With the increasing frequency of foreign entities in UK property deals, Rhian Gyngell and Carolyn Milligan examine the issues involved in obtaining opinion letters
The appeal of UK real estate to foreign investors means that it is common for at least one of the parties to a transaction to be a foreign company. The foreign company may be the buyer, a special purpose vehicle set up to acquire the property, the seller, lender, or guarantor.
Whatever role the foreign company plays, provided it is to be a party to the contractual documentation, the counterparties are likely to require an opinion letter. This can have an impact on both timing and costs and, given the increasing desire to complete deals in shorter timescales, the issues relating to opinions should be identified and addressed from the outset.
Need for legal opinion
To determine whether a legal opinion is required, the starting point is to identify the foreign company’s country of incorporation. Often its foreign status will be obvious, but not always. For example, for transactions involving property in England and Wales, companies incorporated in Scotland and Northern Ireland are not foreign companies, but companies formed in the Channel Islands and the Isle of Man are.
The opinion letter has to be obtained from a law firm qualified to practice in the foreign company’s country of incorporation. Separate opinion letters will be needed in respect of each foreign party.
In very limited circumstances the counterparties may waive the requirement for an opinion letter. This may occur where, for example, the foreign company’s obligations are minor and perhaps there are severe time and cost restraints. However, any decision to proceed without an opinion letter should be based on legal advice.
Purpose of a legal opinion
At the risk of stating the obvious, English and Welsh lawyers can only advise on the law of England and Wales – crucially they cannot confirm whether the foreign company will be bound by the legal documentation. Therefore a foreign lawyer’s opinion is needed to verify various issues, including that:
- the foreign company validly exists as a matter of the law of the foreign jurisdiction and has the capacity to do what it is purporting to do in the transactional documentation;
- any judgment arising from the documentation obtained from a court in England and Wales is enforceable against the foreign company in its country of incorporation; and
- the foreign company has complied with local law in its country of incorporation and fulfilled any procedural requirements (including as to proper execution).
It is important to ensure that the opinion letter can be relied on by all the relevant parties to the transaction, including any funders. Where any document must be registered at the Land Registry, the opinion must also be capable of being relied on by the Land Registry.
Delay and fees
A key issue is that obtaining an opinion letter has the potential to delay the transaction considerably.
A lawyer qualified to practice in the relevant jurisdiction has to be instructed. Once instructed, the foreign lawyer must be given all the foreign company’s constitutional documents as well as all of the final form transactional documents. The lawyer then has to review all this documentation in order to prepare the draft opinion letter. There may be time zone differences and public holidays that affect the speed with which both the foreign and English lawyers are able to communicate and ultimately complete the task.
On receipt of the draft opinion letter, the counterparty’s lawyer then needs to approve it. The foreign lawyer and the English lawyer do not always have the same agenda: the foreign lawyer aims to minimise the reliance that can be placed on its opinion, whereas the English lawyer seeks the maximum protection.
The English lawyer must carefully check the content including, for example, the assumptions contained in the opinion. These can run to several pages and, critically, in some cases, the assumptions can virtually invalidate the purpose of the opinion. Therefore the term “letter” is something of a misnomer; in reality, opinion letters can be complex and lengthy documents that take time to produce, negotiate and agree.
A second key issue is the question of which party will bear the foreign lawyer’s legal fees. Given the considerable amount of work involved, opinion letters are not cheap and there may also be registration fees and other associated costs. There are no fixed rules as to which party meets these costs and it will be a matter for commercial negotiation. Again, to prevent delays, this should be addressed at the outset.
Pre-emptive steps
A simple but helpful solution is to include an express requirement for a legal opinion in the heads of terms. Right at the outset this focuses minds on the involvement of the foreign company and prompts the parties and their advisers to consider cost and time implications. A realistic timetable can then be set, not only to obtain the opinion letter, but also to allow time for the documents to be sent abroad for execution prior to completion.
By addressing these issues at the start, unforeseen delays and costs can be avoided. This will alert the parties and their advisers to the fact that various tax issues may arise. These can also delay completion and will be examined in a further article.
Important reminders for any UK real estate transaction involving a foreign company
- An opinion letter is likely to be required
- Always consider timing issues from the outset, including the extra time required:
- to negotiate and obtain an opinion letter;
- for document review by the foreign lawyers;
- for documents to be sent abroad for execution;
- to re-issue the opinion if any last-minute changes are made to the documents
- Consider an express requirement for a legal opinion in the heads of terms
- Decide at the outset who will bear the costs of the opinion letter
- Remember that tax issues are likely to arise and can also delay completion
Rhian Gyngell is a professional support lawyer and Carolyn Milligan is an associate in real estate at Herbert Smith Freehills LLP
