New real estate disputes partner Paul Tonkin shares some predictions for 2019.
Crystal-ball gazing is always a dangerous business and this is more so than ever in the current global economic and political climate. However, there are a few areas where I can predict with some certainty (and for better or worse) that we will see change in 2019.
Further pressure in the retail and casual dining sector
This one will come as no surprise. Even before 2019 got truly underway, we saw the news of HMV’s (second) administration as the effects of a sluggish Christmas trade compounded what was already a difficult year. 2018 was the year of the CVA with retailers and restaurant groups using CVAs to rationalise their portfolios and reduce lease liabilities. Unless the tide is stemmed, or at least controlled, then we could see a more seismic shift in the fundamentals which underpin the retail investment market. Put simply, how can underlying investment value be assessed where tenants can use CVAs to re-write their lease liabilities? The Hogan Lovells real estate disputes team is acting on a challenge to one of the major CVAs of 2018 and I, for one, hope that this will provide much needed clarity for both landlords and tenants.
A recalibration of residential
The government has committed to tackling the housing shortage and has put forward various measures to achieve this, including changes to the planning system and the removal of red tape around local authority housing development. At the same time, the government has proposed widespread changes to the use of leaseholds in the residential sector, the most significant being a proposed ban on new leasehold houses and a £10 per annum cap on ground rents for leasehold flats. The changes are a reaction to the perceived scandal of consumers being caught out by unfair ground rents. But do they go too far? A blanket ban on leasehold houses may seem like a simple solution but it ignores the fact that many urban regeneration schemes, carried out jointly by local authorities and private developers, rely upon complex leasehold structures. An outright ban on leasehold houses will require a fundamental rethinking of these structures. Similarly, the effective abolition of ground rents ignores the fact that ground rent income (and particularly the ability to sell that income stream) is often a significant line in a developer’s financial appraisal. Removing this will place further pressure on viability which will result in developers finding it even more of a challenge to meet already ambitious affordable housing targets. If the effect of the ban is ultimately to reduce affordable housing allocations, this will be an own goal. My prediction (or hope) for 2019 is that the government takes seriously the industry’s concerns over these proposals and considers whether a sledgehammer really is needed to crack this particular nut.
Flexible working vs flexible leasing
We’re all very familiar with the growth in the flexible business space sector. As uncertainty continues to deter tenants from signing up to long-term lease commitments we will, I’m sure, continue to see more and more landlords rolling out their own flexible working products. However, even within the traditional office leasing model, flexible working cannot be ignored. Collaborative working and co-working arrangements will continue to grow and in that context the traditional lease restrictions on sharing of occupation will become increasingly outmoded. To thrive, landlords will need to embrace flexible working and flexible leasing as an opportunity rather than seeing it as a threat.
Congratulations to Paul Tonkin who was promoted to partner effective 1 January 2019.