As from 1 January 2021 EU law will no longer apply in the UK. In response to questions from our cross-border commercial real estate investor and financier client base, this blog briefly summarises main relevant changes to be taken into account for a Dutch CREF loan agreement, whereby the lender is located in the UK or the loan could be sold or syndicated to lenders located in the UK. The below assumes that the Borrower is a professional borrower located in the Netherlands and the financed real estate is located in the Netherlands.
In summary, although the consequences of Brexit on cross-border Dutch CREF loan agreements are limited, there are some points to bear in mind.
In some EU jurisdictions lenders are required to have a license to lend. Many UK lenders have relied on the EU passporting system in order to lend money in such jurisdictions. As this passporting system no longer applies to the UK, a UK lender providing a loan to a borrower from an EU member state will need to comply with that state's financial regulatory law and licensing requirements.
Under the Dutch Financial Supervision act, lending money only qualifies as a regulated activity for which a license is required if loans are provided to consumers (i.e. natural persons not transacting in the course of their business or profession). As a consequence, a UK lender is still permitted to provide CREF loans to professional borrowers in the Netherlands, just as before.
The Dutch Financial Supervision Act also poses a restriction on borrowers attracting money from the 'public'. Although this criterion is quite broad (and somewhat vague), UK lenders which meet at least two out of the following three criteria: (i) balance sheet total of at least € 20,000,000, (ii) net turnover of at least € 40,000,000 and (iii) equity or equivalent capital of at least € 2,000,000 will qualify as ‘professional market parties’ and would therefore in any case not be considered part of the ‘public’. This might be different for relatively small lenders such as new loan funds. Violation of this provision will not affect the validity or enforceability of the loan agreement concerned but could trigger a significant fine for the borrower.
Stamp duties & withholding tax
In the Netherlands no stamp duties are payable in connection with the entering into or the enforcement of a loan agreement or deeds of mortgage or pledge entered into in connection therewith. Litigation on loan and security documents will trigger court administrative fees and selling real estate whether or not by way of enforcing a mortgage will trigger transfer tax. This will not change. With respect to withholding tax, the Netherlands and the UK already had in place a bilateral convention to avoid double taxation. The impact of Brexit on this is very limited.
Pursuant to the Recast Insolvency Regulation((EU) 2015/848), an EU member state recognises as the appropriate forum for insolvency proceedings the state in which a debtor has its 'centre of main interests'. This regulation also provides for automatic recognition of insolvency proceedings throughout EU member states. As the Recast Insolvency Regulation does no longer apply in the UK, courts will apply their own domestic laws. However, in relation to Dutch borrowers and guarantors under a loan agreement, nothing will change here.
Choice of law
Although there has definitely been a development in the Dutch CREF market over the past years towards using loan agreements that are expressed to be governed by Dutch law, a good number of market parties still opt for English law as governing law for their loan agreement. In short terms, Dutch courts will continue to recognise a choice for English law on the basis of the Rome I Regulation ((EC) No 593/2008), which also applies where parties have opted for the laws of a non-EU jurisdiction.
Choice of jurisdiction and enforcement of judgments
The situation is slightly more complex in relation to choice of jurisdiction (competent courts) clauses and enforcements of judgements. Now that the UK is no longer a member of the EU, English court judgements can no longer ‘automatically’ be enforced in the Netherlands on the basis of the Brussels Ibis Regulation ((EU) No 1215/2012).
On this point, it is helpful that a good number of years ago, in 1967, the Netherlands and the UK entered into a bilateral convention (Convention between the Kingdom of the Netherlands and the United Kingdom of Great Britain and Northern Ireland providing for the Reciprocal Recognition and Enforcement of Judgments in Civil Matters 1967), which had so far been gathering dust. This convention allows for an English court judgment to be enforced in the Netherlands without the need for re-litigation. However, as opposed to the Brussels Ibis Regulation, it does require an exequatur (Dutch court leave) to allow for such an enforcement. Court leave should be a matter of weeks rather than months but does of course still add to time and costs of enforcement to a certain extent. To put this in perspective it should also be noted though that it is possible to enforce Dutch mortgages and pledges without any court proceedings being required on a payment default with respect to the obligations secured thereby.
In the meantime, the UK has also acceded to the Hague Convention on Choice of Court Agreement 2005 (to which the EU already was a party). Unfortunately, this convention only applies in relation to exclusive jurisdiction clauses, whereas a typical LMA style loan agreement is normally not exclusive in the sense that finance parties are usually permitted to also instigate proceedings in other jurisdictions. There is also good argument that this convention only applies to loan agreements entered into after 1 January of this year. Finally, Dutch court leave is required to allow for the enforcement of a foreign judgement.
The UK has in the meantime applied to join the Lugano Convention (Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 2007). This convention largely replicates the Brussel Ibis Regulation. Once the UK becomes a party to the Lugano Convention, English judgments will be enforceable in EU member states in much the same way as they were until end of last year. However, UK's accession to the Lugano Convention requires the consent of all existing signatories to it (EU, Switzerland, Norway and Iceland). This is still an ongoing process and may still take some time.
At least where Dutch CREF loan agreements are concerned market parties will be able to carry on largely as they did post-Brexit. This is good news in a generally still optimistic but for now also still somewhat uncertain market environment, where the end of the COVID pandemic is not yet in sight.