UK: Banking eBulletin, November 2009

Orignally published on 25th November 2009.

This edition of our Banking E-Bulletin is being issued at a time when economic, legal and other changes continue to affect banks, asset based lenders, and their customers. An example is the judgment in the English Supreme Court on 25 November 2009 in the case on unauthorised overdraft charges, where the banks were successful in their appeal.

Our work reflects the overall situation and we are dealing with a wide variety of situations for lenders and also corporate borrowers. We are also delighted to welcome Perry Noble who joined our firm recently as a Consultant from his role as Head of Finance at Freshfields.

We have recently won the MPF European Practice Management Best Use of Technology Award for our innovative on-line management product DMH Direct. The product has helped many of our large clients such as EDF Energy, Tesco and LV to manage their assignments more effectively. DMH Direct gives clients access to a secure, client-friendly window which links to the firm's case management system. Clients can track the progress of matters online, generate on-line management reports providing an overview of current transactions, and submit new instructions online.

Recent legislative developments include the implementation of the remaining provisions of the Companies Act 2006 on 1 October 2009 and the implementation of Payment Services Directive by the Payment Services Regulations on 1 November 2009.

Other developments occurred in the case of Re Bluebrook Limited which seems to be good news for senior lenders. US hedge funds providing investment in leveraged transactions in the UK received nothing when a group of senior lenders successfully applied for court sanction of a scheme of arrangement in August 2009. The senior lenders gave up some of their debt for equity in a new group company while the mezzanine hedge fund lenders were left empty-handed. It is possible that similar schemes of arrangement will be proposed for other borrowers.

Against a background of continued economic uncertainty this edition looks at the efficacy of retention of title clauses in contracts, the creation of shared equity schemes (which may prove useful for developers when selling plots), and the new Lending Code which came into force at the start of November 2009. I hope that you find them of interest.

Shared Equity Schemes - A Solution To A Developer's Balance Sheet?

By Lucy Hall

Shared equity in the UK is on the increase and seen by some as a useful way of getting on to the property ladder. It was the basis for the Government's 'Open Market HomeBuy' scheme which has now been scrapped. It is also the basis of the 'Government's HomeBuy Direct' scheme for buying new homes.

With shared equity, the buyer does not own the property in conjunction with any other party (unlike shared ownership) but instead takes out more than one loan for the property. A mortgage (usually from a bank or building society) and an 'equity loan' (often from the developer). The purchaser is the only person on the deeds. There is no co-owner. However, at a set future date or when the property is sold, the purchaser has to repay the loans and a proportion of any increase in equity of the property to the party making the 'equity loan'.

The Banking and Finance Group and the Real Estate Department of DMH Stallard LLP have acted for a property developer in the creation of its own shared equity scheme which has now been marketed on one of their sites.

The developer was willing to offer up to a specified percentage of the purchase price of the property as an 'equity loan'. The developer took a second charge over the property and the facility agreement provided for the repayment of the loan at the earliest of a set future date or upon the sale or transfer of the property. At such a future date, the developer is due to receive either the original sum lent to the purchaser or that percentage of the eventual resale price, depending on the circumstances.

Advice was provided to the developer about the potential Consumer Credit Act implications of providing such a loan. The facility was structured to ensure that the scheme fell within an exemption under the Act.

Such schemes may help buyers to enter the market as well as assisting developers with the sale of properties during the current economic climate.

BBA publishes update on new Lending Code

By Gwen Godfrey

On 30 October 2009, the British Bankers' Association (BBA) published a press release relating to the new Lending Code which came into force on 1 November 2009, the date on which the FSA assumed responsibility for regulating retail banking conduct of business.

The FSA is taking over from the Banking Code Standards Board (BCSB), which is relaunching as the Lending Standards Board (LSB). The LSB's website went live on 2 November 2009, and the BCSB's website has been closed.

In the past, the FSA has not made comprehensive rules governing the conduct of retail deposit taking business and has instead relied on the regime of voluntary self regulation operating under the Banking Code and the Business Banking Code (the Banking Codes), which the BCSB has been responsible for monitoring and enforcing.

The LSB will oversee the operation of a new Lending Code, which will set out the relationship between lenders and borrowers. In broad terms, the Lending Code replaces those elements of the Banking Code and Business Banking Code (Banking Codes) which relate to lending (that is, their credit and debit elements). It will cover good practice in relation to:

The other elements of the Banking Codes will be covered by the FSA's new regulatory regime.

Commenting on the Lending Code and the LSB, Robert Skinner, LSB Chief Executive, said: "The [LSB] will ensure that the new Lending Code strengthens the protection customers will have when borrowing. It will independently monitor and enforce the Code and take action where lenders fall short of the Code's standards."

Use it or Lose it: Use of Retention of Title Clauses in Sale of Goods Contracts

By Nick Mallett

In these uncertain economic times, sellers often find themselves concerned about receiving payment for goods sold. More and more businesses are suffering cash flow problems often as a result of their own customers becoming insolvent. Demanding payment up front is simply not a commercial reality for most businesses. Businesses can find themselves living in fear of one of their larger purchasers reneging on payment due to a lack of cash flow or insolvency. The knock-on effects of such an occurrence may be devastating to the seller.

One option a seller should consider to is the incorporation of a retention of title clause in the contract for sale. By including a retention of title clause, the seller would be proposing to retain ownership of the goods until it has received full payment. In this way the seller would obtain priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods because it is insolvent or for some other reason.

Drafting contractual retention of title clauses is a particularly technical area. There are a number of variations of the clause, each with its own advantages for different contractual relations. An "all monies clause", for example, allows the seller to reserve ownership of all goods supplied until the buyer has repaid the seller all monies owed, however incurred.

The retention of title clause must also be drafted to fit the commercial context. In particular, attention must be paid to the intentions of the buyer. It is also essential to consider whether the clause amounts to a registrable charge. If so, and no registration has taken place, the clause will be unenforceable against creditors of an insolvent company. It is therefore essential that any retention of title clause be drafted with full knowledge of the party's circumstances and market operations.

DMH Stallard LLP is a law firm that provides a commercial solution for its clients.

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.