Investors take £350m UCIS operators to court

In light of a growing number of rules and regulations regarding advertising for and the operation of UCIS funds, a particular case was brought to B&C’s attention concerning a commercial property investment fund.

The incident in question involved a group of 19 private investors who had previously involved in a number of projects put forward by a firm called Egan Lawson.

The London-based firm established a brand, known as the Albermarle Syndicates, which constituted a number of commercial property investment partnerships in the UK. Since the first fund established in 2001, over 20 syndicates have invested over £350 million in such projects.

After a number of successful transactions with the firm, the investors were offered – via a ‘teaser’ email - a further opportunity to invest in development land at or near an airport property called Fairoaks, through an investment vehicle called Albermarle Fairoaks Limited (AFL).

The forwarded a significant amount of money to AFL’s solicitors in order to be invested into the project, which took the form of an unregulated collective investment scheme (UCIS). At no point did AFL or its solicitors issue an Information Memorandum or application form pertaining to the investment.

A disagreement arose, however, between the investors and AFL’s solicitors when it came to the capital to be used in the scheme. The investors believed that it was agreed that the funds would be held in escrow in the solicitors’ bank account, earning them interest at 1 per cent above base rate.

AFL’s solicitors, on the other hand, denied that there were any such escrow arrangements, and that funds provided for the Fairoaks scheme were forwarded in the form of an unsecured loan and could be considered AFL’s property. Furthermore, the beneficial shareholder of AFL used the funds to repay in part a bridging loan, obtained from high street lender RBS.

In the end, though, the total capital raised was not enough for AFL to pursue the Fairoaks scheme and it was abandoned, leaving part of the bridging loan from RBS still outstanding. AFL then went into administration in April 2008, resulting in the claimants losing their money.

As there was no written agreement between the two parties made, the investors attempted to bring the matter to court. They made a case that the teaser email prompted them to “invest straight away […] prior to formal fund raising in September” and that they would earn the quoted interest pursuant to loan notes issued by AFL. It was argued that both the teaser and the loan notes neither invited or denoted an immediate, unsecured loan.

The investors also understood that the new project would follow the format of previous opportunities entered into with Albermarle, which treated their payments in escrow, despite the absence of a written contractual agreement as was used in the past. This includes a similar investment opportunity in Brighton offered through Albermarle, where no Information Memorandum or application form was filled in, but all invested capital and appropriate interest was returned to investors.

The solicitors, defending against the investors’ claims, argued instead that the escrow process was never explicitly agreed and that, furthermore, there were several discrepancies between the varying personal accounts of the claimants. For example, one stipulated that he had a telephone conversation with Juliet Bellis, a partner at the firm, and explicitly agreed the terms of the deal, despite there being no record of any such communication.

In addition, the solicitors pointed to an Engagement letter –dated 13th July 2007 – which appeared to record the terms of the investors’ retainer. The letter read: “…I can confirm that I am agreeable to receiving the monies from investors on the basis that these monies are remitted either by way of loan to [AFL] or as an investment in whatever structure is put in place for the project and that these monies will be immediately utilised to repay monies owed to the Royal Bank of Scotland.”

In the end, Mr Justice Hildyard, presiding over the investors’ claim, allowed the case to proceed to trial, noting that there were “several compelling reasons” for a trial to be undertaken. In particular, he mentioned several inconsistencies in the solicitors’ supposed communications, the dubious authority of the provided Engagement letter and a relative lack of evidence on the part of both the claimants and defendants.

The case serves to highlights, however, the importance of how such schemes are advertised and described today, and may reveal why advice regarding UCIS is now so closely monitored.