1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern project finance transactions in your jurisdiction?

There are specific laws which apply in the event of the insolvency of a project company, known as the ‘project finance exceptions'. They are exemptions to the general regime of administration which is one of the standard ways of dealing with an insolvent company. When an administrator is appointed to control a company, its objective is to rescue the company or achieve the best outcome for its creditors as a whole. Where the project finance exceptions apply, the lenders to an insolvent project company may appoint an administrative receiver and block the appointment of an administrator, allowing them to prioritise their interests over other creditors and control the insolvency process to realise the value of their security. The project finance exceptions are limited in scope and normally apply only to larger projects with debt requirements of £50 million or more; but they provide a degree of comfort to lenders that would otherwise struggle with the risk profile of a non-recourse project finance structure.

1.2 Do any bilateral and/or multilateral international instruments have particular relevance for project finance transactions in your jurisdiction?

Project finance transactions frequently depend upon the procurement of equipment or materials from outside the United Kingdom. In managing the risks associated with procurement of equipment or materials from manufacturers or suppliers based abroad, the bankability of a project will depend upon the project company's ability to enforce its contractual rights against such counterparties in a timely and cost-effective way. One way of ensuring that rights can be enforced against suppliers in other countries is to incorporate arbitration provisions into their contracts. Although the seat of any arbitration may be in a neutral third country to ensure that the counterparty is protected from any perceptions of bias, the successful party to an arbitration will be able to enforce its award against the other party in its country of incorporation pursuant to the terms of the New York Convention. A number of countries are not signatories to the New York Convention, meaning that additional protections are likely to be required when contracting with counterparties incorporated in those countries.

1.3 Beyond normal governmental institutions, are there regulatory bodies that play a particular role in project finance in your jurisdiction? What powers do they have?

Project finance is widely used by the sponsors of projects in regulated industries such as energy generation. As such, a project company will be subject to the regulatory regime which is applicable to that industry. For example, a project company generating electricity from a grid-connected onshore wind farm will be regulated by the Gas and Electricity Markets Authority via the Office of Gas and Electricity Markets (Ofgem). Ofgem has the power to impose financial penalties and prosecute companies that commit certain offences. Ofgem is also responsible for administering schemes such as:

  • the Renewables Obligation, under which it is responsible for accrediting generating stations and issuing certificates; and
  • the Offtaker of Last Resort scheme, which enables eligible renewable energy generators to enter into a backstop power purchase agreement with a licence supplier if they are unable to enter into a power purchase agreement otherwise.

There are similarly regulators for telecoms (Ofcom), water services (Ofwat) and nuclear (Office for Nuclear Regulation), and others that are responsible for specific industries in which project financed projects may operate.

1.4 What is the government's general approach to project finance in your jurisdiction? Is PFI/PPP a preferred model in your jurisdiction?

Government policy in the United Kingdom has moved away from using PFI/PPP to provide infrastructure for public services in the areas of health, transport, education, prisons and housing. These areas were previously ones in which PFI/PPP were commonly used, but they have fallen out of fashion for various reasons and the UK government is now actively pushing private capital into consumer-funded projects, principally green energy and digital infrastructure. A number of models are favoured by sponsors, including:

  • traditional project finance from commercial banks;
  • private placements or project bonds issued to institutional investors; and
  • hybrid products combining the use of commercial bank debt and funding from non-bank lenders.

2 Project finance market

2.1 How mature is the project finance market in your jurisdiction?

The United Kingdom is a very mature project finance market with sophisticated sponsors, lenders and advisers that often lead the world in developing innovative structures. In addition, English law frequently governs many of the finance documents used to finance projects outside the United Kingdom. This combination of UK project finance experience and the use of English law to govern finance documents around the world has helped London to develop its pre-eminent reputation in the project finance sector.

2.2 On what types of project and in which industries is project finance typically utilised?

The UK government is actively pushing private capital into consumer-funded projects, principally green energy and digital infrastructure. As such, the principal areas for project finance in the United Kingdom are:

  • wind farms (principally offshore, but with onshore returning in importance);
  • solar photovoltaic;
  • battery energy storage;
  • energy from waste;
  • fibre networks; and
  • potentially hydrogen projects in future.

2.3 What significant project financings have commenced or concluded in your jurisdiction over the last 12 months?

The stand-out project was SSE Renewables and Equinor's Dogger Bank Phases 1 and 2, which reached financial close in Q4 2020. The total senior debt facilities are reportedly £4.8 billion, with the final lender group consisting of 29 banks and three export credit agencies.

There has also been some innovative project financing of battery storage projects, which historically have not been considered suitable for project finance due to their offtake arrangements and the lack of contracted revenues. However, Santander Bank and Still Waters Green Technology successfully project financed a battery storage project in late 2020, which was extended in Q1 2021.

3 Finance structures

3.1 What project financing structures are most commonly used in your jurisdiction?

The key structuring considerations for sponsors developing a project include:

  • maximisation of tax efficiency;
  • limitation of liability;
  • ease of realisation of profits; and
  • the ability to transfer ownership of a project at a later date.

Lenders will be keen to ensure that they have security over all of the assets and rights relating to a project. Commonly, a project company is incorporated, often with a holding company whose only function is to hold the shares in the project company and to act as a conduit for the provision of equity to the project. This structure allows sponsors to limit their liability in the event that a project fails. It is common for share capital to be nominal, with equity contributions effectively being made by way of shareholder loan(s). The use of a project company or holding company allows joint ventures between sponsor groups to be managed using shareholders' agreements. The use of a holding company facilitates the granting of share security over a project company to the project's lenders, while allowing the sponsor group more freedom at the level of the holding company. However, it is common for lenders to include contractual restrictions on a sponsor's disposal of its interest in a holding company, not least because they need to comply with regulatory ‘know your client' requirements.

3.2 What are the advantages and disadvantages of these different types of structures?

The advantages of using a holding company structure are that sponsors may have more flexibility to transfer portions of the equity interest in a project at the holding company level than they would have at the project company level, since the holding company's shares are outside the security ring fence which exists around the project company. Although lenders may include contractual restrictions on the proportion of a sponsor's interest that may be transferred without lender consent, it is common for some portion of a minority interest to be transferable subject only to notification and ‘know your client' approval from the lenders. If any change of control by the sponsor is unlikely, the additional administrative burden associated with having a holding company will likely be deemed not to be worthwhile.

3.3 What other factors should parties bear in mind when deciding on a project financing structure?

In addition to the key elements of tax, limitation of liability, distributions and change of control, there are some important considerations for project developers early in the process when developing a new project. Developers commonly begin the process of developing a project, securing property rights and planning consent before a project company is incorporated. The project may not ultimately be viable, so there is no point incurring potentially unnecessary expenditure by incorporating a project company until later in the development process. However, in order to develop a bankable project, land rights and all necessary consents will ultimately need to vest in the project company. The process of transferring contracts and permits from the developer to the project company may result in additional commercial negotiation if the right to do so is not hardwired into them from the start. It is important that developers plan for the steps needed to create a bankable project by including the right to transfer agreements to a project company and the obligation for counterparties to enter into lender direct agreements when requested to do so. This also applies to project-specific rights which may not be easily transferable, especially for projects that fall under the Nationally Significant Infrastructure Project regime.

4 Industry players and ownership requirements

4.1 Who are the key players in project financings in your jurisdiction? Do any restrictions apply in this regard (eg, foreign ownership)?

The areas which are currently seeing a lot of project finance activity in the United Kingdom are renewable energy projects and digital infrastructure. There is a broad range of developers of projects in both of these spaces, but the ultimate sponsors are commonly specialist asset managers, utility companies and institutional investors. Project finance is available from a large range of commercial bank lenders, both in the City of London where many foreign banks have UK branches and from regional UK banks.

4.2 What role does the state play in project financings in your jurisdiction?

The role of the state in most project financings is limited to matters of planning and regulatory compliance of the project company, since the United Kingdom no longer uses PFI/PPP as a means to procure infrastructure for public services. There are exceptions such as in relation to the negotiation of contracts for difference (CfDs), which are used to provide subsidies to projects which would otherwise not be economically viable, such as the Hinkley Point C nuclear power station. CfDs are also used to subsidise renewable energy projects where they are awarded on the basis of an auction which is administered by the Government's Department for Business, Energy & Industrial Strategy.

4.3 Does your jurisdiction have nationalisation or expropriation laws in place? If so, what are the implications in the project finance context?

There is always the possibility that a UK government might pass legislation to nationalise an industry and take projects into public ownership, and no government can bind a future government to prevent it from doing so. The 2017 Labour Party manifesto proposed to bring rail companies, energy companies and water companies into public ownership. Had it won the general election that year, there may have been a nationalisation process by which the government would have acquired the relevant companies in each sector that it wanted to nationalise. Historically, this has been done a number of times – notably between 1946 and 1951, when the Bank of England, hospitals, coal mines, electricity companies, railways, gas companies and iron and steel companies were all nationalised. In these cases, the owners of the companies were compensated by reference to the market value of their companies. There is a distinction to be drawn between the owners of UK companies that are British and those that are foreign. The United Kingdom has signed bilateral investment treaties (BITs) with over 100 other countries providing protection from illegal nationalisation and expropriation of foreign assets. As such, foreign owners or investors whose assets were nationalised would be entitled to fair compensation. British investors would not benefit from the same protection as investors from countries that had signed a BIT, but it would arguably be politically embarrassing for a UK government to pay foreign investors a higher level of compensation after nationalisation than British investors, especially when one considers that those investors include British pension funds.

5 Regulatory and documentary requirements

5.1 What regulatory approvals are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

Project developers need to obtain planning permission before they can start construction of a project. Planning permission is generally granted by a local planning authority and a fee is payable which is essentially calculated by reference to the size of the development. For a solar or wind farm application, the fee is generally calculated by reference to the site area of the equipment only and any associated development, such as access routes. For a wind turbine, the site area is based on the area of land within the sweep of the blades where the turbine rotates 360 degrees. Developments which fall into the Nationally Significant Infrastructure Projects regime obtain their planning consent through a development consent order. This can include energy, transport, water and waste projects.

5.2 What licences are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

Licencing requirements are industry specific. In the energy sector, the Gas Act 1986 (as amended) and the Electricity Act 1989 (as amended) prohibit a number of activities from being carried out without a licence or an exemption from the requirement for a licence. Licensable activities include:

  • conveying gas through pipes to any premises or through an interconnector;
  • shipping gas into a pipeline system; or
  • supplying gas to premises, transmission and distribution of electricity and the generation and supply of electricity to premises.

Historically, developers of wind and solar farms have relied on an exemption from the requirement for a generation licence contained in a class exemption for small-scale generators producing no more than 10 megawatts (MW) of electrical power from any one generating station, or 50MW in the case of a generating station with a declared net capacity of less than 100MW. Offshore projects may require a marine licence from the Marine Management Organisation, although this can form part of the development consent order.

5.3 What documentation is typically involved in a project financing in your jurisdiction?

The documentation for most project finance transactions can be separated into three categories:

  • Equity documents: These typically include:
    • a shareholders' agreement;
    • a shareholder loan agreement; and
    • documents required to evidence corporate authorisation;
  • Project documents: These typically include:
    • a project agreement/concession contract;
    • construction contracts (engineering, procurement and construction or multi-contract);
    • operation and maintenance contracts;
    • lease(s), including a crown estate lease for offshore wind projects;
    • an offtake/power purchase agreement;
    • grid connection agreements for power projects; and
    • a contract for difference to supplement the power purchase agreement and credit support documents relating to these agreements.
  • Finance documents: These typically include:
    • a loan facilities agreement or common terms agreement with separate loan facility agreements;
    • an accounts agreement;
    • lender direct agreements;
    • interest rate and foreign exchange hedging agreements;
    • an intercreditor deed;
    • multiple security documents; and
    • fee letters.

In addition to these contracts, there will generally be ancillary documents such as:

  • a legal due diligence report addressed to the lenders;
  • an insurance adviser's report and insurance contracts;
  • a technical adviser's report;
  • an audited financial model; and
  • legal opinions.

5.4 What registration or filing requirements apply for project financing documents to be valid and enforceable?

In most cases, the only documents required to be registered in relation to project financings in England and Wales are security documents, generally created for the benefit of the lenders. Details of the security created by a company must be filed at Companies House within 21 days of creation, together with a registration form. If the security is registered late or not at all, it will be void against a liquidator, administrator or creditor of the company. In addition to registering security with Companies House, security over land should be registered at the Land Registry (registered land) or Land Charges Department (unregistered land) in order to bind a future lender or purchaser. Failure to register security over land could affect the priority of the security but will not result in it becoming void in the way that failure to register security at Companies House would.

5.5 Is force majeure understood as a legal concept in your jurisdiction?

To the extent that a force majeure event renders performance under a contract impossible, through no fault of the parties, the English common law doctrine of frustration may in certain circumstances be invoked, resulting in the immediate termination of the frustrated contract. In a project finance context, the allocation of risk relating to force majeure is commonly dealt with by negotiated agreement between the project company and the entities it contracts with. Sponsors and lenders are broadly aligned in wishing to insulate the project company from the risk of immediate termination of a project document due to the occurrence of a force majeure event. It is therefore normal for performance to be suspended while the parties try to find a way to remedy the situation, up to a maximum period of time after which the contract may be terminated. Force majeure does not generally apply to payment obligations.

6 Security/guarantees

6.1 What types of security interests and guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)? In particular, is the concept of a security trustee recognised (and if not, how are guarantees or security taken for multiple lenders)?

English law permits the use of a security trustee and it is common in project finance transactions to appoint a security trustee to hold security for the benefit of a single lender or a group of lenders. Generally, a project company will grant a composite debenture in favour of its lenders containing a fixed and floating charge over all of its assets, including its bank accounts and a mortgage over land (described in the Law of Property Act 1925 as a "charge by deed expressed to be by way of legal mortgage"), and assignment of its contractual rights or some variation of the same. In addition, the project company's shareholder(s) will generally grant a charge over the project company's shares in favour of the lenders and assign or charge their rights under the shareholder loan agreement between themselves and the project company. Guarantees are frequently used to provide credit support and are often coupled with indemnities to reduce the risk of a guarantor avoiding liability on technical grounds under the guarantee.

6.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests?

Under English law, a mortgage requires a transfer of title and it is therefore more usual for security to be taken by way of a charge or legal assignment. A mortgage over land is exceptional because, due to the Law of Property Act 1925, there is usually no transfer of title; instead, a charge by way of legal mortgage is created. Charges and mortgages must be registered pursuant to the Companies Act 2006. This requirement also captures security assignments. Although registration may be argued to constitute constructive notice, it is in the beneficiary's best interest for a notice of charge to be served on the counterparties to charged or assigned contracts. Legislation also requires the registration of charges and mortgages over certain classes of asset (eg, land, ships and aircraft) in asset registers. A guarantee is a contractual agreement and there is no requirement for a guarantee to be embodied in a deed, but it is relatively common for parties to do so in order to avoid any arguments about the enforceability of the guarantee on the grounds of lack of consideration. There is no requirement to register a guarantee.

6.3 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Security is commonly taken over property – including land, intangibles such as shares and rights under a contract, and tangible property such a plant and equipment – by way of a fixed or floating charge.

6.4 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how? In particular what types of notice and control (if any) are required?

It is common for the borrower on a project financed transaction to grant a fixed charge over its bank accounts, but there is a risk that a fixed charge may be construed as a floating charge if the level of control over the accounts is such that the borrower can be said to have the ability to deal with the money in those accounts in the ordinary course of its business. The effect of a fixed charge being characterised as a floating charge is that the beneficiary of a floating charge has lower priority in the event of an insolvency than the beneficiary of a fixed charge. The claims of floating charge holders (which crystallise on insolvency) will rank behind those of fixed charged holders, administrators' remuneration and preferential creditors, but ahead of unsecured creditors.

6.5 Is it possible to take security over major licences (particularly in the extractive industry sector)?

Typically, lenders will require security over a concession agreement or licence to the extent required to give them an opportunity to rescue a project by replacing the sponsor, if necessary, through a work-out vehicle. However, where a project is of national significance, lenders may have to accept restrictions on the choice of replacement sponsor; and where the nature of the licence is such that it cannot be transferred without a lengthy process because it has been granted in the name of a specific entity though a statutory instrument, such as a development consent order, lenders may have to accept that their security comes from taking a charge over the shares of the project company rather than the licence a contractual right. As an additional safeguard, lenders to a project with a concession contract or licence commonly require the licensing authority to enter into a lender direct agreement under which they undertake not to terminate the licence until the lenders have had the opportunity to rectify any breach by the project company and step-in to the project.

6.6 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest or the taking of a guarantee?

No stamp duty is payable for registration of security. A nominal fee is payable for the registration of security at:

  • Companies House;
  • the Land Registry (for registered land); and
  • the Land Charges Department (for unregistered land).

6.7 What are the respective obligations and liabilities of the parties under security documents?

There is no standard form of security document. The key elements that they have in common include:

  • the details of the parties;
  • a description of the secured obligations;
  • identification of the thing over which security is being granted; and
  • details of the enforcement rights being granted to the beneficiary of the security.

Beyond this, there may be:

  • undertakings in relation to the treatment of the subject matter of the security;
  • negative pledges regarding the granting of further security;
  • further assurances regarding the need to take steps to ensure the validity of the security; and
  • in the case of a floating charge, details of the circumstances that will result in the crystallisation of the security.

6.8 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security or must enforcement action be pursued through the courts?

The purpose of security in a project finance context is as much defensive as to give the lenders the ability to take over a project company and its assets. By taking first ranking security, the lenders can frustrate the efforts of unsecured creditors that would otherwise seek to bring claims against the project company in a way that would harm the lenders' long-term prospects. Enforcement action may ultimately be required in some cases and the security documents in a project finance transaction will set out the lenders' remedies including:

  • appointing an administrator or administrative receiver (where permitted – see question 1.1);
  • taking possession of or selling the assets of the project company; or
  • exercising rights of set-off.

In relation to cash and financial instruments, including shares, the Financial Collateral Arrangements (No 2) Regulations 2003 permit the beneficiaries of security to enforce their security interests without needing the consent of an administrator or the permission of the court. More generally, the lenders' ability to appoint an administrator out of court, as qualifying floating charge holders, gives them the power to trigger an enforcement freeze which, subject to the provisions of the regulations, applies to all creditors.

A guarantee is a contractual right and will therefore be enforced as a contractual claim, subject to the provisions of the contract under which it is given.

6.9 What other considerations should be borne in mind when perfecting a security interest or taking the benefit of a guarantee in your jurisdiction?

It is important that lenders and their advisers observe the statutory time limits for registration of security, as failure to do so may result in the security being invalid. It is important to correctly identify the thing over which security is being taken, to avoid any risk of security being circumvented through misidentification of the thing it was intended to cover. It is also essential to review the lenders' security arrangements in the event of any material change to the financing of a project – for example, following an increase to the amount of a loan facility. This is because a significant change to the financing arrangements could result in the charges or guarantees being discharged if it is determined that increasing the secured obligations took them outside of the purview of the original security documents or guarantees. It is advised for the lenders to obtain confirmation of security or retake security in the event of any significant change to the secured obligations.

6.10 What other protections are available to a lender to safeguard its position in connection with security or guarantees?

Lenders typically include a substantial number of information covenants in a project finance facility agreement to ensure that they are kept informed of the performance of the projects they are lending to. This is necessary to ensure that they are made aware of any problems with the operation of a project as early as possible, allowing them to be consulted on rectification plans and any impact on the project's financial state. Lenders will commonly employ technical advisers to advise them of problems that may be revealed by analysis of technical data produced by the project's plant and equipment. By ensuring that lenders are kept aware of any problems on a project soon after they arise, the likelihood of them needing to enforce security is reduced because problems can be resolved before they grow to a critical size.

6.11 Are direct agreements with contractual counterparties well understood in your jurisdiction?

They are well understood by sponsors and lenders in the UK project finance industry and they generally contain the step-in rights which are a requirement of the project finance exceptions referred to in question 1.1.

7 Bankruptcy

7.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

As noted in question 6.8, once an application for an administration order is made or a notice of intention to appoint an administrator is filed, there is a moratorium against the enforcement of security against a company, other than security over financial collateral which falls within the provisions of the Financial Collateral Arrangements (No 2) Regulations 2003.

7.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

Under the Insolvency Act 1986, certain transactions entered into by a company before it became insolvent may be reviewed following the commencement of an insolvency process. The grounds for reviewing a transaction in insolvency are:

  • transaction at an undervalue;
  • preference towards a creditor;
  • extortionate credit transaction;
  • avoidance of a floating charge; or
  • transactions defrauding creditors.

If a transaction is successfully challenged, a court may overturn it and order the return of assets to the insolvent company.

8 Project contracts

8.1 Are project contracts in your jurisdiction typically governed by local law?

Yes, English law is generally used to govern the project contracts on projects in England, Wales and Northern Ireland. The project documents for projects in Scotland may be governed by English or Scots law, depending upon the parties' preference.

8.2 What remedies are available to a project company for breach of the project contract?

The remedies vary depending upon the contract, but commonly a breach gives rise to a claim for damages and, if the breach goes to the heart of the contract, a right to terminate the contract, subject to any lender direct agreements. Under construction contracts, there is commonly a right for the project company as the employer to claim liquidated damages at an agreed daily or weekly rate if the contractor is responsible for the late completion of construction work. There are also commonly performance damages under supply and construction contracts to compensate the project company in the event of a project's underperformance due to shortcomings in equipment design, manufacture or installation. Where deposit payments are made to equipment suppliers in advance of goods being delivered, the project company may benefit from a transfer of title to goods before they have been delivered to protect it from losing equipment that has been paid for but not delivered in the event of a supplier's insolvency.

8.3 Are liquidated damages provisions in project contracts enforceable?

Yes, liquidated damages provisions are generally enforceable under English law, but care should be taken when formulating liquidated damages provisions to reduce the risk of them being challenged on the grounds that:

  • they constitute an unlawful penalty and hence are unenforceable; or
  • they are void for uncertainty, which can happen when liquidated damages for partial or sectional completion are inconsistent with the contractual obligations elsewhere in a contract.

8.4 Are there any public policy considerations which need to be taken into account when assessing the enforceability of project contracts?

There are public policy considerations behind some of the principles of English law which may result in contractual provisions being unenforceable. A contractual provision may be unenforceable if it has the effect of unreasonably causing a restraint of trade – for example, by imposing an unreasonably restrictive non-compete covenant or exclusivity requirement. Likewise, a contractual obligation which requires an illegal act to take place will generally not be enforceable. In a project finance context, this could be an obligation which fails to take account of sanctions (both governmental and supranational). Some project finance lenders include an obligation for borrowers to comply with requirements known as the Equator Principles in their finance documents to help manage environmental and social risks.

9 Project risk

9.1 What risks typically arise in project financings in your jurisdiction and how are these best mitigated?

The key risks during the construction phase of a project are:

  • delays;
  • cost overruns;
  • sub-standard performance;
  • new technology risk; and
  • ground risk.

The mitigants for these risks include:

  • comprehensive due diligence by a technical adviser;
  • use of proven technology and an experienced contractor;
  • use of a turn-key contract;
  • risk allocation to insulate the project company from risk;
  • liquidated damages and bonus payments to incentivise the contractor;
  • staged payments; and
  • insurance.

Other key risks include:

  • interest rate risk, which may be hedged; and
  • key counterparty credit risk, especially for a long-term offtaker, which may be managed by including a ratings trigger and termination rights allowing for the replacement if their financial status deteriorates or credit support in the form of bonds or letters of credit and/or parent company guarantees.

Some risks – such as a change in law resulting in the removal of subsidy support – is harder to mitigate effectively and lenders will have to take a view on the likelihood of such an event taking place. The United Kingdom is historically not prone to retrospective removal of subsidies, although it has cut subsidies in relation to renewable energy generation on a prospective basis.

9.2 How significant is political risk in project financings in your jurisdiction? How is this best mitigated?

As noted in question 4.3, the United Kingdom has a history of nationalisation, but generally not without compensation at a market rate. By international standards, the United Kingdom is politically stable and the risk of expropriation of private property, war or revolution is low.

10 Insurance

10.1 What types of insurance arrangements are typically put in place for project financings in your jurisdiction?

During the construction phase of a project, the following insurances are generally required:

  • construction all risks insurance;
  • delay in start-up insurance;
  • third-party liability insurance;
  • directors' and officers' liability insurance; and
  • compulsory insurance such as vehicle insurance (if applicable).

During the operating phase of a project, the following insurances are generally required:

  • property all risks insurance;
  • business interruption insurance;
  • third-party and products liability insurance;
  • directors' and officers' liability insurance; and
  • compulsory insurance such as vehicle insurance (if applicable).

Lenders generally require to be co-insured under the construction all risks insurance, delay in start-up insurance, property all risks insurance, business interruption insurance and third-party and products liability insurance.

10.2 If local insurance is required, can local insurers assign offshore reinsurance contracts in your jurisdiction?

This is not applicable to the United Kingdom, as the question relates to the requirement in some emerging markets that insurances must be written locally by local insurers, which then need to reinsure in order to be able to meet a major claim.

10.3 What other forms of insurance feature in the project finance market in your jurisdiction?

Warranty and indemnity insurance is relatively commonplace in the UK M&A market. There are times when a project financing transaction runs parallel with the acquisition of a project company that lenders seek to introduce exceptions to the non-recourse project finance structure. If the sponsor, in its capacity as the buyer of a project company, successfully claims damages from the developer which sold them the project company under a sale and purchase agreement, those damage may be paid by the insurer that provided warranty and indemnity insurance. The project finance lender may argue that those insurance proceeds should be used to pre-pay the project company's loans because the damages represent compensation for the reduction in value of the project company and therefore their exposure to the project company as a borrower should be reduced by that amount. Sponsors may argue that this goes against the principle of non-recourse project finance, since the proceeds of the warranty and indemnity insurance are not paid to the project company, and there may be no connection between the damages payable to the sponsor under a sale and purchase agreement and the ability of the project company to manage the project.

11 Tax

11.1 What taxes, royalties and similar charges are levied in the project finance context in your jurisdiction?

There are no project finance specific taxes in England and Wales.

11.2 Are any exemptions or incentives available to encourage project finance in your jurisdiction?

Subsidies have historically been made available to support certain types of project, the economics of which would not otherwise have been sustainable e.g. for renewable power generation. Although these subsidies were not directly linked to the structure of a project they were well suited to project finance and it is likely that they were tailored at least in part to take account of the needs of sponsors and lenders who would be likely to use project finance.

11.3 What strategies might parties consider to mitigate their tax liabilities in the project finance context?

As with any kind of corporate endeavour there have been examples of sponsors and their advisers seeking to deploy aggressive tax schemes on project finance transactions. However, in our experience, lenders will be wary of funding projects which use such schemes both for reputational reasons and because of the risk associated with such schemes being successfully challenged by the UK's tax authorities.

12 Governing law and jurisdiction

12.1 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Finance documents on project finance transactions in England and Wales are almost always governed by English law.

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

If an English company enters into a contract that is governed by foreign law and is subject to foreign jurisdiction, the validity or enforceability of that contract will be a matter for the applicable foreign jurisdiction. Enforcing a foreign judgement against the English company is addressed in question 12.4. Security documents should generally be governed by the law of the jurisdiction in which the thing that is being secured is located, although there are complicating factors to be considered in relation to cross-border security.

EU Regulation 593/2008 (‘Rome I') continues to apply following the United Kingdom's departure from the European Union, with amendments, in the United Kingdom as retained EU law. Rome I provides that the applicable law of a contract is without prejudice to the overriding mandatory provisions of the law of the forum. ‘Overriding mandatory provisions' are defined as "provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as political, social and economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable".

So-called ‘asymmetric jurisdiction' clauses – under which the borrower is required to bring proceedings in only one jurisdiction, whereas the lenders have the choice to bring proceedings in other jurisdictions – are common in project finance agreements.

12.3 Are waivers of immunity enforceable in your jurisdiction?

Courts will give effect to the consensual waiver of immunity by a state. Where a state entity enters into a commercial arrangement, it will not generally be entitled to sovereign immunity. Under the State Immunity Act 1978, there are a number of exceptions to the general proposition that UK courts have no jurisdiction to adjudicate disputes against sovereign states, as follows:

  • The state has submitted to the jurisdiction of the UK courts;
  • The proceedings relate to a commercial transaction entered into by the state;
  • The proceedings relate to a contractual obligation on the state to be performed in the United Kingdom; and
  • The state has agreed to submit the dispute to arbitration.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

Judgments from courts in Scotland or Northern Ireland can be enforced in England and Wales pursuant to the Civil Jurisdiction and Judgments Act 1982.

Enforcement of judgments from the European Union, European Free Trade Association states, Mexico, Singapore and Montenegro will be governed by the Hague Convention on the Choice of Court Agreements, where applicable. Judgments from other countries, and judgments to which the Hague Convention does not apply may be enforceable in English courts pursuant to the Administration of Justice Act 1920, the Foreign Judgments (Reciprocal Enforcement) Act 1933 and the common law; but the judgment debtor may be required to commence fresh proceedings before an English court to enforce the foreign judgment as a debt.

The United Kingdom has been a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, since 1975. The New York Convention provides a regime for the enforcement of arbitral awards in contracting states. Over 157 states are signatories to the New York Convention.

In light of the uncertainty around the enforcement of foreign judgments, there are considerable advantages to the use of arbitration as a means of dispute resolution in cross-border commercial contracts.

13 Foreign investment

13.1 What taxes and other charges are levied on foreign investors in the project finance context in your jurisdiction?

This is not specifically applicable to the UK project finance industry.

13.2 Are any incentives available to encourage foreign investment in the project finance context?

This is not specifically applicable to the UK project finance industry.

13.3 What restrictions and requirements apply with regard to the remission of foreign exchange? Are local companies permitted to maintain offshore bank accounts?

The United Kingdom has no exchange controls. As a general rule, an English company can maintain an offshore bank account, provided that doing so is not otherwise prohibited by law, such as by UK sanctions regimes.

13.4 What restrictions and requirements apply with regard to the import of plant and machinery?

Generally, there are few restrictions on the import of plant and machinery, although some specific controls exist – for example, in relation to the import of used forestry equipment, to prevent contaminated soil from being introduced to the United Kingdom. Certain nuclear and chemical goods are subject to import controls. Importers also need to comply with the UK sanctions regimes.

13.5 What restrictions and requirements apply with regard to foreign workers and experts?

In the project finance context, project companies tend not to employ staff directly; instead, they contract with service providers and contractors to secure the services they require. However, if a project party wants to employ foreign staff, it can do so under the United Kingdom's points-based immigration system. There is a route for skilled workers from any country to be employed in the United Kingdom, provided that they have a job offer from an approved employer sponsor.

13.6 Is your jurisdiction party to bilateral investment and withholding tax treaties which might facilitate foreign investment?

According to the World Bank's International Centre for Settlement of Investment Disputes, the United Kingdom is a party to 117 bilateral investment treaties, of which 14 do not appear to have come into force. The United Kingdom has double tax treaties with more than 130 countries, which is one of the world's largest networks.

14 Environmental, social and ethical issues

14.1 What is the applicable environmental regime in your jurisdiction and what specific implications does this have for project financings?

The environmental regulator for England is the Environment Agency (EA), which was created under the Environment Act 1995. The EA regulates major industry and waste, treatment of contaminated land and water management, including flood risk. The EA has wide-ranging investigatory powers as an environmental regulator and enforcement powers, including:

  • the power to issue fines, stop notices, compliance notices and restoration notices; and
  • the power to prosecute environmental offences.

14.2 What is the applicable health and safety regime in your jurisdiction and what specific implications does this have for project financings?

The Health and Safety at Work etc Act 1974 sets out the principal legal framework for occupational health and safety in the United Kingdom. Health and safety infringements are primarily enforced through criminal law. The Health and Safety Executive is responsible for the enforcement of employers' obligations to provide a safe work environment.

Project companies do not tend to employ staff directly, so the obligations relating to health and safety will largely fall on the companies employed by the project company. However, the directors of a project company should ensure that all activities at the site of the project are carried out in accordance with health and safety laws, since there is the potential risk of individual liability for a company director where the company is found guilty of a health and safety offence.

14.3 What social and ethical issues should be borne in mind in the project finance context?

The environmental and corruption laws in the United Kingdom are of a sufficiently high standard that they do not generally need to be supplemented by placing additional obligations to comply with another set of standards in the project company's finance documents. The main exception to this occurs when the parties decide to structure their loan as a green loan or a sustainable loan, in which case they may wish to incorporate green loan principles or sustainability-linked loan principles as published by the Loan Market Association or its more recently published social loan principles.

15 Trends and predictions

15.1 How would you describe the current project finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

We expect most project finance activity in the United Kingdom to be in the energy space and the biggest legal issue to continue to be the phase-out of the London Inter-Bank Offered Rate at the end of 2021. Following the project financing of the first battery storage projects in the United Kingdom, we expect to see the number of such projects grow rapidly as contractual routes to market proliferate. The use of blockchain as a technology to facilitate the management of corporate power purchase agreements for renewable energy, especially in the context of a club deal, will be interesting to watch, as automation will inevitably increase efficiencies and improve competitiveness for market participants. The inclusion of onshore wind and solar in the 2021 contracts for difference (CfD) auction is anticipated to result in highly competitive pricing and may paradoxically stimulate the merchant market for both technologies depending upon how the CfD strike compared to wholesale power prices.

16 Tips and traps

16.1 What are your top tips for the smooth conclusion of a project financing in your jurisdiction and what potential sticking points would you highlight?

Project finance is a complex process with many moving parts, set against a backdrop of changing laws. It is essential for the smooth running of a project finance transaction that the bankability of a project be established, so far as possible, before a sponsor engages with lenders. If a flawed project is taken through a project finance process, the job of fixing it will be much more expensive and time consuming, with lenders and their advisers looking over a sponsor's shoulder, than it would have been otherwise. A bankability check can be carried out relatively quickly before lenders are selected; the results can be used to inform the sponsor as to what gaps there may be in the documentation for it to fix and the findings can be recycled into a due diligence report for the lenders to support the financing.

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.