12 November 2001
An increasingly international property finance market is emerging in Europe. Those who may traditionally have focused on investments in the UK are now more likely to examine opportunities in other European countries, and are often making multijurisdictional investments.
Investors have had access to European banking networks for some time, but the provision of uniform legal services has not to date been similarly widespread. Investors have tended to rely on the use of different law firms in each country, on a case-by-case basis. However, it is becoming ever clearer that the provision of pan-European property finance demands a similarly pan-European approach from legal advisers. Banks and their borrowing customers wish to maximise the efficiency of the way in which finance is arranged, and so dealing with one firm that can integrate local and international advice in a single package represents a very desirable prospect.
Many investors are familiar with the laws and practices in one jurisdiction, but find it difficult to operate in other jurisdictions where the legal system and prevailing market practices are quite different. They are then faced with either the somewhat daunting task of working within an unfamiliar environment, with all the uncertainties and risks that can entail, or seeking to convince practitioners within that jurisdiction to adopt new methods. Neither option is particularly appealing.
In addition to these factors, banks are developing financial products that allow their customers to borrow monies to invest in or develop properties across Europe, rather than using separate and independent investment loans for each individual project or investment. Integrated loan facilities such as these require, of course, integrated legal advice.
But what is required to deliver these integrated legal services? International banking and property expertise needs to be combined with local market knowledge and an intimate understanding of local market practices. The development of property finance across Europe is uneven, hence it is not possible to bring a set of assumptions from one country to a transaction taking place in another.
There are, for example, considerable variations in the way that security can be taken over land. In each country, each approach will have legal pros and cons. But knowing the legal advantages of one approach over another is only half the story; local market practices also need to be taken into account. If, for example, a means of taking security appears to have a number of legal disadvantages but is the most common method used in a particular jurisdiction, a bank may be ill-advised to follow technical legal advice and eschew market practice, and so be seen to impose obligations or requirements that a local bank would not.
The costs of taking security also vary considerably from country to country. Lawyers need to be able to understand how to minimise those costs in each jurisdiction without prejudicing the security taken. Of course, legal opinion must be correct, but it should be tempered with a commercial pragmatism that only local knowledge can deliver.
So, marrying market knowledge and legal expertise is vitally important in property finance. Local knowledge must be offered in the context of an understanding and demonstrable experience of providing cross-border services. Lawyers able to combine these qualities are a rare - and a valuable - commodity.
Law firms that have to date focused on domestic markets are likely to experience some pressure from clients who had hitherto largely limited their interest to one country. As these clients begin to expand their horizons, they will seek services from firms that are able to coordinate their advice across borders. And there is no doubt that the scope of interest in Europe is expanding, and it is certainly not limited to the more established jurisdictions. There is a strong desire and a great need for property development in many of the Central and Eastern European countries, and many banks, particularly German banks, are actively seeking opportunities in the region. Law firms need to be able to follow their clients into these new markets.
Pan-European property finance is an expanding market within an enlarging Europe, and a development that many firms will be keen to take advantage of. Unfortunately, clients are generally unwilling to fund the acquisition of know-how that is required in order to operate in the pan-European market. Those firms with the requisite technical expertise, and which have taken early decisions to invest in their international networks, hold some key advantages over the firms which are only now looking to break into the international property market. Mark O'Neill is a partner at Allen & Overy.
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