Find out how this modification works and how to take advantage of it.
How this modification works
This modification will enable managers and depositaries of authorised funds that invest in immovable property to provide guarantees and indemnities to third parties where required by the terms of the purchase to do so. It will also allow for such guarantees and indemnities to be backed by the scheme property.
Under the unmodified rules, Investment Companies with Variable Capital (ICVCs) and depositaries of authorised retail funds are prevented from providing a guarantee or indemnity in respect of the obligation of any person. Nor may they use any of the scheme property of the fund to discharge any obligations arising under a guarantee or indemnity with respect to the obligation of any person.
For a fund that invests in immovable property (land and buildings), this may cause difficulty in relation to contracts for transferring commercial property. Many of these contracts impose certain obligations or liabilities on the transferee, for which the transferee must give a guarantee of performance to the transferor.
Such obligations are typically about ensuring the payment of rent and other financial liabilities, maintaining the fabric of the property, or covenanting to refrain from undertaking certain commercial activities. These are likely to be seen as normal commercial terms for immovable property, which do not affect its marketability.
We acknowledge that a fund dedicated to investing in immovables is likely to be unduly restricted in its ability to achieve its aims, if it cannot purchase properties because the transferee (who is usually the depositary of the fund) is forbidden to provide the necessary legal undertakings to the transferor.
We also acknowledge that our rules currently provide for other circumstances in which it is considered reasonable to use scheme property to cover the liability under an indemnity. This modification will ensure authorised funds can invest in immovable property of the kinds permitted by our rules, provided the terms of the purchase do not involve taking on obligations or liabilities that would represent an undue risk to investors.
What the modification means for firms
The practical effect of the modification is that depositaries can provide guarantees to third parties for contracts for immovable property to be purchased for the fund, in accordance with certain conditions. The depositary must be satisfied on reasonable grounds that the terms of the guarantee or indemnity will not result in undue risk for unit holders. To meet this condition, we would expect it to base its assessment on appropriate expert advice as to whether the obligations or liabilities are normal commercial terms for a property of that type in that market.
This modification is valid for 5 years from the start date of the direction unless subsequently withdrawn.
How to use this modification
You can take advantage of this modification by consent by:
- Submitting your notification application to us via our Connect[2] system. You can access Connect by signing in to My FCA[3] with your existing details. Please see our user guide[4] to assist with your submission.
- We will then write to you to confirm that the modification has been granted and publish each modification direction we grant on our website.