UK: Legal Update 2013 Part 2: Key Points And Top Tips

Last Updated: 12 December 2013
Article by Amanda Howard

Summary and implications

Our annual legal seminar highlighted new legal topics affecting the funds and real estate sectors. This is part 2 of a two-part series dealing with the topics covered in our seminar.

Part 2 – Real estate and limited partnerships

Legal and regulatory round-up – funds and real estate

  • Rights of light – the current law and the proposed changes;
  • Limited partner claims; and
  • LLPs as general partners.

This two-part autumn briefing sets out the key legal messages from this seminar, and some practical action for your business to consider.

We would be happy to provide you with further information on any of the topics covered, or to come and talk to you in more detail about the actions for your organisation.

Click here for the first part of this briefing, covering the following Regulation and Tax topics:

  • Alternative Investment Fund Managers Directive (AIFMD) – key developments and practical tips;
  • Relaxed US marketing rules for private placements; and
  • Tax – AIFMD and tax residency, FATCA and its effect on real estate funds and an update on tax transparent funds for real estate.


The Law Commission's recommendations for reform

On 18 February this year, the Law Commission made recommendations for reforming the law on rights of light, proposing the following changes:

  • The abolition of prescription as a way of acquiring a right of light in the future. Rights of light which have already been acquired would be unaffected, but it would not be possible to acquire new rights of light by 20 years' enjoyment.
  • A statutory test setting out the criteria the court should take into account when deciding whether to award damages for a breach of a right of light, instead of an injunction requiring a developer to scale back a building which infringes that right.
  • A statutory notice procedure for developers, requiring someone with the benefit of a right of light to state within four months whether they would seek an injunction to protect their light. That person would have a further four months to issue court proceedings to protect the right.
  • The Lands Chamber would have the power to extinguish rights of light which are obsolete or have no practical benefit.

The Law Commission also sought views on additional areas for change. For example, reform of the current law on damages for infringing a right of light. Damages are currently based on what "feels right", which is usually payment of a share of the developer's profits to the neighbour.

The impact of rights of light on development

Developers are concerned that those with a right of light can exercise a significant and disproportionate degree of control over what can be done on neighbouring land; often demanding premiums which bear no resemblance to their actual loss, in return for agreeing to release rights of light.

Are rights of light stifling development?

Developers have been concerned for some time about rights of light issues stifling development. This was highlighted recently in HXRUK (CHC) Ltd v Heaney where the High Court ordered a developer to cut back a completed development which infringed a right of light to a neighbouring building.

The effect of the Law Commission's proposals

Even if the Law Commission's recommendations are enacted, will they have a significant impact on how rights of light are enforced? For example:

  • The abolition of the future acquisition of rights of light seems radical. However, as existing rights of light will be unaffected, buildings which already have a right of light will continue to be an issue for developers for generations to come.
  • The decision whether to grant an injunction to prevent development which would infringe a right of light is within the court's discretion, which makes it impossible to predict the outcome. The proposed statutory test is welcome, but arguably will not make the outcome any more predictable, as the court will still retain its wide discretion.
  • The statutory notice procedure has the potential to be most useful to developers as it forces a neighbour to issue proceedings to protect a right of light, rather than merely to threaten court action. The detail of how the procedure will work will be crucial. For example, if it is to be treated as a last resort as the Law Commission suggests, it will not help developers to add an eight-month delay to their development programme (or longer, if proceedings are issued).


Claims were initiated in December 2011 by a number of investors against the general partner (GP) and manager in Henderson PFI Secondary Fund II. The claims related to breach of mandate and misrepresentation over the way money raised for the fund was invested (and which subsequently resulted in significant losses). A hearing in November 2012 on preliminary issues generally found in favour of the fund.

Why not remove the GP and then sue?

  • Claims against the GP: Limited partners (LPs) can pursue claims on an individual basis against the GP under the limited partnership agreement (LPA). This does not amount to management of partnership business by the LPs.
  • Claims against the manager: "Special circumstances" must exist for LPs to bring a claim against a third party in the name of the limited partnership, for instance, an irreconcilable conflict of interest which means the GP cannot or will not institute proceedings itself on behalf of the limited partnership. However, conducting litigation constitutes "management" and therefore puts those LPs that pursue any claim in the shoes of the GP, and consequently with unlimited liability for all the debts and obligations of the limited partnership for the period of the claim.
  • No requirement to replace the GP: the court agreed with the investors, that there were persuasive commercial reasons why they did not have to exercise their contractual right under the LPA to remove the GP and appoint a substitute GP (who would then pursue an action on the limited partnership's behalf). Investors should still be able to seek redress where they choose not to exercise this right.

In the Henderson case the LPs argued that the investment solely in John Laing plc, a public listed company which specialised in projects arising out of PFI and other infrastructure projects, was outside the Fund's investment objective – investing in a portfolio consisting exclusively or principally of PFI concession companies. However, the judge disagreed with this and would not narrow the investment policy wording in the Fund LPA by importing concepts of proportionality from other ancillary documentation (the private placement memorandum). This reminds us of the importance of careful drafting and analysis of the investment objective in the principal fund documentation.

Why not remove the GP and then sue?

There may be valid commercial reasons not to do this, for example:

  • The limited partnership is loss-making. A replacement GP may be hard to find, and will want to be both substantially rewarded and to receive an indemnity for any latent potential exposure.
  • The new GP would want to assess the merits of the case, which may involve an application to the court.
  • The outgoing GP may be entitled to compensation, an additional partnership expense.
  • The investment structure is complex, partly controlled by the existing management group and it would be time-consuming and expensive for another to gain control.
  • The parties are otherwise content with the way the GP and/or manager are managing the fund and attempting to ameliorate the issues which gave rise to the claim.


Partnership accounts do not need to be filed at Companies House, either annually or on dissolution, if the general partner is a limited liability partnership (LLP). For this reason, general partners established as LLPs have been growing in popularity. It allows a business to keep private financial information it would prefer remained confidential.

Filing obligations for qualifying partnerships

For qualifying partnerships, unless an exemption applies, the UK GP has to:

  • prepare annual accounts and a report for the partnership, and arrange for an auditor's report;
  • append the partnership accounts and reports to its own annual accounts and reports and deliver them to Companies House; and
  • supply the names of the partners to anyone who requests them.

Which UK limited partnerships have to publish accounts?

UK limited partnerships with general partners that are either:

  • companies; or
  • Scottish partnerships with limited company members (or, for Scottish LPs, where the GP is a limited company),

are qualifying partnerships. They are treated as companies for the purpose of filing their accounts. The filing obligations are shown in the box opposite.

There are two relevant exemptions to filing:

  • Where the dormant and small company rules apply to the partnership, it can take advantage of less onerous accounting and reporting requirements and (unless required by the partners) dispense with the auditing requirement.
  • Where the partnership is dealt with on a consolidated basis with the general partner or its parent's accounts, then no separate partnership accounts need to be registered at Companies House.

LLPs as GPs – structuring issues

Some wider points to consider if thinking of using an LLP as a GP are as follows:

  • A GP LLP will not affect any other principal aspect of fund structuring. For instance, fund management services will still need to be provided by a regulated entity.
  • LLPs themselves are subject to statutory filing requirements in a way similar to companies, but will only need to reflect their partnership share in such accounts.
  • An LLP is tax transparent so that any profits made through acting as a GP will be taxed in the hands of the members of the LLP.
  • For property law reasons, the GP LLP may own two nominee companies to hold legal title in any real property.

Conversion or transfer to an LLP?

  • It is not possible to convert to an LLP from a company, a general partnership or a limited partnership.
  • Appointment of an LLP as a GP of an existing limited partnership is by way of transfer of GP interests.
  • Considerations on transfer:
    1. provisions in the limited partnership agreement, for instance, consents needed from the limited partners;
    2. the Limited Partnerships Act 1907; and
    3. possible taxes arising on the transfer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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