If you are an introducer or intermediary, your contacts with investors may well be your most valuable asset. You may have spent years developing those relationships through networking, client entertaining and travel. You provide a very valuable service in filtering opportunities and connecting those investors with suitable projects.
At LCN Legal, we are often involved in projects where introducers have a critical role. Many of those projects involve very significant sums, and it is natural that the introducers should be rewarded for their efforts. Often this reward is in the form of a commission, introduction fee or fundraising fee, which is payable only if the project goes ahead.
From our perspective as English lawyers, we often come across situations where introducers may not receive the reward they were expecting, or may expose themselves to unexpected liabilities. Here is a list of the 7 most costly mistakes that we see.
Timing is crucial. If you don’t have a clear contractual entitlement to receive fees before you make the introduction – or at least a signed non-disclosure and non-circumvention agreement, you may just be relying on the goodwill of the parties to pay you a fee.
It is a common misconception that letting others provide their standard form agreements will save you time and money. However, the best way of securing your entitlement to fees is to take control over the terms of your fee agreement. Another party’s contract will be unlikely to protect your interests. If you don’t have a suitable contract in place, you may not receive the fee you should: for example, does the contract cover you if the investor is offered an opportunity to buy, but then agrees to make a loan instead? Or if the investor makes an investment in a different project? Or if the purchase price is payable in instalments, or in non-cash consideration? Or if the investment is not made by the investor you have introduced, but by a related party? All these situations can be addressed in black and white if you have the right contract in place.
The best contract in the world will not help you if you have signed it with the wrong person. For example, if you sign an introduction agreement with another intermediary in a chain of intermediaries, your entitlement to get paid will only be as strong as the weakest link in that chain. The strength of any given link depends on two factors: the terms of the relevant contract, and the financial standing of the paying party. If your contract is with a company which has no assets, and only an indirect connection with the project, your fees are at risk. All this means that you need to understand the full picture, choose your counterparty to the contract wisely, and require a guarantor where necessary.
In principle, it is acceptable to receive a fee from the buyer and the seller in a particular project. However, when you start to act as agent for one party, various implied legal obligations can arise. This can include a duty not to make a secret profit from that particular role. This can mean that if you haven’t made it very clear to the first party that you will receive and retain a fee from someone else, you may have a duty to pay over that fee to the first party.
Unless your commission agreement expressly says that VAT is charged in addition, the legal interpretation under English law will usually be that whatever fee you have quoted includes VAT. This may mean that if you are subject to VAT, you bear that cost (currently 20%).
Provided you are only making introductions for the purposes of investing directly in UK property and you are not offering or arranging an investment in shares or any other security or financial products, you should not have to worry about infringing financial services regulation in the UK. However, if the project involves selling or issuing shares, loan notes, participations in a collective investment scheme or some other form of investment, you need to consider your position very carefully, and make sure you are acting within the relevant rules. The UK’s Financial Conduct Authority regularly prosecutes offenders, and other parties may make a complaint, particularly if a project does not produce the expected returns.
We have put this last because it has the least to do with legal considerations, but really it’s the most fundamental point. More often than not, failing to ask questions about the investor will mean that you don’t receive a fee because the investment project doesn’t go ahead. Some of the basic questions to ask include:
If you would like more extensive help creating a tailored template introduction agreement or non-disclosure and non-circumvention agreement, please call us on +44 020 3432 3269 or email us at info@lcnproperty.com.
LCN Property helps investors, asset managers, developers and property finders setup and maintain solid legal foundations for their projects.