Option agreements are powerful tools in the world of real estate development, providing developers with flexibility, security, and strategic advantages. From a developer’s standpoint, option agreements are invaluable for navigating the complex terrain of property acquisition and development. Let’s delve into the key aspects of option agreements and why they matter.

Firstly, option agreements offer developers the exclusive right to purchase a property a predetermined price / pricing mechanism within a specified timeframe.  This exclusivity minimises competition allowing developer to conduct due diligence and secure financing without the fear of losing the property to other buyers.  An additional key feature of an option agreement is the period during which the developer can assess the property’s potential for development. This due diligence phase gives developers time to submit a planning application and uncover potential challenges or opportunities (such as contaminated land, flooding or issues with road or utility access) of the site. If the initial period is long enough it also gives developers the ability to delay a project until costs come down or the planning environment changes.  It is key that an option agreement allows rather than compels the developer to purchase the land.

Option agreements typically require a nominal fee (paid by the developer to the landowner) on exchange in order to secure the agreement in the first instance. While they are sometimes a significant sum, it can be a cost-effective way for developers to control a property / their commercial position without the hefty upfront costs of a full purchase.

From a strategic standpoint, option agreements allow developers to time their acquisitions to market conditions and project timelines, reducing financial risks. Option agreements also empower developers to navigate the complexities of property development with confidence. They provide exclusivity, due diligence opportunities, cost-efficiency, and strategic advantages that make them an invaluable tool for developers seeking to unlock the full potential of their projects.

For more information or to find out how we can help please visit our property team web page or call us on 01206 577676.

You may be aware that a company has a separate legal personality from its shareholders and directors. Just like a person, a company can own property, enter into contracts, borrow money, sue and be sued.  But does this mean that directors can never be held liable for their company’s conduct?

The short answer is no.  As we looked at in our last commercial blog, directors of a company are subject to various statutory duties owed to their company under the Companies Act 2006.  If a director breaches his duties, the company may take action against him.  The director may be required to account for profits, return property or pay compensation to the company.   Alternatively, shareholders may by way of resolution ratify or in other words sanction the director’s behaviour meaning that they and therefore the company cannot subsequently take action against him. Because of this, if a director is also a majority shareholder, he might feel that he can breach his duties as director, yet sanction them as shareholder, thus avoiding liability for his actions. This shouldn’t be relied upon.  Share ownership of a company can change affecting the level of control he has, or he may fall out with other shareholders he has previously depended on to vote in his favour. A minority shareholder can also bring what is known as a ‘derivative claim’ against the company for any perceived wrong-doing.

Aside from a breach of directors’ duties, a director may also find himself liable under the terms of a contract. When a director enters into a contract he does so as an agent on behalf of the company. This means the company is a party to and may be sued for breach of contract, not the director.   However, the director must ensure that whomever he is dealing with is aware of this, and correspondence and stationery should indicate the same.  They must also ensure that when entering into third party contracts, that they do not exceed their authority to do so.  A distinction in law is made between a director’s actual and apparent authority. His actual authority is that authorised by the company. His apparent authority is that ostensibly and outwardly shown. If he exceeds his actual authority, but does not exceed his apparent authority, the contract will be binding on the company.  The director will be liable to the company to indemnify them for any loss suffered. If he exceeds his actual and apparent authority, the contract will not be binding on the company. The director will be personally liable to the third party for any loss suffered.

Alongside this the director may be liable for negligent or fraudulent misrepresentation. In the landmark case of Contex Drouzhba Ltd v Wiseman, the defendant director agreed to pay the claimant for a shipment of goods within 30 days, knowing that his company was insolvent and unable to meet this obligation. He had fraudulently misrepresented them and was liable for damages, a decision upheld by the Court of Appeal which stated, “where fraud is committed by a director, his status as director of the company cannot act as a shield from the liability for his own fraud”. 

Directors may also be personally liable if, as is often the case, they give personal guarantees as security for a loan to the company. If the company defaults on that loan, the personal guarantee can be enforced against the director’s own assets. In a worst-case scenario, he may lose his home or be declared bankrupt. What this begins to show is that a director, as agent of a company, cannot hide behind it.  There are various ways, not all them covered here, that a director can find himself personally liable. For further information on directors’ liabilities, please don’t hesitate to contact our Commercial solicitor, David Cammack.  Please call 07909 564799 or e-mail [email protected].

Directors, or officers of the company as they are otherwise known, are as important as the shareholders of a company, if not more so. They are responsible for the day-to-day management of the company, and collectively make important decisions at board meetings. They will decide for example whether to employ executive staff or enter into a contract with a third party.

But with great power comes great responsibility and, for this reason, a series of statutory duties are imposed on directors by law under the Companies Act 2006. These duties are owed by the directors to the company rather than to the shareholders themselves. Every director needs to be familiar with these duties, so as not to breach them and risk incurring personal liability.

The duties of a director are as follows:

Duty to act within their powers

A director must act in accordance with the company’s constitution, and only exercise powers for the purposes for which they are conferred.  A company’s constitution is widely defined and includes the company’s articles of association. If there are restrictions on how the director must operate contained within a shareholders agreement, the director’s service agreement, the bank mandate, specific board minutes or other company documents, then the director needs to act accordingly.

Whether a director has exercised his powers for the purposes for which they were given is dependent on the facts. A court would decide firstly what was the purpose of the power, and secondly whether the director used the power for that purpose when he exercised it.

Duty to promote the success of the company

A director must act in a way he considers (in good faith and honesty) would be most likely to promote the overall success of the company, including its profitability. A director should take into account the long-term consequences of any decision, the interests of employees, working relationships with customers and suppliers, the impact on the community and the environment, the company’s reputation and the need to act fairly between shareholders.

This is what is known as a subjective test. This means that the court would ask whether the director honestly believed that an action taken by the company would most likely promote the success of the company, rather than whether he should have believed it, or whether the action actually did promote the success of the company.

Duty to exercise independent judgment

A director must act independently in his decision-making. He cannot for example agree with a third party (such as a shareholder, customer or supplier) to vote in a given way at a board meeting.  For the avoidance of doubt, this will not prevent a director from taking professional advice, be it legal or financial, but it is for him to decide whether to act upon it.

Duty to exercise reasonable care, skill and diligence

A director must exercise reasonable care, skill and diligence, at a level that would be exercised by a reasonably diligent person with both (a) the general knowledge, skills and experience that may be reasonably expected and (b) the general knowledge, skills and experience that the director actually has (e.g. if he has a particular area, or high level, of expertise).

What may be reasonably expected of the director is again fact-dependent and will vary based on, for example, the size, sophistication and success of the company.  Only if the director’s actual knowledge, skills and expertise are higher than those reasonably expected, will he be judged to a higher standard. Directors cannot avoid liability for this duty by simply delegating their responsibilities or being inactive.

Duty to avoid conflicts of interest

This is an important duty, and one that we see directors breach most often. A director must avoid a situation in which he has, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

This applies to the exploitation of any information, opportunity or property. An example might be if a director had obtained information by virtue of his being a director, and used this information for his own personal advantage, for example by entering into a contract under his own name, rather than that of the company’s; or buying a property when the company might have invested in it instead.  Effectively he is taking advantage of his position to put his interests before those of the company. It is irrelevant if the company first had sight of the business opportunity and for whatever reason declined to act on it.

If a director is in breach of this duty, he will be obliged to account to the company for any profits he makes, unless his actions were authorised by the company (meaning its shareholders, acting by majority).  Some directors have tried to circumvent this duty by resigning from their company before exploiting a business opportunity elsewhere. However, such a director may still be liable if the intention to do this can be shown.

Duty not to accept a benefit from third parties

A director must not accept a benefit from a third party that is given by reason of (a) his being a director, or (b) his doing or not doing anything as a director.  There will be no breach of this duty if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest, for example normal corporate hospitality.

As a matter of good practice, companies should also ensure that any benefit received does not amount to an offence under the Bribery Act 2010, as it is punishable by an unlimited fine and up to 10 years’ in prison.

Duty to declare their interest in a proposed transaction or arrangement with the company           

A director in any way directly or indirectly interested in a proposed transaction or arrangement with the company must declare the nature and extent of that interest to the other directors.  An example of this would be if the company was seeking to purchase land, which the director owned or co-owned. The company would want the lowest price, whereas the director in his personal capacity would seek the highest. This would clearly give rise to a conflict of interest and become problematic.  A director must therefore declare his interest as soon as possible, either at a board meeting or in writing. There is another similar provision contained in the Companies Act 2006 whereby a director must declare their interest in an existing transaction or arrangement with the company.

So you can see that there are a number of duties and a common theme to some of them is that the director must not take advantage of the company. A sole director who is also the sole shareholder still owes these duties, even if there are no other shareholders who might object to his taking advantage of the company. Even in that context, his duties become more relevant if the company gets into financial difficulty, so in effect he owes some of these duties to its creditors. Our next blog article will look into this area in more detail.

For further information on directors’ duties, please don’t hesitate to contact our commercial solicitor, David Cammack.  Please call 07909 564799 or e-mail [email protected].

Upcoming changes to Companies House

The Economic Crime and Corporate Transparency Bill, which will come into force in due course, is set to make the ownership of small to medium-sized, limited companies more transparent and improve the accuracy of the company register, as well as tackle economic crime. Companies House has been given a budget of £83 million to implement changes so that it can meet this aim.

Following implementation of the Economic Crime and Corporate Transparency Bill, Companies House will be assigned a far more active role in ensuring that the register consists of reliable data regarding companies and their people. As well as this, Companies House must place focus on upholding the integrity of the register to provide better transparency.

Two of the key problems since the scrapping of the old Annual Return following implementation of the Companies Act 2006 are:

• the Confirmation Statement, with its bands of percentage ownership, 25%+ to 50%, 50%+ to 75% and 75%+, serve to obscure the underlying ownership more than clarify it, and in the author’s opinion was a big step backwards; and
• people very often get their Confirmation Statement and PSC filings wrong when declaring what the share ownerships are, something the author has seen frequently. The many PSC forms available also often seem confusing.

For example, shareholdings under 25% are simply not declared, so the public do not know who owns smaller shareholdings. A company with 5 owners who each hold say 20% will not have any PSCs and so the public will be entirely in the dark as to its ownership. The Annual Return stated the complete ownership of all shares in a company and was a superior document that could have simply been built on by a requirement that beneficial ownerships are also declared.

So how is the government correcting these and other errors?

To uphold accuracy and reliability of the register, Companies House will be entrusted to query filings which appear suspicious, even before a company is incorporated. For example, where numerous, repeated applications are made to register a company name but there is already a company with a similar name in the register. If a filing does seem suspicious, Companies House will be able to request further evidence to support the legitimacy of that company or it can reject these applications where justified.

Data sharing will be made available to Companies House, which will enable it to compare the data submitted to it against private and public sectors. These could include law enforcement bodies, government bodies and regulatory bodies. By allowing data-sharing, suspicious filing can be identified more easily, which could lead to a reduction in economic criminal activity.

To further aid the reduction in economic criminal activity, there will be a requirement of identity verification for anyone who sets up, manages or controls a company. This applies to directors, people with significant control (PSCs) and individuals acting on behalf of the company. If identification is not successfully obtained by the end of a set period, this may lead to criminal sanctions, in addition to possible civil penalties.

To increase transparency, companies will need to submit information about their shareholders on a one-off basis to Companies House. However, there will be more extensive rights introduced, so that applications can be made for certain personal information to be suppressed from the public register.

A corporate director will only be retained or appointed following the introduction of the Economic Crime and Corporate Transparency Bill if all directors of their company are individual people who are able to have their identity verified. Therefore, a corporate director cannot itself have a corporate director for their own company. Further, all corporate directors must be UK companies or registered entities – overseas corporate directors will not suffice.

Electronic filing will be implemented using the system iXBRL. Key information, including company accounts, will be easily identifiable, as information will be fully tagged. Small and micro companies must file a full balance sheet, alongside a profit and loss account. Small companies will also need to file a directors’ report with their accounts.

A new register will be created which will contain information regarding overseas entities. The aim is that it will include better information about beneficial owners and necessitate overseas entities to register if they own land. Should there be non-compliance, criminal penalties will follow.

Hopefully, the Economic Crime and Corporate Transparency Bill will transform Companies House, ensuring that that fraudulent activity is more easily identifiable, to allow the register to be as transparent, reliable and accurate as possible.

If you’d like to know more about how this may affect you and your business, please don’t hesitate to contact our commercial solicitor, David Cammack.  Please call 07909 564799 or e-mail [email protected].

 

What is administrative receivership?

 

When a company borrows money from a bank, they will usually be required to sign a debenture providing the bank with a charge over the freehold property and all other assets of the company, thus providing security for the loan.  If the company defaults on the terms of the loan, the bank can appoint an administrative receiver to ‘receive’ and liquidate (i.e. sell) the company assets in order to repay the loan.  They can do this regardless of whether the company is officially declared insolvent or not.

This process is called administrative receivership. Its purpose is to allow a creditor with security over a limited company’s property to recover its money. The administrative receiver must be a licensed insolvency practitioner, who will be primarily accountable to the charge holder that appointed them.

The administrative receiver will be able to seize and dispose of the company’s assets, either piece-by-piece, or by selling off the company’s business as a going concern (e.g. if it is a profitable trading business) in satisfaction of the debt owed.

The particular powers of the administrative receiver are set out in Part 3 of the Insolvency Act 1986 and under the Law of Property Act 1925.  Often the bank or other lender will want to extend the statutory powers of the insolvency practitioner in the security agreement with the borrowing company.

 

How does administrative receivership compare with other forms of company insolvency?

 

Many may not recognise the difference between receivership and liquidation of the company. Liquidators will act on behalf of a group of creditors collectively, whereas the administrative receiver will act in the interests of only the charge holder who appointed them.

It differs too from administration, in which an insolvency practitioner will again try to improve the position for all creditors, rather than only one and will at least consider rescuing the company if it proves possible.

In the case of all forced liquidations and all administrations, the insolvency practitioner is only appointed because the company is already insolvent. In the case of the appointment of an administrative receiver, it might just be a temporary cash-flow problem that has led to the default on the loan.

What are the consequences for a company?

 

Typically, if a company is in default on a loan, they are already in some financial difficulty. A receiver seizing and selling their assets will only make things worse, for both them and unsecured creditors, and in most cases will cause the company to cease operating.  If the tangible assets of a company are forcibly removed, a company may be left with supply and demand problems and significant staff redundancies.

This in turn can cause reputational damage for the company which will be difficult to recover from in full. That said, it may have its benefits.  Depending on how much is taken to satisfy the debt, a company may be able to continue operating, pay off its debtors and avoid bankruptcy and potential liability for the directors for wrongful trading. However, if not, then the control of the company will be returned to the directors, who may then need to make redundancies and shut the company down if it is no longer viable.

For further information on administrative receivership – whether it might help or hinder your business, and what alternatives may be available to you – please don’t hesitate to contact our commercial solicitor, David Cammack. Please call 07909 564799 or contact him by e-mail: [email protected]