JPUTS - Great for the owner, but what about the banks?
SOURCE: SCOTTISH BANKER: AUGUST 2005
A Jersey Property Unit Trust ("JPUT"), is a popular way of holding UK property as, if properly created, it can enable ownership of property to change, without incurring Stamp Duty Land Tax (SDLT), currently up to 4% of the consideration. This is a considerable saving, and a major incentive for all borrowers, but what is the impact for the banks?
Assuming a bank has a fixed charge over a property, if a borrower wants to transfer a property to a JPUT, the bank will have to consider its position. In order to avoid SDLT on the transfer of the property to the JPUT it is essential that a some conditions are met. The main one affecting the bank is that the price for the property must be covered by the issue of units in the JPUT. As a consequence, the fixed charge must be released prior to the transfer (to avoid any argument that the consideration also includes any assumption of liability for debt). The borrower is still in debt to the bank, so how does the bank obtain adequate security?
The Property is transferred to the JPUT by a Contribution Agreement (the transfer contract is therefore between the borrower and the trustees of the JPUT), and the borrower owns all the units in the JPUT. Therefore, the bank takes a charge over the units in the JPUT.
The bank would need to review the terms of the Trust Deed that creates the JPUT to ensure that the units can be properly secured. It would also have to ensure the powers of the Trust are such that there is a reasonable degree of protection for the unitholder (and therefore the bank, if it has to enforce its security) e.g. restriction on granting charges over the property. Often a covenant is included in the facility to oblige the borrower to realise the property and/or the units (or indeed grant a legal charge directly over the property) after a set period.
Further, the bank would have to consider whether the borrower had funds available in the event that SDLT was charged on the transfer of the property to the JPUT, as the SDLT will be a liability of the JPUT, and would reduce the value of the bank’s security.
The other angle for a bank is where it funds a purchaser of the units in the JPUT (which will enable it to control the property). There is no SDLT chargeable on the sale and purchase of the units in a JPUT (hence the SDLT saving compared to a normal purchase). The purchaser would ensure that the JPUT would grant a first ranking legal charge over the property direct to the bank (effectively a third party charge). Again the terms of the Trust Deed would have to be verified to ensure they were in order, and the bank would obtain a first charge over the units in the JPUT, and it would have to cover the possibility of SDLT being charged in connection with the first transfer.
The usual property diligence would have to be undertaken on behalf of the bank and the Contribution Agreement would have to be carefully reviewed as if there was a problem with the property, the purchaser would have to procure that the Trustees of the JPUT enforce that document against the person that transferred the property to the JPUT.
This is a brief overview of JPUT transactions and you should always seek specific advice on each transaction.
Semple Fraser has particular expertise in JPUT transactions and has advised clients on the JPUT structure in connection with transactions worth over £1.1bn.
AUTHOR: ALEX INNES