Ring-fencing – what does it mean for bank landlords?

What does retail bank ring-fencing mean for the landlords of bank branches? We consider the impact in an article for Estates Gazette.

Under the Financial Services (Banking Reform) Act 2013, large UK banks must separate personal retail banking services from their investment banking division by 1 January 2019. The aim is to offer better protection to retail customers. Put simply, a new retail bank entity is created, and the retail banking activities are transferred into it, segregating it from the riskier activities of the investment arm. In the event of another banking crash, this restructuring should help avoid the need for further taxpayer bailouts of our banks.

The five UK banks which will be ring-fenced are Barclays, Lloyds, HSBC, Santander and RBS:

• the Barclays scheme was effected on 1 April 2018;
• the first RBS scheme was effected on 30 April 2018 (there will be a second scheme later in 2018);
• the Lloyds scheme was effected on 28 May 2018;
• the current scheduled date for the HSBC scheme is 1 July 2018; and
• the current scheduled dates for the Santander schemes are 9, 16, 23 and 30 July 2018.

How does ring-fencing take place?

The ring-fenced transfer scheme is proposed by the relevant bank, and then sanctioned by the High Court. A court order makes a bulk transfer of all eligible agreements between the original bank entity, and the new ring-fenced entity.

The bulk transfer process is an enormous undertaking. It has been described by the chancellor of the High Court as “a statutory project on an unprecedented scale”. The UK regulatory bodies, the Prudential Regulation Authority and the Financial Conduct Authority, have described it as “a highly complex project of national importance”.

So why have we heard so little about it? Probably because, for most of us who hold our current account or business account with these banks, the changes happen without any direct participation being needed. Perhaps our sort code or account number will change, but the changes have a low impact.

What does this mean for landlords?

If you are a landlord of a bank branch, or offices occupied by a bank, you may already have received a letter from the bank tenant’s agents, notifying you that going forward you will have a different tenant.

This notification may seem surprising – but importantly the court order overrides the usual principles of landlord and tenant law, and any provisions in the lease that might restrict assignment or change of control of the tenant entity.

The court order lists the relevant properties that are automatically transferred, and the landlord is treated in the same way as a retail customer: it is simply informed that the transfer has taken place. Individual assignments will only be made for a very few key properties, such as data centres.

Will landlords be adversely affected?

The view formed by the banks’ independent advisers appears to be that, given the covenant strength of the ring-fenced banks, landlords and other interested parties will not be adversely affected.

The advisers have also concluded that a statutory transfer scheme is the only viable option, given the deadline of 1 January 2019. Taking HSBC as an example, approximately 700 properties will transfer under the scheme. Individual assignment or transfer negotiations for thousands of properties in total are not viewed as feasible.

But landlords and other parties to property transactions with the ring-fenced banks are likely to have a number of questions.

What if lease renewal proceedings or other litigation are pending in relation to the lease?

This will be taken over by the new tenant entity automatically and the landlord does not need to take any additional steps in relation to this.

What if the lease contains any covenants or concessions that are expressed to be personal to the tenant?

These would apply to the new tenant entity as the transfer has taken place by statute rather than by any transfer of the property interest.

What if I assigned an “old lease” (pre-1996) to a bank – will I be released from the tenant’s covenants when the lease passes to the ring-fenced bank?

No, you will not be released – you will remain liable, whereas the previous bank tenant will not. The lease liability will be treated as being held by the ring-fenced bank from the date that you assigned the lease.

What if I am the beneficiary of a restriction on title, preventing a property from being transferred by the bank without my consent?

The tenant entity will change anyway. Your consent will not be sought, as the restriction on title is overridden by the statutory transfer.

What if I have provided a collateral warranty for the benefit of the original bank, and that collateral warranty contains a restriction on the number of assignments?

An assignment will not be “used up” by this transfer, and so there would be no reduction in the number of permitted assignments remaining.

Who pays my legal and surveyors’ fees for looking at the impact of the transfer scheme?

There is no mechanism to claim these fees back from the bank tenant. Whereas a costs undertaking would usually be required in the case of an application to assign a lease, this has been circumvented by the statutory scheme. The specialist adviser to HSBC calculated that the cost of paying landlords’ and tenants’ legal and surveyors’ fees in respect of the assignment applications could be in excess of £1.8m plus VAT. This was considered to have a significant adverse impact on the bank’s customers and was another justification for taking the bulk transfer route.

Surprising – but not overly concerning

The ring-fenced transfer scheme has the laudable intention of protecting retail banking customers in the event of another banking crash. The new tenant entities will be of sound covenant strength, and so this change should not be of serious concern to landlords. But no doubt the thousands of landlords being notified of the change in their tenant will be surprised, given that the scheme overrides fundamental principles of landlord and tenant law, and perhaps even negotiated lease provisions.

This article was first published in Estates Gazette on 19 June 2018.