Paul Chases assesses proposals for overdue reform of UK limited partnership law, which should be good news for real estate investors
UK limited partnerships are commonly used as real estate investment vehicles, but can be a challenge to operate because the law governing them has been in force for more than a century and has been in need of modernisation for some time.
The Law Commission published a report on partnership law back in 2003, but unfortunately draft legislation (intended to modernise the law in this area) was subsequently abandoned because of the responses from various stakeholders. In the 2013 Budget, the government announced that it would consult on technical changes to UK partnership legislation with a view to removing unnecessary legal complexity and administrative burdens.
As a follow-on, the Treasury has just published a consultation paper seeking views on certain proposed changes to the Limited Partnership Act 1907 (the principal legislation governing UK limited partnerships), with the consultation period set to end on 5 October 2015. The modernising amendments – set out in a draft legislative reform order published alongside the consultation paper – look like they may finally deal with the uncertainties and dated practices relating to UK limited partnership law.
But how would such changes directly benefit those investing in real estate assets through UK domiciled limited partnerships?
How could the modernised law apply?
If enacted, the amendments would apply to a new form of corporate vehicle currently named a “private fund limited partnership” (PFLP), which is a UK limited partnership that: (i) amounts to a “collective investment scheme” (as defined by the Financial Services and Markets Act legislation); and (ii) is subject to a written agreement (which English limited partnerships do not currently require).
It is proposed that both new and existing UK limited partnerships could qualify as PFLPs. An existing UK limited partnership could apply to Companies House to be redesignated as a PFLP within 12 months of the draft legislative reform order coming into force (provided the relevant requirements are met).
Amendment to limited partner arrangements
Under existing law, if a limited partner takes part in the management of a UK limited partnership business, it faces the potential loss of its limited liability and may become liable for partnership debts and obligations (during such period of participation).
This basic position will remain the same for a PFLP, but with the exception of a non-exhaustive “white list” of activities/decisions that a PFLP limited partner may be involved in without being treated as taking part in the management of the partnership business. Such activities/decisions include whether or not to:
- vary the partnership agreement;
- change the general nature of the partnership’s business;
- allow a particular investment by the partnership;
- incur, extend or discharge partnership debt;
- dispose of or acquire partnership assets;
- appoint or remove a partner;
- approve partnership accounts;
- approve the valuation of partnership assets;
- act as a director, member, employee, officer or shareholder of a general partner or another person appointed to manage or advise the partnership;
- approve the winding-up of the partnership; and
- approve a decision that involves an actual or potential conflict of interest that affects or relates to the partnership, its business, a partner in the partnership or a person appointed to manage or advise the partnership.
These far-reaching amendments would provide certainty about what a PFLP limited partner can and cannot do before losing its limited liability status. This could be particularly relevant for passive or semi-passive real estate investors who, historically, have not wanted to invest in (or, for tax reasons, are restricted from investing in) the general partner vehicle that acts for, and on behalf of, the UK limited partnership.
Under the proposed legislation, such investors could retain their economic interest in the UK limited partnership as a PFLP limited partner while having clear approval rights on material investment issues (which would, in turn, protect their investment) in the knowledge that their limited liability status will not be compromised.
Improving investor privacy
Under existing law, the general nature of a limited partnership’s business and the amount of capital contributed to the limited partnership by its partners is information that must be filed with the registrar at Companies House (and which is therefore publicly available).
It is proposed that there would be no requirement to disclose/file the general nature of a PFLP’s business or the capital contributed by PFLP partners to it (this information would therefore remain private).
Further, the arcane requirement under existing law to advertise (in the London Gazette or Edinburgh Gazette) the transfer of a limited partner’s interests to a third party or the change in status of a general partner to a limited partner would also
be removed.
The proposed changes do not just improve privacy for investors, but they also pave the way for the smoother completion of corporate real estate acquisitions, disposals, reorganisations and refinancings involving UK limited partnerships by removing administrative burdens and improving deal certainty (for example, parties will no longer be beholden to a notice appearing in the Gazette in order to complete the relevant transaction step).
Changes to capital contributions
Generally, UK limited partnerships are structured so that a limited partner will make a de minimis capital contribution (for example, 1% or less), with the remainder of its economic interest often being provided in the form of a loan advance from the limited partner to the UK limited partnership.
This split is used as, under existing law, a limited partner must make a capital contribution but is restricted from withdrawing it (during the life of the UK limited partnership). If a limited partner makes such a withdrawal, it becomes liable for the debts and obligations of the UK limited partnership up to the amount withdrawn.
It is proposed that a PFLP limited partner would no longer be required to make any capital contribution, which means a PFLP’s limited partner’s entire economic commitment to the PFLP could be advanced in the form of a loan.
Furthermore, if a PFLP limited partner does contribute capital to a PFLP but then subsequently withdraws it, such PFLP limited partner will no longer be liable for the debts and obligations of the PFLP up to the amount of any capital that it has withdrawn.
New exemptions from statutory duties
It is also proposed that a PFLP limited partner be exempt from certain duties which, under existing law, apply to all partners of a UK limited partnership.
PFLP limited partners would be exempt from the duty to disclose accounts/information to their fellow partners and from the restriction on competing with the PFLP.
PFLP limited partners would therefore be free to carry on business of the same nature that competes with that of the PFLP without requiring the consent of the other partners or having to account for the profits made in relation to the competing business.
These changes are designed to improve investor privacy and benefit the more passive real estate investor which may be economically interested in a number of real estate funds or corporate structures with a similar investment profile as the PFLP in question.
SUMMARY OF PRINCIPAL CHANGES PROPOSED
| Application of proposed changes? | They apply to certain existing and new UK limited partnerships |
| Name of the new English law partnership? | Private Fund Limited Partnership (PFLP) |
| How will the limited partner role change? | Limited partners will be able to get involved in the approval of key partnership matters without losing their limited liability status |
| What will happen to capital contributions? | Partners will no longer be required to make a minimum capital contribution and, if capital is contributed, it can be withdrawn without the relevant partner losing its limited liability status |
| How is partner privacy improved? | Partners will no longer be required to file certain information about the UK limited partnership (business undertaken, capital contributed, and so on) |
| What statutory duties would a partner now be exempt from? | The duty to disclose accounts/information to their fellow partners and the restriction on competing with the PFLP |
| Who will these changes be of interest to? | International investors, sovereign wealth funds, pension funds, public and private real estate companies, real estate private equity funds, banks and individuals involved in corporate real estate joint ventures, structured investments, acquisitions, disposals and reorganisations |
Read the details
Read the draft Legislative Reform (Limited Partnerships) Order 2015 >>
Paul Chases is a senior associate and head of corporate real estate at Herbert Smith Freehills LLP
