The court considers how to categorise different monetary receipts and, in particular, premiums paid on the surrender of leases.
The difference between capital and income receipts is often important for tax purposes. CBRE Loan Servicing Ltd v Gemini (Eclipse 2006-3) Plc [2015] EWHC 2769 (Ch); [2015] PLSCS 279 demonstrates that it is often important to be able to distinguish between receipts for other reasons.
The case concerned a complex securitisation of a loan secured on a portfolio of commercial properties in England, Wales and Scotland. The income derived from the properties was intended to service the commitments of the borrowers under the loan and was, in turn, used to pay interest to the investors in the securities. The securitised structure ran smoothly until the financial crisis, when the loan went into default. The question for the court was: how should the various receipts from the properties be characterised? Were they to be treated as “principal” or “interest” for the purposes of the payments due to the various parties involved in the securitisation?
After reviewing the documentation, the judge considered that the parties had intended that the process of characterising receipts should be a relatively routine matter that could be handled without legal sophistication – and decided to apply commercial common sense. As a result, he characterised rental income as “interest”, and ruled that the proceeds of sale of the properties should be characterised as “principal” because they represented the realised capital value of the assets that stood as security for the loan. The judge considered that this was in line with what the parties might reasonably have been expected to contemplate and was consistent with the approach adopted before the loan was in default.
The difference between capital and income receipts is often important for tax purposes. CBRE Loan Servicing Ltd v Gemini (Eclipse 2006-3) Plc [2015] EWHC 2769 (Ch); [2015] PLSCS 279 demonstrates that it is often important to be able to distinguish between receipts for other reasons.
The case concerned a complex securitisation of a loan secured on a portfolio of commercial properties in England, Wales and Scotland. The income derived from the properties was intended to service the commitments of the borrowers under the loan and was, in turn, used to pay interest to the investors in the securities. The securitised structure ran smoothly until the financial crisis, when the loan went into default. The question for the court was: how should the various receipts from the properties be characterised? Were they to be treated as “principal” or “interest” for the purposes of the payments due to the various parties involved in the securitisation?
After reviewing the documentation, the judge considered that the parties had intended that the process of characterising receipts should be a relatively routine matter that could be handled without legal sophistication – and decided to apply commercial common sense. As a result, he characterised rental income as “interest”, and ruled that the proceeds of sale of the properties should be characterised as “principal” because they represented the realised capital value of the assets that stood as security for the loan. The judge considered that this was in line with what the parties might reasonably have been expected to contemplate and was consistent with the approach adopted before the loan was in default.
Conveyancers will be interested in the judge’s ruling on the question of how any premiums received on the surrender of leases were to be treated. Henderson J observed that the position here was, potentially, more debatable. He indicated that this was because the circumstances and basis on which the premium was calculated might vary from case to case. However, on the basis that the surrenders in question had attracted, or would attract, premiums representing the capitalised value to the landlord of the remaining terms of the leases that were to be surrendered, the premiums were to be characterised as the proceeds of sale of the properties. In other words, the premiums were to be treated as principal. The ruling might well have been different, of course, if the payments in question were made in respect of the tenants’ liabilities for dilapidations instead.
The decision calls to mind the rules that apply as between landlords and lenders when a lease is surrendered. Lenders generally expect to receive any proceeds of sale from their securities and their consent may well be required where a landlord accepts a surrender as a result of section 100(4) of the Law of Property Act 1925, which provides that lenders must consent to surrenders where consideration will pass to the landlord. Alternatively, the legal charge may actually impose such a requirement in order to protect the value of the lender’s security.
Allyson Colby is a property law consultant
