Arrangements that have an artificial effect on pricing are
arrangements that go beyond those that would be expected in a
normal open market transaction at arm's length, having regard to
the prevailing market conditions.
Property developers may offer inducements to sell or let
buildings in a depressed property market, especially if they are
sited in less desirable locations, such as some enterprise zones.
Some of the inducements may also increase the value of the
building, but do not treat the uplift in value as caught by the
legislation if the inducements are no more than those expected in a
normal open market sale.
Here are examples of the sort of transactions caught by the
legislation.
Reverse premiums
A prospective tenant may be paid an inducement to enter into
a lease. This can be a normal commercial arrangement, for instance
to attract any tenant, or in some cases a particular prime tenant
who will enhance a development to make it more attractive to other
tenants. However, if the rents payable under the lease are also set
at above open market value, this can inflate the value of the
relevant interest and a challenge under CAA01/S357 may be possible
in respect of the inflated element of the value.
Leasebacks
A developer may sell the relevant interest to an investor and
then lease the building back until a tenant is found. This is not
objectionable if the rents paid by the developer are not more than
those expected in the open market. However, a sale and leaseback at
an inflated building price and rent would be objectionable.
Construction Leases
In some cases, particularly in enterprise zones, the
developer may enter into the leaseback before the building has been
completed. This is not objectionable if the arrangements are
commercial, and do not inflate the value of the completed
development, when looked at as a whole.
Rental Guarantees (1)
A third party (usually a clearing bank) will guarantee to pay
rent for a limited period or until a tenant is found. The vendor
may take a leaseback from the purchaser and places enough of the
sale proceeds on deposit with the bank to cover the maximum pay out
possible under the guarantee. The bank then pays the rents to the
purchaser until the expiry of the guarantee, or a real tenant is
found, in which case the balance of the sums on deposit are repaid
to the vendor. This sort of arrangement will normally be acceptable
if the rents are pitched at a commercial level.
Rental Guarantees (2)
A developer might secure a tenant who commits himself to
occupy a building at an agreed rent once the building has been
completed. A building with a guaranteed tenant will often be worth
more than an empty building, especially where there is a glut of
surplus property. This uplift in value is acceptable provided that
the rental terms are at a normal commercial rate after the effect
of other arrangements, such as reverse premiums have been taken
into account.
