The real risks of directorship in real estate
The real risks of directorship in real estate
"The core risk to be aware of is that being on the board of a property-owning company means that certain legal liabilities lie with you as an individual."
Directors often don’t realise they can be prosecuted as an individual if there are accidents or issues on-site. A qualified chartered surveyor with almost 20 years’ experience in the industry, Ocorian Client Director for Real Estate Nick Terry covers the risks of real estate responsibility.
Any real estate investment comes with inherent risks - risks from the location of the asset, from the actions of tenants that live or work inside it, feasibility risks in terms of potential delivery of a plan - and any director who sits on a board that owns or runs an asset must be aware of these risks.
If directors are unaware of the risks, they need to get that information from someone else, such as the asset manager, solicitors, or other investors, and must ensure that information is totally impartial to allow them to make decisions based on it. It’s a very difficult line to tread - on the one hand you need to demonstrate directorial independence, but on the other it may be difficult to go against what a specialist is advising you.
Being legally liable
The core risk to be aware of is that being on the board of a property-owning company means that certain legal liabilities lie with you as an individual. Think of it this way: the UK Land Registry contains a list of the registered proprietor for every piece of registered land in the country. Being that name, whether as an individual or as an officer of a corporate body, carries certain responsibilities.
As the registered proprietor, you are responsible for goings-on on that piece of land, and you have legal duties to the people using that land and to the environment around it, to maintain it and ensure it's accessible. And in cases where the registered proprietor is a company, those duties can fall to the directors of the company as individuals - the responsibility usually ends with individuals.
Keep an eye on those day-to-day operational risks
So, what are some of those obligations? For example, there are more than 270 laws relating to the environment in the UK, including the Environmental Protection Act 1990 and the Control of Pollution Act 1974, and you’ll need to ensure your real estate asset is in compliance with all laws applicable to that site. That means ensuring tenants are complying, too, especially if their use involves oil and fuel tanks, plants and weeds, or cesspits and waste pumping stations.
In terms of property use, laws exist around disability discrimination, defective premises, occupiers’ liabilities, planning, and so on. Let’s take a quick look at the story of Mr. Harvey.
Mr. Harvey was a student who in 2003, after watching rugby (and the post-match celebrations) ran away from a taxi leaving a friend who had failed to pay their way during the night to pick up the fare. In running away, Mr. Harvey entered land owned by Plymouth City Council (but landscaped by Tesco) where he tripped and fell 5m onto the Tesco car park, sustaining serious injuries.
Mr. Harvey was initially successful in claiming that Plymouth City Council had failed him in their duty of care to visitors to their land. Although this was subsequently overturned at appeal (some ten years and many thousands of pounds worth of legal fees later), it should prove a warning to all landowners as the time and expense of defending the case was not insignificant.
This is the sort of responsibility that goes with being the registered proprietor of a piece of land. Even if your asset is vacant, you must protect it against squatters, or children playing on building sites - the list goes on. And we haven’t even discussed paying business rates, local levies, utilities charges, infrastructure levies, and so on.
A worthwhile risk when done correctly
Why would someone take on this risk? Well, as detailed in my recent article about the real reasons investors choose real estate, it is incredibly attractive to those looking for long-term income streams with generally stable returns.
Ocorian works with various investors and asset managers, operating real estate portfolios from around £50 million up to around £1.5 billion, so we know the good and the bad of investing and dealing with these risks head-on. As long as you work with experienced teams with their eye on the ball, you can help to mitigate those risks and enjoy long-term success with your real estate investment.