The real estate question

There are signs of life returning to market for investment in ports and terminals as is illustrated by increasing activity in port concessions being tendered and awarded – particularly in Africa, South America and the Indian sub-continent – and in projects that have been “on hold” now proceeding.

One aspect of such investments to which particular attention ought to be paid, especially for investors and funders who are relatively new to the market, is how the relevant land and real estate interests comprising the port and/or terminal are to be developed, occupied, controlled and securitised.

Depending on the characteristics of an individual port or terminal, it is likely that complex land arrangements could exist and concessionaires, or investors in a concessionaire should carefully consider the land issues that may arise.

As with all landlord-tenant type relationships, the owner and occupier, being the concessionaire in the case of a concession, will want to protect their respective rights over the relevant land, while the owner will seek to reserve as flexible rights as possible over the concession area.

The concessionaire on the other hand will look to ensure there is as little interference as possible with its right to use the land. Contrary to the concessionaire’s wishes, it is likely that the owner will also want to limit the concessionaire’s right to grant subleases and licences to third parties.

Any right of a concessionaire to use land may also be subject to pre-existing rights, such as sub-leases or licences, which the owner is already bound and will bind the concessionaire going forwards.

Concessionaires should ensure full rights of access to and from the terminal or port. Although this point may be obvious, it is surprising that concessionaires have been known to take leases granting only limited access rights and/or a lack of commitment from owners to provide or procure the provision of utilities to the site. Conducting a due diligence exercise of the surrounding area is therefore important. The concessionaire should then ensure appropriate provisions are included in the concession agreement and/or lease.

Given that terminals are often located on brown-field sites the concession agreement and/or any separate lease must also clearly address who is responsible for clean up of existing contamination and liability for contamination going forward.

As concession agreements are usually granted on a long-term basis, there is difficulty in anticipating circumstances that may affect the concession in the future. An owner may wish to limit the term to evaluate the concessionaire’s performance, but the concessionaire ideally will want an option to extend the term conditionally. The shorter the lease, the greater the concessionaire’s reluctance to incur significant capital costs.

The concessionaire will want to maximise the term to guarantee recovery of investments and maximise financial benefit. In market fluctuations, renegotiation of the concession agreement or lease may be open to the parties so that they can re-discuss rent and onerous terms and conditions. The concessionaire should also carefully consider its rights of termination and compensation.

A potential problem arises if the concession agreement contains commercially sensitive terms that both parties want to keep confidential for their own reasons and the competitors/customers may have access to it via the land register. This problem may be avoided in some jurisdictions, such as England and Wales

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which allow for commercially sensitive provisions in a register-able document to be blanked out.

Another issue that should be considered in regard to whether to include provisions relating to the use of land in a concession agreement or to proceed by way of lease is stamp duty or similar taxes. Depending upon the tax regime in a country, stamp duty may be payable on the value consideration/concession/royalty fees transferred from the concessionaire to the entity controlling the port.

Under a concession agreement, the concessionaire usually pays the port owner an upfront payment for the concession, royalty fees, penalties and rental payment. Logically, stamp duty should only be payable on the element of the payment that relates to use or control of land. However, if the issue of the control of land and title to it is included in the concession agreement, the concessionaire may face a substantial tax liability, which could have been avoided if a separate lease agreement was entered into.

In the current funding climate, concessionaires may face difficulty in terms of financing. Proceeding by way of a separate lease, which can be registered in the relevant jurisdiction, can be of advantage in that this results in a tangible asset which can be offered as security to potential investors and funders. The funder is then likely to have the comfort of having its interest in the lease protected on the land registry. However, this is subject to the particular laws of the relevant jurisdiction. In some jurisdictions, Dubai for example, only locally registered financial institutions can register charges over interests in land.

More fundamental than any restrictions on registration of charges of land at the relevant land registry is the fact that the port authority or relevant government entity will often want to restrict the concessionaire’s ability to use the relevant assets, including land, as a means to secure its finance and may wish to include provisions to that effect.

In certain jurisdictions the grant of a long-term lease or concessions does allow the transfer of property rights a third party. It is common for owners to resist provisions which allow step-in rights for the concessionaire’s funders in the event of default. However, if the grantor does allow funders step-in rights, it is usually subject to the owner’s consent. This applies particularly in the case of land leases compared with transfers of contractual rights under a concession to another party.

The problem that concessionaires face is that funders typically seek the granting of such security unconditionally. The concessionaire should ensure that the consent of the owner is acknowledged in the granting of security to their lenders. Ideally, the concessionaire should ensure that the owner enters into a direct agreement with the funders in respect of the security, particularly in relation to the land assets and rights granted to the concessionaire under the concession or lease.

While land and real estate issues will not be the commercial driver in relation to any investment in ports and terminals, as highlighted above, sufficient understanding of the relevant land issues attached to a port or terminal concession is vitally important. Such understanding will commercially benefit not only owners and concessionaires, but also funders and investors in particular those venturing into the sector for the first time. There can be significant consequences from the point of view of development, securitisation and operating the relevant facility, if detailed consideration is not given to real estate issues at an early stage.