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In the evolving landscape of corporate governance and employee incentives, employee share schemes (ESS) are gaining traction as a means for companies to align the interests of their employees with those of the business.

Among these, the Enterprise Management Incentive (EMI) and Employee Ownership Trust (EOT) schemes stand out for their potential to drive growth, enhance employee engagement, and facilitate succession planning.

As more and more businesses explore the benefits of ESS, it is important that they consider the unique legal implications of passing on part of their business to their team.

The Rise of Employee Share Schemes

The increasing popularity of ESS is no coincidence. In an era where talent retention and motivation are paramount, these schemes offer a tangible way to reward employees not just for their present contributions but also for their role in the company’s future success.

The EMI and EOT, in particular, have garnered attention for their favourable tax treatment and flexibility, making them attractive options for both employers and employees.

The ESS have also been shown to be a positive way to encourage employee “buy in” and commitment, as staff feel a stronger connection to their place of work, thanks to the financial opportunities on offer.

Enterprise Management Incentives (EMI)

The EMI scheme is designed for small to medium-sized enterprises (SMEs) with high growth potential, allowing them to grant share options to key employees as a form of non-cash remuneration.

The legal framework governing EMIs is intricate, with strict eligibility criteria for both companies and employees.

Companies must navigate these regulations carefully to ensure compliance and maximise the scheme’s benefits, which include tax advantages for both the employer and the employee.

Key considerations for setting up an EMI include:

• Company eligibility: The company’s gross assets must not exceed £30 million, and it must operate in a qualifying trade. Your company needs to operate independently, meaning another company should not own or control over 50 per cent of its ordinary share capital. Additionally, there must be no existing arrangements for such ownership or control to occur. If your company owns any subsidiary companies, these subsidiaries must also meet the criteria for EMI eligibility. Specifically, if they are subsidiaries managing property, your company must own and control at least 90 per cent of them.
• Employee eligibility: EMI options are available exclusively to employees who commit to working a minimum of 25 hours per week. For those working fewer hours, at least 75 per cent of their total working time must be dedicated to the company. Additionally, employees holding a ‘material interest’ in more than 30 per cent of the company’s share capital prior to the granting of options are ineligible to participate.
• Limitations: There is a limit on the value of shares that can be held under EMI options, which currently stands at £250,000 per employee.
• Granting Options: The process of granting options must comply with specific legal requirements, including the terms of the option and how it is communicated to the employee. The most that a company can grant is £3m in unexercised options at any one time.

Employee Ownership Trusts (EOT)

EOTs represent a different approach to employee share ownership, where a trust acquires a significant stake in the company on behalf of all employees.

This model promotes a collective ownership culture, with employees benefiting indirectly through the trust.

The EOT has become a popular mechanism for succession planning, particularly among companies looking to preserve their legacy while ensuring their workforce is invested in the company’s future.

Legal considerations for establishing an EOT include:

• Structure: The trust must be established with the sole purpose of holding shares for the benefit of the employees.
• Control: There are specific requirements regarding the company’s control and the trust’s operation, including the appointment of trustees.
• Benefits: While the EOT offers tax efficiencies, such as relief from Capital Gains Tax on the sale of shares to the trust, companies must comply with various conditions to qualify for these benefits.

Additional legal considerations

Setting up an EMI or EOT scheme is not without its challenges. Companies must consider the legal implications, including compliance with tax laws, corporate governance standards, and employment regulations.

Additionally, the process involves meticulous planning and documentation to ensure the scheme is implemented effectively and aligns with the company’s strategic objectives.

The decision by owner-managers to create ESS may also bring them in conflict with other shareholders without proper consultation, leaving them open to litigation in the most serious circumstances.

These two share schemes are only part of several share schemes made available to employees and there may be other options that are more suited to your business.

Ultimately…

Employee share schemes like EMI and EOT are powerful tools for fostering a shared sense of ownership and commitment among employees.

However, the success of these schemes hinges on a thorough understanding of the legal landscape and meticulous planning.

Companies contemplating the introduction of an ESS should seek expert legal advice to navigate the complexities involved and ensure that their scheme not only complies with the law but also aligns with their business goals and culture.

To find out more about our corporate legal services, including our expertise in shareholder arrangements and company structures, please contact us.

Currently at Committee stage in the House of Lords, the Leasehold and Freehold Reform Bill aim to offer enhanced protections for homeowners of leasehold properties – but campaigners are calling for further intervention.

The Bill would outlaw the creation of new leaseholds on houses and flats, as well as making it easier for leaseholders to purchase the freehold on their homes.

However, many argue that there needs to be support for existing leaseholders, including those who face increasing ground rent and other costs which are seeing some being threatened with eviction.

Our property law expert, Carey Jacobs, addresses the challenges facing many leaseholders in the UK and what needs to be done to support them in the long term.

How do leasehold properties work?

“When many people think of leasehold properties, they think of rental units,” said Carey.

“However, a decent number of owner-occupied properties are leasehold, most of these flats or apartments. Individuals or families own the unit in which they live but not the ground or the communal spaces within the building, which means they are still liable for ground rent.”

As a result, leaseholders may face higher costs than freeholders in similar properties.

When this leaves leaseholders unable to meet high rental costs or unwilling to due to rising rates, the freeholder can threaten to take possession of the property through the Courts if there is a breach of lease.

Enhancing protections

Leaseholders only need to owe a relatively small three-figure sum in order for freeholders to apply for repossession, although many are faced with far higher debts when they are unable to cope with rising costs.

“Additionally,” said Carey, “leaseholders often find themselves paying outstanding costs before the proceedings reach the Courts, despite finding costs unreasonable.

“It would be highly beneficial for leaseholders to have more protections in place over the significant investment they have already made in purchasing a property.

“From our perspective, it will be interesting to see where legislation around leasehold properties takes the residential property field and how this will impact the needs of homeowner clients in the coming years.”

For advice on leasehold properties and changes to leasehold legislation, please contact our Residential Property team today.

Our Private Client team are excited to announce the introduction of an innovative digital offering to estate planning clients – meeting the needs of a dynamic client base with growing concerns for sustainability.

We have now teamed up with Zenplans, an online estate planning tool, designed to help individuals easily and securely organise, store and selectively share life’s most important information.

How Zenplans works

Zenplans is designed to provide peace of mind for families, storing all information and documents securely but accessibly whenever it’s needed.

All of your affairs are kept in one place, helping both you and us administer your estate as effectively as possible.

It is also designed to support financial planning for significant life events such as a house purchase, giving you a truly holistic view of your estate.

As a new adopter of the platform, we’re currently offering our valued clients access to Zenplans completely free of charge until 30 June 2024.

Beyond that, use will likely only be subject to a nominal charge of £24 per year – without creating a contractual obligation for our users.

A sustainable step forward

With many estate planning clients focusing on creating a secure future for their family, we’re proud that Zenplans is a paperless platform, reducing the waste produced during the process.

Aside from being a more sustainable approach, paperless estate planning through Zenplans keeps all information in one place and reduces the risk of lost information and insecure data.

Ultimately, we have made this move to enhance the service we can offer to our estate planning clients.

To find out more about using Zenplans, we’d urge all clients to watch this two-minute explainer video and read our dedicated factsheet before getting started.

Taking out a business loan is a common way of financing a new business or the growth of an existing one – but there are key considerations that borrowers and lenders will have to make.

Borrowers, typically business owners or sole traders, will need to decide how much they want to borrow and how much they can realistically repay.

Upon application, lenders will decide what level of risk the borrower represents and whether they can offer the necessary amount.

One of the ways that borrowers can increase their appeal to lenders is by applying for a ‘secured’ loan – a loan which secures the funding against the business or individual’s assets.

Why take out a secured loan?

Done properly with due diligence, a secured loan can open a lot of doors for growing businesses.

As it offers security to the lender, loan providers are typically willing to offer a larger loan than for unsecured amounts, which can provide vital funding for business activities.

Before accepting terms on a secured loan, borrowers should seek legal advice regarding the agreements they are required to enter into to understand the extent of their liability and what assets are at risk if they fail to make repayments.

What assets do lenders look for?

This depends on how much borrowers are looking to take out and what assets they own that can be put up as collateral. It may also depend on the lender’s specific borrowing policy.

As a rule of thumb, the more you borrow, the more security the lender will require.

Examples of security are legal charges, debentures, personal guarantees, corporate guarantees or fixed charges over other valuable assets of the borrower such as intellectual property or valuable equipment.

In practice, this might mean that, if a business fails to make repayments on a loan, it’s directors may find assets such as real estate or personal possessions (if they have charged personal assets to secure the corporate lending) are sold to recover the sums due under the loan agreement.

The costs associated with the security will depend on the security sought by the lender, but can vary from £500 to £1,500 (plus VAT and disbursements) each.

It is also normal practice for the borrower to pay the lender’s costs for preparing and putting the security in place.

Both parties should agree any legal costs in advance before incurring said costs.

Before entering into a loan agreement, borrowers should seek independent legal advice to ensure that they fully understand the risks to personal and business assets.

We can provide impartial, straightforward legal advice to anyone considering providing personal guarantees to a loan or financing.

Contact Dashna Morarji-Sagoo by emailing DashnaMorarji-Sagoo@palmerslaw.co.uk or calling 01375 484443 or BJ Chong by emailing BJChong@palmerslaw.co.uk

The contents of this article are intended for informational and educational purposes only.

For business owners, flexibility can be as valuable as stability when it comes down to finding the right commercial property.

Understanding how to effectively include, negotiate, and utilise break clauses can save your business considerable time and money. Here’s what you need to know:

What is a break clause?

A break clause is a section of a commercial property lease which allows the tenant to break the lease and exit the property at a certain point before the end of the lease.

In the case of properties such as offices, a lease may last 10 years with a break clause at five years.

They are appealing to tenants because, in the case that a company grows or needs less space within the period of a lease, tenants can leave the property in search of a tenancy which better meets their needs.

Break clauses in commercial property contracts

A break clause must be explicitly included in the lease agreement to be valid.

When drafting or reviewing a lease, it’s crucial to pay close attention to the wording of the break clause to ensure it aligns with your business needs.

Typically, the clause specifies conditions under which the lease can be terminated early, including notice periods, any financial penalties, and the state in which the property must be returned.

This means that you need to have your lease carefully reviewed before signing it and make sure that it will be suitable for your business for the entire duration of your lease term prior to the break clause.

How do I negotiate break clauses?

Negotiating a break clause requires a balance between your need for flexibility and your landlord’s need for security and an assurance that they will have tenants for a specified amount of time.

You should be aiming for a break clause that allows you to exit the lease with minimal financial burden, such as negotiating early exit fees.

This will provide you with the option to respond to changing market conditions or business needs.

Landlords, on the other hand, may seek to include conditions that protect their investment, such as longer notice periods or requirements for the property’s condition upon termination.

Key points to negotiate with your landlord

As we have said, there are three major issues that you’ll need to negotiate with your landlord in order to reach a mutually satisfactory contract:

• Notice periods – This is how far in advance you must inform your landlord of your intention to terminate the lease. Shorter notice periods offer more flexibility for tenants, while landlords may prefer longer periods.
• Break penalties – Some break clauses include financial penalties for early termination, even though you are doing so within the bounds of the contract, so you can make your lease more cost-effective by negotiating these costs down.
• Condition of Premises – Although not specific to break clauses alone, most early termination clauses state that a property must be left in a certain condition. Returning the property in good condition is always best practice to avoid contractual disputes.

Make sure to do this in plenty of time before you plan to take possession of the property and avoid signing a contract that you are not happy with.

When break clauses may not be appropriate

Despite their benefits, break clauses are not always the most useful approach to a tenancy.

The most important thing to remember is that break clauses typically go both ways, meaning the landlord can also break your tenancy at these points without legal repercussions.

For tenants planning to invest significantly in the leased property, securing a long-term lease without a break clause can offer more stability, ensuring that your investment is not lost due to an early termination.

Landlords, particularly those with sought-after properties, may prefer leases without break clauses to ensure a stable, long-term income stream.

For bespoke advice on break clauses and commercial property contracts, please feel free to get in touch with our Commercial Property team.