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Keeping It Real Estate

News and Trends in UK Real Estate, Disputes and Planning Law

Posted in Real Estate News

Wait before waiving

When a tenant leases equipment from third parties for use in their premises or enters into hire-purchase arrangements, the finance/ leasing companies often ask the landlord to waive their rights over such equipment.  Tenants can put great pressure on landlords to sign waiver letters urgently, claiming that without them they will not be able to take delivery of a vital (and usually very expensive) piece of equipment and that any delay will be detrimental to their business. Although landlords may want to accommodate such requests, they should view these letters with caution.

The main thrust of a waiver letter will be that title in the equipment will not pass to the landlord.  At first glance this seems uncontroversial, but to the extent that the equipment is attached to the building, it may become part of the premises. Without an agreement to the contrary, such equipment will belong to whomever has the right to occupy the building which will be the landlord once the lease expires or is terminated.  Air conditioning plant and lifts are obvious examples of equipment which is attached to a building, but the point may also apply in relation to equipment which needs to be bolted into the structure.

Any acknowledgement that title will not pass to the landlord (and indeed any agreement by the landlord not to take control of the equipment to recover rent arrears) should only, therefore, be agreed by the landlord on condition that the finance/ leasing company has to remove the equipment following the termination of the lease (however that comes about) within a specified period of time.  Until the equipment is removed, the landlord may not be able to relet the premises so if the finance/ leasing company fails to do so, the landlord should have a right to remove, store or dispose of the equipment.  Any proceeds of sale (less removal, storage and disposal costs) will then belong to the finance/ leasing company.  This point is often highly contentious, not least because the equipment may have little or no value once it is removed or because it may need specialist disposal agents to obtain the best price on a sale.

Whilst the lease subsists, it may not be possible for the landlord to grant the finance/ leasing company a right to enter the premises to remove the equipment so any such right should only be agreed in so far as the landlord is lawfully able to do so.

Finally, the finance or leasing company should have an obligation to rectify any damage caused by the entry and removal of goods and any entry should be at their own risk. The finance/ leasing company should also indemnify the landlord against any resulting costs or claims.

Waiver letters are often presented to landlords as “non-negotiable”.  However, it is highly unlikely that the landlord will owe any contractual obligation (in the lease or elsewhere) to the tenant to sign one, so the starting point should be that the landlord will only do so at the tenant’s cost and on terms which it considers satisfactory.  With this in mind, a tenant who requires a landlord’s waiver should raise the issue as early as possible to avoid delays.

Posted in Real Estate News

Hogan Lovells Hosts ‘Openings and Closures’ Retail Summit

Last week saw the launch of the Local Data Company’s third ‘Openings and Closures’ report at an event hosted by Hogan Lovells. Matthew Hopkinson of LDC gave a presentation on the report’s findings which was followed by a panel discussion chaired by Samantha Fenwick, a reporter with You and Yours – BBC Radio 4′s consumer programme. The panel included our own Mathew Ditchburn, Michael Weedon of the British Independent Retailers Association, Professor Paul Longley of UCL, Simon Danczuk MP for Rochdale and Hussein Lalani the founder of 99p Stores. Continue Reading

Posted in Real Estate News

Ready, Steady, Bid!

London is a seller’s market.  Many are looking to maximise the price they can achieve by adopting a more formal bid process, particularly for high profile assets such as the former Canadian Embassy last year and, currently, the Gherkin.

The benefit of such a process to the seller is clear, but for prospective buyers it can be a very costly way of failing to spend that £100m.  The main cause of this is that the structure of most bid processes requires bidders to undertake substantial amounts of due diligence before they know whether they are going to be the chosen one.  The ease of the process depends on how well organised the seller’s team is and how transparent they are prepared to be over timing and selection criteria.

Most bid processes will follow a two stage approach, with an initial round of offers and then a shortlist of bidders.  Those shortlisted will be expected not only to fine tune their price offer, but often also to mark up the purchase contract and confirm that they have completed their due diligence on the asset. So serious bidders will have done most of the work at the point they submit their best offer, as they will be expected to exchange the purchase agreement within a couple of days of the chosen offer being accepted.

One of the initial decisions to make, therefore, is how much due diligence to undertake at each stage.  Most bidders will want to limit how much they spend at the initial stage and reserve the bulk of the work to be done if they are shortlisted.  At the initial stage it is mostly a question of identifying key issues that impact on value and, as ever, there is a risk/reward balance.

Buyers’ costs could be mitigated if sellers were prepared to make Certificates of Title available to bidders, but they often avoid even that effort (and cost) and only provide access to a website on which title information is available for bidders to review.  Some such websites are clear and comprehensive, but not all.

It is also essential to check the requirements of the process and make sure they are followed, so in addition to due diligence on the asset, prospective buyers need to prepare their bid carefully to try to get an edge – it is not just deciding on the bid price.  This includes preparing appropriate background material on themselves and their track record.  Financial substance will be key, so if the proposed bid vehicle is for example, a special purpose vehicle with no substance in itself, buyers should consider providing guarantors.

Proof of funds will usually also be needed, so bidders will need to get letters from their bankers confirming the sums available.  The more reputable the bank providing such a letter, the better.  It all adds to the credibility of the bid.  Ultimately, what the seller wants to know is that the bidder can exchange and complete quickly, if its bid is accepted.

An earlier version of these top tips appeared in the Autumn 2014 EG London Investor Guide.

Posted in Real Estate News

The Occupier Whisperer

Dion Panambalana lifts the lid on the top tips he is giving to office tenants – useful for a savvy investor keen to plot occupiers’ next moves.

Now that the leasing market is back in central London for office occupiers, here are the top five issues I would suggest tenants consider on a major office letting:

  1. Certainty on rent and rent at review – and what they are going to pay by way of service charge – have always been top of a tenant’s shortlist of issues that need to be addressed.  Rent reviews are relatively rare because leases tend to be 10 years or less, unless they are major occupiers taking a lot of space.  So it is quite common to see some sort of “fix” in years 5 to 10.  Similarly with service charge, although that tends to be over a shorter period.
  2. If tenants are taking space that has been constructed to shell and core, I recommend they ask the landlord to put their fit out contractors onto their insurance policy, so that if they cause damage to the building, the landlord’s insurance policy covers it.  Otherwise their contractors will need to take out their own insurance and add that to the cost of the fit out.  There is a debate to be had between landlord and tenant on cost as typically the landlord might have built to a Cat A standard of finish anyway.  Either way it is probably cheaper for the landlord to insure this than for the tenant’s contractors to have to bear it.
  3. The Model Commercial Lease suite of documents (“MCL“) has now launched and is intended to represent a fair starting point for landlords on all classes of institutional property.  Many tenants can use the drafting in it to reflect their final negotiating position.  A position that has gained a lot of traction in the last year or so is the good neighbour arrangements.  This means that when a landlord is spending a tenant’s money, or making decisions that affect the tenant’s business at the premises, it must behave reasonably and not overspend, or unreasonably regulate.  The MCL reflects current practice in this regard as these clauses tend to be accepted by landlords, if they have not already included them in their lease, without murmur.
  4. On many lettings, some sort of schedule to reflect reinstatement, rent review (if there is one) and dilapidations liability tends to be the norm.  If tenants are taking new space this will be covered.  But it is also important for older space, where tenants might want to limit their repairing liability and be as clear as they can on dilapidations and reinstatement.
  5. Finally the relationship between landlord and tenant, which has been changing to a customer-based relationship for many landlords over the last 15 years, has finally started to change in the legal market.  So, tenants can ask for something that they genuinely need for their business and which the landlord can reasonably accommodate at no extra cost, but maybe with minor inconvenience.  If the tenant can fully and fairly explain their position and is prepared to concede something else in return, I would advise them to ask and they may receive!

An earlier version of these top tips appeared in the Autumn 2014 EG London Investor Guide

Posted in Case Updates

Repeat guarantees back in the headlines

In the latest round of litigation on the vexatious issue of repeat guarantees, the Court of Appeal reached a sensible, commercial decision in Tindall Cobham 1 Limited v Adda Hotels [2014].  You will remember that repeat guarantees require the same guarantor to guarantee successive tenants. They were seen as a practical solution for both landlord and tenant when subsidiary companies of little covenant strength wished to transfer leases between themselves as part of a corporate re-structuring.  Landlords had no objection as long as each tenant was backed by the same parent guarantee. Repeat guarantee clauses were relatively commonplace until the Court of Appeal’s decision in House of Fraser –v- K/S Victoria Street [2011], when the Court decided that a direct guarantee of the immediate assignee’s obligations given by the current tenant’s guarantor would be void under the Landlord and Tenant (Covenants) Act 1995.

In the Tindall case, the Tindall companies were the tenants of a portfolio of hotels owned by Adda. The Tindall companies were part of the Hilton Group and their obligations under the leases were guaranteed by the Hilton parent company.

The leases under which Tindall occupied the portfolio all contained two alienation provisions in respect of assignment.  First, the usual qualified covenant, subject to a number of stringent conditions under the Landlord and Tenant Act 1927.  Second, a covenant permitting assignment to associated companies subject to Tindall (a) providing notice of any assignment within 10 working days and (b) procuring that the “Guarantor and any other guarantor of the Tenant ” would directly covenant with the Landlord as guarantor of the assignee.

Following the K/S Victoria Street case, Tindall argued that condition (b) was void and should be struck out.  This would mean the leases gave them an unrestricted right to assign to any associated company provided that they gave notice as per condition (a).

The landlord disputed this interpretation. The Court at first instance held that the principle of “validate where possible” applied. Consequently, condition (b) should be interpreted as imposing an obligation to procure a guarantee from “any other guarantor [of equivalent covenant strength]” as opposed to from “the Guarantor“. This then allowed the covenant to survive “intact“. Tindall therefore could not assign unless it procured a guarantor of equivalent covenant strength to Hilton.

Tindall appealed. The Court of Appeal held that the trial judge’s interpretation went too far. Condition (b) was indeed void under the 1995 Act. However, conditions (a) and (b) were part and parcel of the same proviso to the qualified covenant and therefore they must stand or fall together. They were both struck down by the Court and the clause was reduced to a standard qualified covenant against assignment.

Posted in Real Estate News

Better together after all – real estate in the UK

After months of waiting, the results are finally known.  Scotland has voted to remain part of the Union, established back in 1707. When it joined, it kept its own established legal system which it has retained to this day, distinct from that of England and Wales. Scotland even has its own land registry – the Registers of Scotland.  Advice on real estate law in Scotland will continue to be sought from a Scottish lawyer rather than dealt with by English lawyers.

All three major Westminster parties have signalled their approval for further devolved powers to Scotland.  Commenting on the result David Cameron raised the West Lothian question, confirming his commitment to greater devolution across Great Britain, including votes on English issues by English MPs at Westminster.

It remains to be seen how far real estate is likely be affected by further devolution in the future.  Areas such as taxation, planning, enforcement of disputes and statutory regulation of leases have already begun to evolve.  That evolution will inevitably now hasten in the wake of today’s results and the clear appetite for constitutional reform.

Posted in Real Estate News

Hogan Lovells and Falcon Chambers launch new protocol for avoiding real estate disputes

In a perfect world, landlords and tenants would enter into leases for exactly the length of term that each would favour, and tenants would occupy until lease expiry.  In practice, landlords usually want to tie their tenants in for long terms to secure steady income streams, while tenants desire flexibility.  The only means of keeping both parties (relatively) happy is to have flexible alienation provisions, allowing the tenant to pass on its bargain to a third party when it wants, subject to the landlord being satisfied that the replacement tenant is an adequate covenant.

Following the Landlord and Tenant Act 1988 and a series of subsequent court decisions, tenants who seek licence to assign or sublet their leases may now feel that they have at least some of the law on their side but may also quail at the sheer bulk and complexity of it.  Landlords will not sleep easily either – for the perils of delaying or being too demanding (e.g. when attaching conditions to any consent) are substantial.

Against this background, Hogan Lovells and Falcon Chambers have devised the Protocol for Applications for Consent to Assign or Sublet, which goes live today:

www.propertyprotocols.co.uk

This Protocol, which applies to commercial property situated in England and Wales has three purposes.  First, to improve communication between landlord and tenant and establish a workable timetable.  Second, to avoid arguments as to the information and documentation that should form part of any application, and as to the period of time within which the landlord should give its decision.  Third, in case disputes do arise, parties are guided towards alternative dispute resolution, with recourse to the courts being an option of last resort.

We envisage this Protocol being disseminated by the legal and surveying professions as a ready reckoner for behaviour at the point of application.  As it becomes embedded in practice, we would hope to see it being referred to in leases and other binding documents as a behavioural code to which arbitrators and courts will have regard when assessing compliance.

We also hope that this Protocol will serve as the first in a series of similar “best practice” documents designed to smooth landlord and tenant relations, to be placed on the above website.

The team who created the Protocol are Nicholas Cheffings and Mathew Ditchburn, partners in Hogan Lovells real estate disputes team, and Guy Fetherstonhaugh QC and Jonathan Karas QC from Falcon Chambers.

Posted in Real Estate News

Landlord liable for business rates following lease disclaimer

It has been understood since the Hindcastle case in 1997 that a guarantor’s payment obligations under a lease survive disclaimer by an insolvent tenant’s liquidator.  What has been less clear is how that works, given that the tenant’s obligation to pay rent dies when the lease is disclaimed.

Does the guarantor’s liability continue because the lease also continues to exist in some way?  The recent case of Schroder Exempt Property Unit Trust v Birmingham CC [2014] has shed some light on this and clarified that, following disclaimer, the landlord is liable for business rates on empty properties.

What is disclaimer?

A liquidator has a statutory power under the Insolvency Act 1986 to disclaim onerous property.  The effect of this is “to determine… the rights, interests and liabilities of the company in or in respect of the property disclaimed“, thereby unburdening the insolvent estate from future liabilities in respect of property that is of no use to the liquidator.

However, disclaimer expressly “does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person“.

Hindcastle, which is still the leading authority, confirmed that a guarantor’s liabilities are not affected by disclaimer, notwithstanding that the tenant’s obligation to pay the rent has fallen away.  In order to understand this concept, some have explained the guarantor’s post-disclaimer obligations as arising out of some residual, “shadowy existence” of the lease.  The Schroder case demonstrates that to be an unhelpful analogy.

Who is liable for business rates following disclaimer?

In Schroder, the High Court had to decide whether business rates on empty property were payable by the landlord or the tenant’s guarantor, in circumstances where the lease had been disclaimed by the tenant’s liquidator but the landlord had continued demanding rent from the guarantor without taking the property back.  Rates legislation says that liability for empty properties lies with the “owner” of the premises, meaning “the person entitled to possession of it“.  The question for the Court was therefore, whether the landlord in those circumstances was entitled to possession.

In a decision that relied substantially on Hindcastle, the judge held that where a lease has been disclaimed, it has been determined.  Rights and liabilities survive not because they arise out of the residue or “shadowy existence” of the lease, but because the statutory scheme requires that to be the case.  In effect, the statute deems that those obligations should continue as though the lease still existed. If somebody seeks a vesting order in respect of a disclaimed lease then the lease is somehow recreated for that purpose but – until then – it has been determined.

From that starting point, it was relatively easy for the Court to conclude that, as disclaimer brings the lease to an end, the landlord is immediately entitled to possession and so is liable to pay empty rates.  As many landlords are still managing a number of empty properties at the tail end of the economic downturn, this decision will not be good news, but at least provides some welcome certainty.

Posted in Real Estate News

Utilities companies denied power to take priority over other creditors in administration

The High Court of England and Wales handed down judgment last week in the case of Christine Mary Laverty and others as Joint Liquidators of PGL Realisations PLC and others v British Gas Trading Limited [2014] EWHC 2721.  In an important decision for the insolvency industry, it was held that the statutory deemed contracts regime for gas and electricity supply could not be used by utilities companies to gain priority over other creditors.

The case concerned the Peacocks retail chain, which collapsed into administration in January 2012.  Officeholders from KPMG, advised by Hogan Lovells, were appointed administrators to various companies within the Peacocks group.

At the time of the administration, one of the companies held a series of gas and electricity supply contracts with British Gas on behalf of the group.  It was a term of the contracts that if the company appointed administrators then British Gas could terminate the contracts, which it did shortly after the administration appointment.

Legislation provides that where there is no express supply contract in place, one will be deemed to exist for any supply of utilities made.  Under the Gas Code, the deemed contract is between the supplier and the “consumer”.  Under the Electricity Code it is with the “occupier” or “owner” of the property.  When British Gas terminated the express contracts, one or other of the companies fell within those definitions and so deemed contracts for the supply of gas and electricity were imposed on them.

The terms of deemed contracts are for the relevant utilities companies to determine.  British Gas’ terms included that the deemed contract would continue, even after the customer had vacated the premises supplied with gas or electricity, until someone else that British Gas accepted as a customer took over the supply. After the administrators had sold the business, they ceased trading and closed the remaining 224 stores, 177 of which were supplied by British Gas.  Although those stores were by that stage empty, the deemed contracts continued.

The administrators accepted that the cost of utilities supplied to the stores during the administration while the companies continued to trade from them was an expense of the administration, but considered that any charges accruing once the stores had been vacated ranked as unsecured claims provable in the administration.  British Gas claimed that ongoing charges totalling about £1.2 million (comprising fixed standing charges and ongoing usage at some stores) were automatically an administration expense, irrespective of whether the charges had been incurred as a result of something done by the administrators or for their benefit.  The dispute was taken to Court.

The decision  

The Chancellor of the High Court, who heard the case, applied the test set out by Lord Neuberger in the landmark Supreme Court decision of Nortel GmbH from July 2013, on which Hogan Lovells also advised, in relation to pension liabilities.

The Court concluded that if pre-administration utilities contracts are terminated after the company enters insolvency and new contracts deemed to arise under statute, the liabilities under those deemed contracts are not treated as administration expenses simply because they arose during the administration.  Although technically new contracts, the deemed contracts had arisen out of a pre-administration “obligation” within the meaning of the Insolvency Act 1986 as the companies had fallen within the scope of the deemed contract regime as soon as the group took supplies from British Gas.  Equally, there was nothing in the Gas or Electricity Codes, or in the nature of the liability, to indicate that Parliament intended that the liabilities under the deemed contracts should rank as anything other than provable debts.  On that basis, the charges were held to be provable debts.

Comment   

If British Gas had succeeded it would have meant that utilities companies would be able unilaterally to achieve priority over other creditors in respect of supplies that were never requested and made to premises after administrators had closed them.  For a property-heavy business like a retailer, that could be a significant liability.  In certain circumstances it could put the administration process into jeopardy.

The decision is a timely one as it coincides with the Government’s current consultation on introducing legislation which, amongst other things, would invalidate termination clauses in utilities contracts triggered by insolvency.  It does not obviate the need for the consultation as utilities companies may still, for example, terminate contracts to get the benefit of non-discounted rates under their standard deemed contract terms, even if they do not gain automatic priority.

 

Posted in Real Estate News

UK: Flood Re – consultation on proposed regulations implementing the scheme

There has been much discussion about the Government’s plans to implement a new scheme for providing flood insurance to certain properties at greater risk of flooding (see post on Flood Re and our client briefing). The Water Act 2014 (which received Royal Assent on 14 May 2014) sets the legal framework and parameters within which Flood Re will operate and the broad scope of the regulations. The Government is intending to introduce regulations to enable the insurance industry to implement Flood Re next year. The proposed regulations will cover the legal framework around the Flood Re Scheme, its funding and its administration. DEFRA (the Department for Environment Food and Rural Affairs) has issued a consultation (22 July 2014) seeking views on these regulations.