works does not exceed the annual rent, (ii) the works do not affect the safety of the leased property, its esthetical value or its health aspects and (iii) the tenant informs the landlord before the start of the works, unless otherwise agreed in writing;
- the parties can terminate the short-term lease agreement before its expiration date by mutual consent in writing.
Real Estate Quarterly – Operating permits for commercial establishments: update in Flanders
In Flanders, the federal Ikea law is still in force, as since the 6th State Reform and contrary to the other Regions, the Flemish Region has not yet adopted a new regulation. On 11 May 2016, a draft decree on general regulation of commercial establishments has been submitted to the Flemish Parliament, holding new rules with regards to the operating permits in the Flemish Region.
The draft decree incorporates the new rules into the existing environmental permit regulation, entering into force early 2017. The provisions applicable to the operating permits should be effective one year later, i.e. early 2018.
The main aspects of the draft decree are as follows:
- The procedures have been simplified: a project that currently requires several permits subject to separate procedures, will only be subject to one procedure and one permit covering all planning, environmental and operating aspects.
- Some main concepts of the current legislation, i.e. net retail surface and substantial change have been specified, leaving less room to interpretation.The net retail surface now always includes the entrance hall, and not only when it is used for disposal or sale of goods as provided by the Ikea law.
Where the federal legislation requires an operating permit in case of substantial change in the nature of the commercial activity, the new draft decree refers to substantial changes in the categories of commercial activities. Four different categories have been defined : (i) sale of food; (ii) sale of personal equipment (i.a. clothes, shoes, leather goods, cosmetics and jewelry); (iii) sale of plants, flowers, agricultural and horticultural goods; and (iv) sale of other products. A modification where one of these activities is being started or substantially moves from one category to another requires a permit. The change of category is seen as substantial if it exceeds the authorised number of square meters of net retail surface with at least one of these surfaces:
– with 10% of the total authorised net retail surface;
– with 300 m².
- A specific regime for pop-up shops, intended to be limited in duration, has been allowed.
- The local authorities are entitled to implement their own binding general policy on commercial establishments reflecting their personal vision. They will be allowed to appoint core shopping zones with strong commercial incentives and specifically define, by area, the distribution key of the goods offered for sale. Local authorities could also enter into (private) agreements with property developers or other retail operators but without any guarantee for the effective granting of the permit.
Real Estate Quarterly – Existing split structures: end of the story (?)
Split structures between related parties are not allowed anymore since the entry-into-force of the (revised) general anti-abuse rule. For existing split structures, the question of their exit remains debated: share deal on both the leasehold and the freehold companies, share deal on the leasehold company and asset deal on the freehold (with a company other than the leasehold company as purchaser), asset deal with or without reunification of the full ownership. Each scenario shall depend on the economics of the deal and on a case-by-case analysis.
From a tax standpoint, the scenario of the asset deal with reunification of the full ownership in the hands of a third party is (was ?) the most debated.
It appeared quite rapidly, at least at Brussels and Walloon regional levels for which the Ruling Commission remains competent, that the (former) commitment not to reunite unless transfer taxes at a rate of 12.50% are paid on the value in full ownership was not supported by legal provisions, and that such reunification in the hands of a third party should be allowed subject to (i) 2% transfer taxes on the transfer of the leasehold and (ii) 12.50% transfer taxes on the sale of the freehold.
Then raised the question of the transfer tax treatment applicable to the works performed by the leaseholder. The answer is to be found in the legal analysis of the concepts of long-term lease right and property rights.
- During the term of its rights, the leaseholder can execute any works it considers necessary in the property, subject to its legal obligation to maintain the value of the property. The freeholder is only subject to a passive obligation to let benefit of the property until termination of the long-term lease right.
- Upon termination of the long-term lease right, the full ownership over the property, incl. any alterations, refurbishments, renovations, revert automatically to the freeholder without any indemnification being due to leaseholder. In other words, these alterations, refurbishments, renovations are, until termination of the long-term lease right, ownership of the leaseholder. Indeed, the long-term lease right includes an accessory right to build, according to which the leaseholder is the rightful owner of what it built on the object of this right to build.
- The aforementioned rule in terms of property rights suffer however one exception, for those works that immediately incorporate the asset and cannot be removed. These works cannot be subject to a separate or split ownership, and as a consequence the property rights accrue immediately to the freeholder, without having to wait until the termination of the long-term lease right.
Applied to transfer taxes, it gives the following regime:
- Leaseholder benefits from a long-term lease right on the ground and has built a building. The leaseholder is the rightful owner of the building until termination of the long-term lease right. The transfer of the long-term lease right on the ground is subject to 2% transfer taxes and the correlative transfer of the full ownership over the building is subject to 10 or 12.50% transfer taxes.
- Leaseholder benefits from a long-term lease right on the ground and the building, and it has performed certain works within the building. For those works that do not incorporate immediately the asset and can be removed, the leaseholder is the rightful owner until termination of the long-term lease right. The transfer of the long-term lease right (and of those works that have incorporated immediately the asset and cannot be removed) is subject to 2% and the correlative transfer of the full ownership over those works that can be removed is subject to 10 or 12.50% transfer taxes.
The above is, in our view, a general guidance but remains subject to a case-by-case analysis of the contractual provisions of the long-term lease right, of the type of works concerned and of the VAT status of the leaseholder and these works. Important to note: transfer taxes on the sale of the freehold are assessed on the higher of the agreed value or the market value. It is therefore highly recommend to have an independent appraisal report confirming the allocation of values between the leasehold and the freehold.
Real Estate Quarterly – Brexit – and now?
UK Referendum closed with the decision to leave the EU. UK must now notify the European Council of its intention to withdraw from the Union, and the negotiations on the exit modalities will then start. Important to note: until the end of these negotiations or the 2-year period (subject to extension decided unanimously) as from the UK formal notice, UK is still a Member State and all EU legislations remain applicable.
The results of the negotiations between EU and UK are at this stage unpredictable. However, from a legal and tax standpoint, real estate investors and managers should pay attention to the following items and monitor carefully any progress of the negotiations in these fields.
Equity and debt financing of local investments. In accordance with the provisions of the Parent-Subsidiary Directive resp. the Interest-Royalty Directive, and the conditions set forth by these directives, dividends distributed from and interest paid by local property companies to UK parent companies benefit from a withholding tax exemption. Depending on the exit modalities, such withholding tax exemption might not be available anymore.
However, for local property companies established in Belgium, the unavailability of the Parent-Subsidiary Directive should not cause any new tax leakage since Belgian domestic law as extended the scope of application to all treaty countries, incl. therefore UK irrespective of its EU membership. The same is true regarding the unavailability of the Interest-Royalty Directive since the entry-into-force on 1 January 2013 of the Protocol to the Belgium-UK tax treaty, which provides for a large withholding tax exemption on cross-border interest.
Restructuring of real estate portfolio. Under the conditions of the Merger Directive, restructurings can be implemented in tax neutrality, i.e. without taxation of the latent gain. Depending on the exit modalities, the benefit of the Merger Directive could not be available anymore in a scenario where a local property company would be absorbed by a UK parent company. In this respect, restructuring scenario might be reviewed and anticipated.
Contractual clauses. Many commercial agreements (e.g. financing and hedging agreements, management agreements) provide for English law as governing law and English courts as competent courts, sometimes even if none of the parties is linked to UK. References to EU concepts or legislations (e.g. EU territory, EU insolvency regulation) are frequent as well in those agreements.
With respect to governing law clauses, the principle laid down by the Rome I and Rome II Regulations is the respect of parties’ autonomy on the choice of law, subject to a few exceptions. Although UK would exit EU and not be bound anymore by Rome I and Rome II Regulations, Member State Courts should still enforce the parties’ choice if it is English law. Depending on the exit modalities, the key question is whether parties will still accept to submit their commercial agreements to English law knowing that the latter might less be influenced by EU law.
The Recast Brussels Regulation deals with jurisdiction clauses, and provides for the respect of parties’ autonomy in relation to the choice of forum, the recognition and enforcement of judgments rendered in other Member States, subject to a few exceptions. Depending on the exit modalities, having UK leaving this harmonised (at least in terms of recognition and enforcement) jurisdictional system might lead to increased uncertainties in case of litigation and need for local law advice regarding enforcement risk of a UK judgment.
Asset and fund managers. With the banking industry, the fund industry is likely the one to be most impacted, whether on short term due to the uncertainty created or on long term subject to the exit modalities. The obvious issue is the “passporting” allowing an AIF manager recognised in a Member State to manage AIFs established in other Member States. Anticipating on the possible unavailability of this “passporting”, one might consider duplicating existing structures to still be in a position to market and manage funds EU-wide. In this respect, the Belgian real estate institutional funds might become an interesting alternative for real estate investments in continental Europe. The issue lies also in international mobility of employees, for whom working in the UK resp. in EU could be more difficult post exit, depending on exit modalities, the future of the remuneration policy under the AIFMD and the taxation scheme of managers.
At this stage, contingency planning and review of contractual clauses, which might lead to potential issues, can be recommended, bearing in mind that there is still a long path to exit. We will follow the EU-UK negotiations in this respect and keep you updated.
Real Estate Quarterly – Q1& Q2 2016
Click here to read the Real Estate Quarterly – Q1 & Q2 2016