UK limited partnerships are commonly used as real estate investment vehicles but can be a challenge to operate.
The Treasury has just published a consultation paper seeking views on certain proposed changes to the Limited Partnership Act 1907 (the principal legislation governing UK limited partnerships). The modernising amendments look like they may finally deal with the uncertainties and dated practices relating to UK limited partnership law. Such changes would directly benefit those investing in real estate assets through UK domiciled limited partnerships.
The amendments (if enacted) would apply to a new form of entity referred to as a "private fund limited partnership" ("PFLP"), which, in summary, is a UK limited partnership that: (i) is subject to a written agreement; and (ii) amounts to a "collective investment scheme" (as defined by the Financial Services and Markets Act legislation).
Importantly it is proposed that both new and existing UK limited partnerships could qualify as PFLPs. An existing UK limited partnership could apply to Companies House to be re-designated as a PFLP within 12 months of the draft legislative reform order coming into force (provided the relevant requirements are met).
Under existing law if a limited partner participates in the management of UK limited partnership business it faces the potential loss of its limited liability and may become liable for partnership debts and obligations (during such period of participation).
This basic position will remain the same for a PFLP but with the exception of a non-exhaustive "white list" of activities/decisions that a PFLP limited partner may be involved in without being treated as taking part in the management of the partnership business. Such activities/decisions include whether or not to:
- vary the partnership agreement;
- change the general nature of the partnership's business;
- allow a particular investment by the partnership;
- incur, extend or discharge partnership debt;
- dispose of or acquire partnership assets;
- appoint or remove a partner;
- approve partnership accounts;
- approve the valuation of partnership assets;
- act as a director, member, employee, officer, shareholder in a general partner or another person appointed to manage or advise the partnership;
- approve the winding up of the partnership; and
- approve a decision which involves an actual or potential conflict of interest that affects or relates to the partnership, its business, a partner in the partnership or a person appointed to manage or advise the partnership.
These far reaching amendments would provide certainty about what a PFLP limited partner can and cannot do before losing its limited liability status. This could be particularly relevant for passive or semi-passive real estate investors who, historically, have not wanted to invest in (or, for tax reasons, are restricted from investing in) the general partner vehicle that acts for and on behalf of the UK limited partnership. Under the proposed legislation, such investors could retain their economic interest in the UK limited partnership as a PFLP limited partner whilst having clear approval rights on material investment issues (which would in turn protect their investment) in the knowledge that their limited liability status will not be compromised.
Under existing law the general nature of a limited partnership's business and the amount of capital contributed to the limited partnership by its partners is information that must be filed with the registrar at Companies House (which information is therefore publicly available). It is proposed that there would be no requirement to disclose/file the general nature of a PFLP's business or the capital contributed by PFLP partners to it (which information would therefore remain private).
Further, the arcane requirement under existing law to advertise (in the London or Edinburgh Gazette) the transfer of a limited partner’s interests to a third party or the change in status of a general partner to a limited partner would also be removed.
The proposed changes do not just improve privacy for investors but they also pave the way for the smoother completion of corporate real estate acquisitions, disposals, reorganisations and re-financings involving UK limited partnerships by removing administrative burdens and improving deal certainty (e.g. parties will no longer be beholden to a notice appearing in the Gazette in order to complete the relevant transaction step).
Generally UK limited partnerships are structured such that a limited partner will make a de minimis capital contribution (e.g. 1% or less) with the remainder of its economic interest often being provided in the form of a loan advance from the limited partner to the UK limited partnership.
This split is used as under existing law a limited partner must make a capital contribution but is restricted from withdrawing it (during the life of the UK limited partnership). If a limited partner makes such a withdrawal it becomes liable for the debts and obligations of the UK limited partnership up to the amount withdrawn.
It is proposed that a PFLP limited partner would no longer be required to make any capital contribution (which means a PFLP's limited partner's entire economic commitment to the PFLP could be advanced in the form of a loan).
Furthermore, if a PFLP limited partner does contribute capital to a PFLP, but then subsequently withdraws it, such PFLP limited partner will no longer be liable for the debts and obligations of the PFLP up to the amount of any capital which it has withdrawn.
It is also proposed that a PFLP limited partner be exempt from certain duties which, under existing law, apply to all partners of a UK limited partnership.
PFLP limited partners would be exempt from the duty to disclose accounts/information to their fellow partners and from the restriction on competing with the PFLP.
PFLP limited partners would therefore be free to carry on business of the same nature which competes with that of the PFLP without requiring the consent of the other partners or having to account for the profits made in relation to the competing business.
These changes are designed to improve investor privacy and benefit the more passive real estate investor which may be economically interested in a number of real estate funds or corporate structures with a similar investment profile as the PFLP in question.
The Treasury consultation paper Proposal on using Legislative Reform Order to change partnership legislation for private equity investments and the draft The Legislative Reform (Limited Partnerships) Order 2015 are available on the gov.uk website.
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