In the current global real estate market it is not unusual for one of the parties to a UK based commercial real estate transaction to be incorporated outside of Great Britain. However, lawyers can only give advice on matters governed by the law which they are qualified in. This means that where a party is incorporated overseas, an English lawyer is unable to advise on whether or not the transaction is binding on that party. This exposes the other parties to the risk that they will be unable to enforce against that party in the event that it fails to perform its obligations. To mitigate against this, a legal opinion can be obtained from a lawyer based in the country in which the contracting party is incorporated.
What is the purpose of the opinion?
If a transaction is entered into between companies which are incorporated in Great Britain (England, Scotland and Wales), substantial protection already exists under the Companies Acts in relation to whether or not the companies have the necessary powers and capacity to enter into the transaction.
However, when an overseas incorporated company is involved in a transaction, such protection is not available in relation to that company. If the documents state that the agreement is governed by English law and that the English courts have exclusive jurisdiction, it will be possible to obtain a judgment in England. Unfortunately, this does not mean that the judgment is enforceable: it will usually need to be enforced by action taken in the country where that company is incorporated; if it is determined that the documents in question did not in fact bind that company in the first place, the enforcement action will not succeed.
A legal opinion is a written confirmation given by a lawyer in the country in which the overseas party is located. The lawyer certifies that the transaction will be effective and enforceable under the applicable foreign laws, thereby reducing the risk to the other parties. In the event that the opinion is incorrect, and the transaction is not in fact enforceable, the party that the opinion is addressed to may be able to sue the lawyers who gave it.
When should an opinion be obtained?
Whenever a party to a transaction is incorporated outside of Great Britain, thought should always be given as to whether a legal opinion is required. Note that this includes parties incorporated in Northern Ireland, the Channel Islands and the Isle of Man, in addition to more obviously overseas companies in other parts of the world.
Whilst the starting point should be to assume that a legal opinion will always be required in these situations, obtaining an opinion can be time-consuming and costly. Deciding whether or not to require that an opinion is provided therefore comes down to a review of the risk of not having one. It is necessary to consider what contractual obligations the overseas party has and what losses will be suffered if they are found to be non-binding. For example:
- The tenant under a lease has numerous obligations including payment of rent and other sums and carrying out repairs to the property. In the event that these obligations are not enforceable the landlord may suffer significant losses so it is essential that the landlord has protection against this risk.
- Similarly, it is essential that the tenant’s guarantor’s obligations are binding, as these are designed to protect the landlord in the event that the tenant fails to perform.
- The landlord tends to have less onerous obligations; however, a tenant will want to know that the landlord has the capacity to grant the lease; where the landlord covenants to provide essential services, to insure or to carry out repairs a tenant will want to know that these obligations are enforceable.
- A buyer of property will want to know that the seller has the capacity to sell the property to him (though see the note below regarding registration).
- Where a buyer of property is giving covenants or indemnities to the seller, the seller will want to be sure that he can enforce these.
- Where security is being given (for example, a rent deposit) it is essential that this security is enforceable.
It is worth noting that the Land Registry does not require that a legal opinion is obtained before registering a transaction, provided that the Land Registry’s prescribed attestation clauses are used. However, just because a transaction is registered it does not eliminate the risk that other elements of it will not be enforceable.
How should an opinion be obtained?
Where a legal opinion is required it is essential that you plan ahead. Depending on the jurisdiction, it can take a considerable amount of time to obtain a satisfactory opinion, so this is not something to leave until the last minute.
One option is to ask the overseas party’s own solicitors to provide the opinion. The benefit of this approach is that they are probably familiar with providing opinions so will know the "form", will have the documents needed to produce it readily to hand, and may already be familiar with the transaction. Alternatively the opinion can be obtained from any reputable firm in the relevant jurisdiction, though this is likely to be more time consuming.
Copies of all relevant documentation will need to be supplied to the overseas lawyers so that they are able to prepare the opinion.
What format should the opinion take?
Legal opinions tend to follow the same format. They will confirm which company (or other body) they relate to, which jurisdiction they cover, set out the documents reviewed, make assumption of fact and then give the required opinions, followed by any qualifications to these. Where there are any areas of legal uncertainty, or issues which require analysis, the opinion will usually remain in a standard format, supplemented by an additional reasoned opinion.
The structure will usually be as follows:
- Background: a description of the transaction and what the parties are going to be doing.
- Documents examined: the firm giving the opinion will look not only at the transaction documents (eg lease, rent deposit, transfer deed) but also the company’s constitutional documents, plus any required board authority and minutes allowing the company to enter into the transaction.
- Enquires made: the opinion will set out what searches have been undertaken in producing it.
- Assumptions: this will normally include assuming that documents and records reviewed are accurate, that all signatures are correct and authentic and that no provision of any other country’s law adversely affects the opinion being expressed.
- Opinion as to:
- Incorporation, capacity and authority: a confirmation that the company is validly existing, has the necessary powers to execute and perform the relevant documents, and that any required action has been taken by the company to authorise the execution of the transaction documents.
- Solvency: that no proceedings have been started or steps taken for the winding-up or dissolution of the company.
- Legal effect and enforceability: that the documents create valid, binding and enforceable obligations in the relevant jurisdiction, without any need for additional authorisations, registration or payment and that the documents will be properly executed if signed in a specified way.
- Governing law and jurisdiction: that the law chosen to govern the documents has been validly chosen and will be applied.
- Qualifications: standard qualifications are usually matters of general law which it is impractical to advise upon fully but which might undermine the enforceability of the transaction (for example that if the foreign party becomes insolvent this will limit the ability to enforce obligations against it or that rights may be lost when statutory limitation periods expire).
- Reliance: the opinion will indicate who may rely on it – it will usually be addressed to the party who wishes to rely on it but reliance may be extended, for example to include funders and the party’s legal advisors.