John Keenan: SIPP/SSAS limitation of liability clauses explained

John Keenan strongly recommends a limitation of liability clause is included in every lease linked to to SIPP and SSAS pensions. Here's why...

When a small self-administered scheme (SSAS) or self-invested personal pension (SIPP) purchases a commercial property the requirement for a limitation of liability clause within the subsequent lease between new owners and tenant should be put on the table at the earliest possible juncture.

This clause is as far removed from its ‘LOL’ acronym (used in text speak) as it could be, and in our experience not flagging it at the earliest opportunity can cause real problems down the line.

At its worst, it can waste thousands of pounds of valuable pension scheme funds. Certainly no LOL matter.

So what is it and what does it do?

A limitation of liability is a clause inserted within a lease that ensures if any liability arises, then it will be restricted to the value of the individual’s pension scheme funds. It should be clearly flagged within a lease and an example of the typical wording would be:

It is hereby agreed by the parties hereto that the liability of ABC Pension Trustees shall not exceed the net value of the assets within its control in THE A SMITH SIPP and that save for that the TENANT shall not have any claim whatsoever against ABC Pension Trustees.”

This protects both the professional trustees and, where they are a trustee, the member in their individual capacity. By ring-fencing liability to the assets of the SIPP member’s fund that is making the investment, it also ensures that the assets of other pension trust members are not exposed where they are all held under one trust.

When is it required?

I would strongly recommend that the limitation of liability clause is included in every lease.

This would include agreements with the freeholder (when purchasing long leasehold) or the tenant (when granting a lease as a freeholder or long leaseholder).

In my experience persuading the other party to accept this requirement usually falls into one of two categories; either completely straightforward or very complicated, there doesn’t seem to be many that fall in-between.

A straightforward example might be when a SSAS or SIPP is purchasing and leasing the property to a connected party.

In these circumstances it won’t usually cause a problem, as while the owner-tenant must act independently (wearing the two hats of pension scheme and tenant), there is no commercial favour being granted and both parties benefit as it is in their interests to have their pension scheme assets protected.

In our experience, the lawyers representing both parties will agree to the clause and the lease will be executed.

Where it becomes complicated is when a property is being purchased subject to an existing lease already being in place. In these circumstances, you are asking an existing tenant to vary the terms of the lease to include the limitation of liability clause.

While in practice it should not cause them any concerns, you are still beholden upon them acceding to the request and in our experience where the tenant is someone like a large national supermarket, betting chain or retail outlet, they have standard leases with all their landlords and can be unwilling to give any local or specific flexibility.

An absolute must

The limitation of liability clause is a pre-requisite for most SSAS and SIPP providers and, taking us back to the first point, it must be raised at the outset otherwise you run the risk of a commercial property purchase costing thousands of pounds in legal fees only to get to a point where the SSAS or SIPP realises it cannot proceed with a transaction because the tenant will simply not agree to the clause.

We have thousands of SSAS and SIPP commercial properties within our portfolio and have purchased hundreds this year, all of which will have the limitation of liability clause. It should not be a problem as long as it is explained clearly and at the right time.

Oh, and assuming the tenant is reasonable, which they always are, LOL!

John Keenan is corporate development manager at Xafinity SIPP and SSAS