Retailers playing hard ball

I was extremely interested to read this article in Retail Week:

http://www.retail-week.com/property/analysis-the-retailers-pursuit-for-favourable-uk-lease-terms/5046366.article

Fashion retailer, H & M, has put forward a tough new set of terms to its Landlord. The terms include:

• A reduction in the amount of rent it would pay if 15% of a shopping centre it occupies falls vacant. If this were to happen H&M would immediately cease paying the base rent and would revert to simply paying the landlord a turnover-linked “top-up” fee.
• The fashion retailer is also stipulating that if the vacancy rate of a centre remained at 15% or rose over a set period, it could further reduce its rent, regardless of whether its turnover stays the same or increases.
• Ultimately, H&M could then terminate the lease if it still wasn’t happy.
• H & M will also have the option to abandon a Lease immediately if a big anchor store in the centre (e.g. Debenhams) leaves.

In my opinion, the above confirms what I have argued in previous posts. Landlords fear empty stores above anything else. Inflation is running at 2.7% (CPI) and 3.3% (RPI) respectively. The article does make clear that turnover Leases are increasingly common in shopping centres and are another weapon at the Landlord's disposal to create a diverse mix of retail Tenants. The article also alludes to problems with the Landlord and Tenant Act (LTA). It gives the example of Westfield and asserts that many stores (in Westfield) have Leases of varying lengths both in and outside the remit of the LTA. It remains to be seen whether or not more retail Tenants will take a leaf out of H & M's book. However the option of turnover Leases, as well as Leases outside the remit of the LTA (and thus the security of tenure provisions giving the Tenant the option of moving on when the Lease expires), would suggest that the Landlord is not completely powerless. The article makes another interesting point- what is a strong covenant (i.e. Tenant) today may not be tomorrow. The recent high street administrations have proved this. If retail Tenants start playing hard ball, Landlords should remember that they are not totally powerless.

Let there be light...or not...

The Law Commission has opened a consultation on its provisional proposals to reform the right to light (which is commonly claimed by property owners concerned to protect their house from developers). The consultation proposals can be found here:

http://lawcommission.justice.gov.uk/news/rights-to-light-news.htm

In most cases property owners will acquire the right to light through prescription i.e. if they have enjoyed the right for an uninterrupted period of at least 20 years. The right to light is difficult to deduce from title deeds or Land Registry documents. Other common law juridictions (e.g. New Zealand) have abolished the right to light through prescription. The right is controversial because it presents a conflict between the right to light and the developer's right to build on their land. The conflict was illustrated in the case of HKRUK II Ltd v Marcus Alexander Heaney (Heaney) 2010. In this case, Heaney's right to light was blocked by the developer. The court awarded a mandatory injunction so that the developer was forced to take down the extra floors of the development that interferred with Heaney's right to light. The court was influenced by the fact that the developer knew that they were committing an actionable breach of Heaney's right to light. Since then, developers have naturally been cautious of interferring with rights to light. The consultation has proposed the following:

• It should no longer be possible to acquire rights to light by long use (known as “prescription”).
• The introduction of a new statutory test to clarify the current law on when courts may order a person to pay damages instead of ordering that person to demolish or stop constructing a building that interferes with a right to light.
• The introduction of a new statutory notice procedure, which requires those with the benefit of rights to light to make clear whether they intend to apply to the court for an injunction (ordering a neighbouring landowner not to build in a way that infringes their right to light), with the aim of introducing greater certainty into rights to light disputes.
• The Lands Chamber of the Upper Tribunal should be able to extinguish rights to light that are obsolete or have no practical benefit, with payment of compensation in appropriate cases, as it can do under the present law in respect of restrictive covenants.

This should result in greater certainty for developers- particularly the abolition of prescription and the introduction of a statutory notice procedure prior to exercising the right. Developers will have to wait longer though to see the ink dry and the proposals set out in law. Only then will developers be able to get on with development without having to look over their shoulder constantly. Right now, the above is a shining light that will bring the unfortunate developer in from the dark.

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Business rates- every Landlord's bogey man

HMV, Jessops, Blockbusters and Republic. All have faced the brunt of the administrator's axe (though the administrators would argue that they are performing life saving surgery- depends on how you look at it). Yesterday, the BRC (British Retail Consortium) announced a toxic cocktail of falling footfall (caused by bad weather in January) and increased vacancy rates in town centres (now standing at 14.2% with the highest rates in Wales and the North). I was interested to read this article in Retail Week at:

http://www.retail-week.com/property/retail-administrations-could-lead-to-a-sixth-of-stores-lying-empty/5046319.article

It's an eye opener. As a result of administrations, one in six stores will lie empty. So what can be done about it? Yesterday, I argued that the above presents an opportunity for the sharp commercial Tenant as Landlords will want to do everything in their power to entice and keep Tenants in their property. That said, conditions on the high street still remain difficult. Wages are being held down in both the public and private sectors whilst RPI inflation (used to measure wage deals and rents) stands at 3.3%. As a result, consumer spending will remain squeezed. What can be done about it? In my opinion, a cut to business rates (even temporary) in the upcoming budget would allow many struggling retail Tenants and their Landlords to breathe a sigh of relief. Business rates are, in many places, higher than rents. The next re-evaluation is not set until 2017. The BRC has estimated that business rates will cost £175m and 14,500 new jobs in 2013. The BRC has argued that the government should calculate future increases by the average of CPI over 12 months rather than a single month's RPI.  I accept that business rates are only part of the problem for the high street. However, it is an issue that seems to keep cropping up in the wake of the above administrations (and will not go away). A cut to business rates will do more to boost economic growth than a crowd pleasing Mansion tax. The above figures speak for themselves. Let's hope the Chancellor listens.

On another note- a campaign to cut business rates could work to the advantage of many law firms. I was reading an article in the Law Society Gazette (http://www.lawgazette.co.uk/blogs/blogs/in-business-blog/why-do-firms-run-shy-campaigns) yesterday which argued that many law firms run shy of running campaigns and need to do more to market their individual brands. A law firm campaign to cut business rates, based on the experience of advising struggling retail Tenants and SME's, would help the client and the firm. The client- it shows an awareness and understanding of the wider issues and problems affecting the client's industry. The firm- it will boost the firm's profile. A campaign to cut business rates will show a law firm committed to confronting their client's problems (albeit in a rather different manner) rather than just advising on the problem and regretting that nothing can be done about it. As a result, said law firm will be viewed as committed to their clients and proactive. In short, so much more than just a legal adviser. This is important, when clients are demanding so much more for their money. Definitely something for law firms (with strong commercial / commercial real estate pedigrees) to think about.

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Footfall and vacancy rates

I was interested to read a recent report from the British Retail Consortium (BRC) at:

http://www.brc.org.uk/brc_news_detail.asp?id=2393&iCat=681&iSubCat=2

The report states that footfall in January was 4.6% lower than a year ago. However, the vacancy rate fell to 10.9% in January down from 11.3% in October 2012. Both figures make for grim reading. Falling footfall and disappointing vacancy figures. Both pose problems for commercial Landlords who need healthy profit making (and rent paying) Tenants in their properties. As stated previously, many high street and shopping centre Leases are due to expire by 2015. It is vital, more than ever, that Landlords keep Tenants in their properties. This could present a good opportunity for the sharp Tenant.

How?

• The above is a strong argument in favour of monthly rents. Many retailers struggle with quarterly rent payments. Monthly payments would help Tenant businesses balance their cash flows better. Many institutional Landlords have made the switch to monthly payments. Moreover, monthly rents would avoid a Goldacre problem (the Landlord having to wait three months for their rent after the Tenant has gone into administration) because the Landlord would only have to wait a month for their rent.
• The Tenant is in a strong position to argue for liberal user, alterations and alienation clauses. The Landlord, as an investor, will naturally be concerned to protect the value of their investment. However, they must decide whether or not they want a Tenant more.

HMV, Jessops, Republic- it's becoming a worrying trend for the high street. The current spate of administrations is understandably leading to many sleepless nights for Landlords. Who knows whether or not it is your Tenant who is going to go bust next? It is in the interests of Landlords to keep Tenants (satisfied) in their properties. Smart Tenants will realise that this presents an opportunity.

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Competent Landlord- Frozen Value Ltd v Heron Ltd

Today's post concerns the definition of the 'competent Landlord' in relation to business Lease renewals under part II of the 1954 Landlord and Tenant Act (LTA). It is therefore of relevance to both commercial Landlords and Tenants who are seeking either to stop or renew their Lease.

First- some context. Business Tenants have security of tenure under the LTA. This means that their Lease will continue (once it has come to an end) on the same terms and at the same rent as before. The Landlord can only oppose the renewal by using one of the prescribed methods under the act. The Landlord can only oppose the Tenant's application by asserting one or more of the grounds in s30 (1) LTA. The grounds are:

• The Tenant's failure to repair the property (a)
• The Tenant's persistent failure to pay rent (b)
• Substantial breach of other obligations (c)
• Suitable alternative accommodation is available for the Tenant (d)
• On a sub letting of part, the Landlord requires the whole of the premises (e)
• The Landlord intends to demolish, reconstruct or carry out a substantial work of construction to the holding (f)
• The Landlord intends to occupy the premises (g)

The case of Frozen Value Ltd v Heron Ltd (Frozen Value) 2012 concerned ground G- the Landlord's intention to occupy the premises for the purpose of a business or as his residence. In order to rely on ground G, the Landlord must have owned the property for at least five years. This is to prevent a buyer purchasing the Landlord's interest, before the expiry of the Lease, and seeking to rely on ground G. In Frozen Value the Landlord was granted a new headlease throughout the five year period. However, the Landlord was not the competent Landlord throughout the five year period. As such, the Landlord in this case could not rely on ground G.

What does this mean for Landlords? If a Landlord seeks to rely on ground G under s30 LTA then they must have been the competent Landlord at all times throughout the five year period. Successive periods under separate Leases can be aggregated for the purpose of calculating the five year rule. However, the Landlord must have been the competent Landlord throughout the five year period. This is important as ground G is a mandatory ground- if the Landlord can successfully establish it then the court must refuse to grant the Tenant a new tenancy (the Tenant will then be able to claim compensation for disturbance. This is because it is not the Tenant's fault that the Lease will not be renewed). As stated previously, many shopping centre and high street Leases are due to expire by 2015. The above should be noted by retail (and indeed all) Landlords who do not want the current Tenant to stay in their property i.e. because they want to add variety in the shopping centre or introduce a new and more reputable Tenant in the property.

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Govt's SME property scheme fails

Today's post concerns a property related government scheme to open up unused (government) properties to SME's. However an article in The Guardian reports, that takeup on the scheme has been abysmal, with only four businesses currently awaiting to hear whether their bid (to occupy a government property) has been successful. The article can be accessed at:

http://www.guardian.co.uk/business/2013/feb/15/businesses-empty-buildings-plan-failing

The principle reasons for this failure are:

• Unsuitable properties
• Poor security
• Restrictive Leases which state that the property can only be used for government purposes

The last point is of interest. The Government has recently announced changes to permitted development. In short, it will be easier to convert from office (B1A) to residential (C3). The government has also allowed free schools to open up in commercial premises (for a year) without planning permission. The above illustrates a potential problem. A Lease may contain a user clause that restricts the use of the property. An onerous user clause could easily defeat a business or free school from setting up in an unused property. The government's aim of streamlining the planning process is laudable and welcome. However, restrictive user could turn the whole process on its head.

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Mansion Tax 2.0

The Labour leader, Ed Miliband, has recently announced that a future Labour government would introduce a Mansion tax on homes worth £2m plus to fund the re-introduction of the 10p tax band (that was scrapped by the previous Labour government). Where have we heard this before? The policy is the brainchild of the Liberal Democrats and usually rears its ugly head whenever our politicians are strapped for cash (which is always).

I thought I would review the pros and cons of the proposal.

Pros

• It is better to tax assets which are not mobile (such as property) as opposed to income.
• Cuts and spending reductions in the welfare budget, (particularly housing benefit) justifies a Mansion tax on high value property, in the interests of fairness.

Cons

• The proposal would affect homes with a value of £2m plus. How would a valuation take place? Would it simply affect homes falling in the higher council tax bands? Any valuation could prove highly intrusive and controversial.
• It would affect people who are asset rich (and who have seen the value of their homes rise considerably) but cash poor.
• The coalition government have already introduced a 7% rate of SDLT for £2m plus homes (and a 15% rate if a house is purchased through a company). How much additional revenue would a Mansion tax raise?
• It could affect a lucrative central London market for residential property. Much of the growth in the residential property market has come from wealthy (mostly foreign) investors looking for a safe haven for their cash.

It would appear that the cons far outweigh the pros of this proposal. In times of austerity, it looks and sounds good for politicians to play to the gallery. It should be remembered that the above depends on Labour winning the next election. That is a matter for another post and, indeed, another blog altogether!

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