Key trends in commercial property- September 2013

The media has been awash with plenty of coverage relating to deals in the commercial property sector. With the economy showing tentative signs of recovery, it is not surprising that investors seek buildings with strong covenants, long lease terms, fixed RPI linked rent reviews and opportunities to improve their asset through management. I thought I would summarise some of the key trends in the sector, with examples of recent deals.

Office property

City of London offices have continued to perform well. The city continues to see strong demand from Insurance/ TMT tenants. It was recently announced that Henderson Global Investors have submitted plans for a new building at 40 Leadenhall Street appropriately named 'the toaster rack.' If successful, this will join the 'walkie talkie' (20 Fenchurch Street), 'the cheese grater', 'the shard' and 'the Gherkin' etc. Add to this the fact that Songbird Estates, (owners of the Canary Wharf office portfolio) have increased their underlying profits, and it appears that this sector will continue to perform well.

Industrial property

The internet is changing the way we shop. High business rates charges are making it increasingly unviable to retain traditional bricks and mortar shops.  That said, the rise of 'click and collect' is a dominant trend in the retail sector with shops acting as collection points. However, warehouses are needed to store and distribute products to the shops concerned. Thus, warehouses and distribution units have seen strong demand. See Segro's and London Metric's activities in this sector.

Regional assets

There have been signs of increased demand for regional assets from investors. As stated above, investors appear to be keen to acquire assets that are capable of being actively managed and can produce a stable long term income. See LaSalle Investment Management's recent acquisition of a Birmingham shopping centre.

The rise of Chinese Insurance funds

Commercial property professionals would be wise to pay attention to investors from the Asia Pacific region. Chinese Insurance funds are relatively new to the market. A recent regulatory change allows such funds to invest 15% of their total assets in 'non self use real estate.' As a result, such funds are likely to target high transparency markets, such as the UK, for their Investment.

The rise of alternative sources of finance

Banks are unlikely to extend their commercial real estate loan books anytime soon. This creates opportunity for alternative sources of lending such as high net worth individuals, pension funds, Insurance and sovereign wealth funds etc. Alternative investors with strong cash flows are likely to continue to generate considerable activity in the commercial property sector.

These are just a few of the current Issues and trends in the commercial real estate sector at the moment.

Recent developments in Property

My hands have been rather tied recently and I have not been able to blog as much as I would like. Fortunately, much has happened in the Property world of late. I thought I would use my return to briefly summarise some of those changes:

Office to residential conversions: The government has passed the Town and Country Planning (General Permitted Development) (Amendment) (England) Order 2013. This will allow offices and other commercial property to be converted into residential property without express planning permission. The measure is designed as part of the government's wider efforts to streamline the planning system and accelarate economic growth. Nearly all of London's boroughs have sought an exemption to protect their office stock. The problem is that not all commercial property will be suitable for residential development. If changes need to be made to a property (in order to make it suitable for development) then surely express planning permission will still be required? Perhaps the government's plans to stop the planners planning may not be quite successful after all.

Statutory Code between Pubcos and Tenants: pub Tenants on 'tied' Leases have argued that the practice is unfair and anti competitive. Under a tied Lease, a pub Tenant must buy their Beer from the parent company. Contrast this with 'free of tie' Leases where pub Tenants can purchase drinks on the open market. Tied Tenants argue that such Leases are restrictive and have forced up rents. The government has responded by proposing a statutory code to regulate the above practices. Pubcos argue that this runs contrary to the government's general aim of reducing red tape. They assert that Pubcos provide vital assistance to their Tenants in terms of branding, know how etc. This may well be an interesting example of regulation that works in favour of small businesses for once.

Marks and Spencer v BNP Paribas Securities Trust Company- this is the first case where a Tenant has succeeded in recovering rent relating to a period after the break date. The Tenant was required to pay a premium of a year's rent. The Lease contained a clause stating that there would be no recovery of rent on the break date. The Tenant paid the premium and also made other payments (service charge payments etc) that related to the period after the break date. The Tenant was subsequently successful in recovering the payments that had been made. It remains to be seen whether or not this trend will continue. In the meantime, it shifts the balance back in favour of the Tenant. Break clauses have traditionally operated in favour of the Landlord and are strictly construed by the court. This case will provide relief for many commercial Tenants.

Aurora Fashions- fashioning Leases for tough times

I was not surprised to learn that Aurora Fashions has entered into negotiations with Landlords seeking favourable rent and other terms. This is hardly surprising against a backdrop of stubborn inflation and persistently weak economic growth. When you throw in business rates (which it has been estimated costs the high street some £175m) and empty property rates it is no wonder the future looks bleak. Thus, many businesses will not want to be locked into a 'straightjacket Lease.' Many Tenants will try to negotiate monthly payments, rent free periods or even less onerous break options. As the economy continues to flatline, we may increasingly see new Leases replacing the old 25 and 50 year Leases. What will the new Leases look like?

• They may well be as short as 5 years or even less. What qualifies as a 'strong covenant' today may not tomorrow.
• They could exclude the operation of the Landlord and Tenant Act (LTA) 1954. This will alleviate the Landlord's concern that an underperforming Tenant will not 'move on' once their term has expired.
• Break clause conditions may well be less onerous. Traditionally, Landlords have drafted very tight and narrow break clauses designed to penalise a leaving Tenant. Lax break options will allow a Tenant to move on and the Landlord to create a diverse mix of Tenants in their centre or premises.
• Restrictions on assignment may well be relaxed. A struggling Tenant may wish to sub-let part of their premises to an under-Tenant. A Landlord should be encouraged to view this positively if it will allow a Tenant some breathing space to trade.

In short, a new style Lease suited to tough economic times contains advantages for both the Landlord and Tenant. It gives a struggling Tenant some leeway and allows the Landlord the chance to easily bring in new Tenants if things don't work out. The recent trend of administrations may well be showing that new fashions are replacing old ideas...

Conservation covenants

I have been following the recent BBC programme- 'The Planners.' Briefly, it follows developers up and down the country whose ambitions for development are pitted (and usually thwarted) against the wrath of local objectors and the scrutiny of local planning committees. This revealing series illustrated just why planning law is such a stimulating and interesting (albeit niche) area of law. It concerns politics, power and personalities. It is far from being dry and mundane.

Despite the above, developers of commercial property and residential housing schemes should be aware of the latest consultation paper published by the Law Commission:

http://lawcommission.justice.gov.uk/areas/conservation-covenants.htm

The paper considers the case for conservation covenants. Such covenants would be entered into between developers and landowners and a responsible body (charities / local or central government) with the explicit aim of heritage and agricultural land conservation. Such covenants exist in other countries but not the UK. Such covenants would be long lasting and designed to protect the land even after the landowner has parted with possession. Unlike restrictive covenants, they would affect both Freehold and Leasehold land and can be positive as well as negative. The Commission asserts that only 'responsible bodies' such as charities would be able to create conservation covenants. The idea is to preserve the environment for future generations. We shall have to watch this space to see how such an idea will work in practice. Developers are well advised to keep an eye on the consultation.

I have no objection to the preservation of the environment. The concerns of local residents must always be borne in mind when considering new development. However, economic growth depends on new employment opportunities through the creation of new homes, retail and leisure units. Conservation covenants may well have a laudable aim. However, the Law Commission may end up creating (rather than solving) more problems if its proposals end up thwarting much needed urban development and renewal.

Property implications of the budget

On my return to writing this blog (my hands have been rather tied as of late) I felt it pertinent to discuss some of the most important aspects of last week's budget. Overall, no major surprises. Osborne delivered a political budget. It wasn't exactly 'rabbits out of hats' but it was undoubtedly populist in tone and, frankly, did little to address the structural flaws in the UK economy. So not quite an omnishambles budget?

The main provisions of interest to the property industry are thus:

• £3bn of extra capital spending was announced for Infrastructure investment- on the one hand this is welcome news for the property industry. Investment in new schools, bridges, roads and railways can only have a positive effect on economic growth. However, the money does not start to come on flow until 2015/16. It would be more beneficial, to have the full effects of the investment coming on stream now.

• New mortgage guarantees and shared equity schemes for first time buyers- the government promised new mortgage guarantee support for first time buyers of new build residential property. We shall have to watch this space to see whether or not it will lead to increased activity in the property market. Funding for Lending had a small effect on the property market. That said, there is disappointment that the Chancellor did not do more to extend the scheme to assist SME's and business tenants. Lenders are more reluctant to lend to a business tenant than they are to a residential mortgagee. We've had project Merlin, quantitative easing, credit easing etc. All seem to have had a negligible effect on increasing lending to SME's.

• A corporation tax cut to 20% and a new employment allowance (through cuts to employer's NI contributions). The benefits are obvious. Cuts to corporation tax and NI will only reduce the business tenant's overheads. This is surely welcome relief at a time when many tenants (particularly in the retail sector) are struggling with rising rent bills. That said, the Chancellor did miss the boat and failed to listen to retailer's concerns regarding business rates. Most retailers will face a rates bill of £175m this year. I have stated before on this blog, that many Leases are up for renewal in the coming years. If no action is taken to alleviate the stress placed on retailers, then tenants may be forced to leave their properties when their Leases come up for renewal. This will result in the nightmare scenario of an empty property for the Landlord.

• An 'annual tax on enveloped dwellings' (ATED) will come into force this April. This applies to companies who purchase high end residential property. This is in addition to a stamp duty rate of 15% (for properties worth £2m or over purchased by a company) and a capital gains tax charge of 28% on a gain made by 'non natural persons.' The government does not want to deter property investment made for genuine commercial reasons. Thus, there are reliefs from the ATED e.g. if the property is purchased for charitable purposes, or is made open to the public for at least 28 days a year. This is indeed laudable, however it does show how heavily property is taxed in this country. This could well become a general trend as the government moves from a tax system based on income (which is highly mobile) to one based on property and other assets (which cannot be moved so easily). This is especially so as politicians continue to explore the possibilities of a much vaunted 'mansion tax' on high value residential property. The above suggests that it may not be necessary.

I have analysed the main provisions of the budget that will be of interest to the property industry. In short, the Chancellor has missed an opportunity by not bringing forward capital investment sooner, by not cutting business rates and by not extending government schemes to increase lending to business tenants. Many Leases are coming up for renewal. The Chancellor missed the chance to deliver a budget that would save Britain's high streets. Perhaps it has turned out to be something of an omnishambles after all...

The rise of turnover rents

It is amazing to think how many high street businesses have been consigned to the graveyard. It is difficult to know what can be done about it. There are the usual mooted suggestions- business rates cuts, greater use of 'click and collect' options by stores etc. However, I was interested to read this article in Retail Week:

http://www.retail-week.com/sports-direct-offers-turnover-deal-on-republic-stores-rent/5047295.article?blocktitle=More-News-and-Insight&contentID=5271

Republic, the fashion chain, was bought out of administration by Sports Direct (SD). SD offered Republic's Landlords 15% of the stores turnover to cover rents, rates and service charges. SD claims that 'given the number of voids on the high street, retailers’ relationships with landlords are coming to the fore. We’re doing something that’s really innovative that should be mutually beneficial.' Voids means empty shops and units. SD have also signalled that the new contracts would retain some flexibility, so that Landlords can walk away if they become unhappy with the arrangements.

The last part is interesting- the proposal by SD should be mutually beneficial to both Tenants and Landlords. This could indeed mark a sea change in the retail industry. Previously, I had written about how H & M had delivered a tough new set of Lease proposals to its Landlords. SD's proposals are completely different and a breath of fresh air. Landlords get their rent and have an interest in the continuing success of the businesses. Times are tough for Landlords- we are all aware of the rent problems they face after an administration, CVA or pre-pack deal. Landlords are caught between a rock and hard place in Lease negotiations- trying to protect the value of their investments (and the interests of their fellow investors by getting a good rent deal) and satisfying the Tenant who could walk away. SD's plans could mark a complete shift in the relationships between commercial Landlords and Tenants. Plans where both parties have a stake in the continuing success of the business and its property portfolio. We shall have to watch this space as to whether or not such proposals become commonplace in the retail industry.

Business rates rethink

I have written many times on this blog about the harm to SME's caused by business rates. The next re- evaluation is not set until 2017. In some places, rates can be higher than rents. The 'Fair Rates for Retail' campaign has called upon the Chancellor to freeze or (preferably) cut business rates in the upcoming budget. Business rates are, in the words of Kwasi Kwarteng MP (in an article in today's Guardian), a 'tax on the high street.' The Chancellor would do well to listen to his colleague as well as to struggling businesses on our high street. February showed that retail sales had grown by 2.7%. This is positive news. However, consumer spending is likely to remain depressed. The recent string of high street administrations shows this. Therefore, I was pleased to read this:

http://www.retail-week.com/in-business/policy/treasury-considers-business-rates-rethink-as-pressure-from-retailers-grows/5046900.article?blocktitle=Most-popular&contentID=-1

The government has signalled that it is considering a u - turn on business rates. Unlike the others, this u-turn will be deeply welcome and much needed. Ian Cheshire, CEO of Kingfisher and Chairman of the BRC (British Retail Consortium), states that that were it not for long-term leases he would close a quarter of the DIY retailer’s stores due to the tax burden. The following Retail Week article:

 http://www.retail-week.com/in-business/fair-rates-for-retail/fair-rates-for-retail-retailers-urge-rates-freeze/5041237.article

also makes clear that two years of punitive rate increases have added more than £500m to costs. The BRC Director General was right to assert that 'the most important four letter word in Westminster should be jobs.' The government already boasts that it has already created more than a million private sector jobs since taking office. Whether it has or hasn't, the fact remains that a business rates cut would increase the pace of job creation. Job creation is the strongest argument for a rates cut.

The Chancellor should listen. According to the article- the government is considering the way that increases in rates are calculated (by linking them to the lower rate of CPI rather than RPI). Business rates are bad news all around- bad for Tenants struggling to make a profit, bad for Landlords who need rent paying Tenants in their properties and bad for a government in need of tax receipts to balance the books. Will the Chancellor freeze or cut rates? Only budget day will tell. If the Chancellor wants a big headline initiative (that will actually have any effect) then he knows what he must do.

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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Back to school- planning changes

The government has recently announced changes to the planning process to make it easier for free schools to set up in empty commercial properties. Free schools will be allowed to set up in properties, for a year, without having to obtain planning permission. The changes come as part of the Growth and Infrastructure Bill and is part of the government's effort to streamline the planning process. The government has set up a website, with surplus government property, to aid potential free schools with their search for a building.

What are the potential pitfalls?

• Not every commercial property will be suitable for use as a free school. For example, say a free school identifies an empty warehouse that had previously stored chemicals. If structural alterations are needed, will planning permission still be required?
• If free schools do not manage to obtain planning permission, within a year, will they be forced to look for another property? This will be inconvenient for obvious reasons (and does defeat the purpose of the proposals).
• Councils will presumably retain their article 4 powers i.e. they can still override development and stop free schools setting up in certain properties?
• Will listed building and conservation area consents still be applicable?
• Councils already have to give priority to new school developments as part of the planning process. Do the above proposals really add anything?

The government's attempt to simplify our byzantine planning process is laudable. We shall have to wait and see whether or not the government deserves a gold star or whether it should go back to the drawing board.

Liability of guarantors- Greene King Plc v Quisine Restaurants Ltd

Today's post concerns the liability of guarantors under a commercial Lease. In tough times, a Tenant may wish to underlet all or part of their premises, in order to raise some much needed funds. However, the Tenant may be asked, by the Landlord, to guarantee the obligations of the under Tenant. This is especially the case if the under Tenant is a 'weak covenant' i.e. they are not a reputable Tenant. By giving a guarantee, the Landlord gets an assurance that his rent will be paid.

The facts of Greene King v Quisine Restaurants Ltd are this. Greene King (GK) underlet basement commercial premises to Quisine Restaurants Ltd (QRL). QRL was owned by a Mr. Shasha (Shasha). The underlet was assigned and QRL guaranteed the obligations of the assignee.  Shasha also entered into an agreement whereby he would he would guarantee the obligations of QRL to GK. GK would use its reasonable endeavours to inform Shasha every time the underlease was more than two months in arrears. The underlease rent later became more than two months in arrears and GK did not serve any notice on Shasha (informing him of the same). Both QRL and Shasha argued that the serving of notice, to inform them of rent arrears, was a condition precedent of them being liable to act as guarantors. As the notice was not served, QRL and Shasha argued they were released from their liabilities. The court disagreed and held that the serving of the notice did not go to the root of the contract and did not cause either of the guarantors any loss. The serving of the notice was to give Shasha the opportunity, to put pressure on the assignee, to meet the rent arrears. Shasha did not have any control over the assignee and could not have prevented any further liabilities. The court held that a failure to serve the notice did not release QRL and Shasha from their guarantor liabilities.

What does this mean for Landlords and Tenants? the case illustrates a classic principle of contract law that underpins property cases- the court will not intervene to perfect a bargain made between commercial parties. On a practical note- guarantors will not be released from their liabilities, regarding assignees, if the Landlord forgets to serve a notice. This sets a precedent in favour of the Landlord and will come as a relief at a time when most retail and high street Leases are due to expire and the incoming Tenants are relatively young compared with the exiting Tenants. It is a welcome present for Landlords who fear recovering their rent from struggling retail Tenants (especially as the Commercial Rent Arrears Recovery regime is not set to come into force until this summer). The above, along with break clauses, are another weapon in the Landlord's armoury.

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Overriding Interests- time is nearly up...

I thought I would remind my readers of a development that is of the utmost importance to property Lawyers and their clients.

What's special about the 13th October 2013? It's a day like any other. From 13th October 2013 (at midnight) certain rights will lose their status as overriding interests.

What are overriding interests? First- some context. The purpose of the Land Registration Act (LRA) 2002 was to make the register an accurate reflection of title by reducing the number of unregistered entries (and thus the number of overriding interests). Overriding interests are unregistered interests in land which override first registration of land and any other subsequent dispositions of land. In short, they will bind any purchasers of land whether or not s/he knew about them. This will change from 13th October 2013. From the 13th a purchaser of land will not be bound, by an overriding interest, if s/he did not know about them. To protect an overriding interest, a caution against first registration (for unregistered land) or a notice (for registered land) will have to be entered.

What examples of overriding interests exist? common examples are manorial (hunting, shooting and fishing) and franchise (the right to hold a fair) rights. However, the Chancel repairs liability is potentially the most significant for clients and their Lawyers.

What is a Chancel? The Chancel is the area around the sanctuary in the Church.

How is the right enforced and who enforces it? The Parochial Church Council (PCC) has the fiduciary duty, as a charity, of protecting and preserving the Church's assets. The PCC will enforce the liability. To guard against this risk, Lawyers have traditionally carried out Chancel repair searches and taken out Insurance policies should a risk arise. The case of Aston Cantlow v Wallbank revealed the potential expense that may be incurred (the Wallbanks were liable for repair liabilities running into the thousands!).

How is the 13th October change significant? The Church of England has advised the PCC's that they have a duty (as a charity) to maximise their income by enforcing Chancel repair liabilities. Enforcement will also effect the PCC's ability to obtain heritage grants. The 13th October change aims to provide greater certainty for purchasers of land. Lawyers will no longer have to carry out searches- any risk will be revealed by the title registers and Insurance will only be needed if a risk is revealed by the register. However, Insurance premiums will increase as there is a greater likelihood that the Insurance companies will have to pay out. There will also be potential disputes as to whether the liability should attach to a particular piece of land or whether or not it should be shared amongst the other land owners. The general point is this- a purchaser of land, after 13th October, will not be bound by a Chancel repair liability if s/he did not know about it. We shall have to wait and see whether or not there are a series of attempts by PCC's to register their rights. In any event, Lawyers should be aware of the changes and mark the 13th October 2013 in their diaries.

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Break clauses strike again- PCE Investors Ltd v Cancer Research

I have written frequently about the perils of break clauses in the commercial Lease for the Tenant. The odds are firmly stacked against the Tenant. Most Leases require pre-conditions that have to be satisfied before the Lease can be validly broken. These terms will be construed by Landlords strictly. After all, the Landlord does not want to have to look for another Tenant and be left out of pocket. This posts concerns the case of PCE Investors Ltd v Cancer Research (2012).

PCE Investors Ltd (Tenant) held an underlease of commercial premises in Regent Street, London from Cancer Research (Landlord). The annual rent was £190,000 payable on the usual quarterly days. The break clause was dependent on the Tenant having 'paid the rents reserved and demanded by this Lease up to the termination date.' The Tenant twice sought confirmation from the Landlord that an apportioned amount was the correct amount of rent. On both occassions, the Landlord did not respond. Once the break date had passed, the Landlord claimed that the Tenant's break notice was invalid. The Tenant brought proceedings against the Landlord.

The court found in the Landlords favour. The Tenant was bound to pay the full amount, and not an apportioned amount, on the quarterly days. The Landlord was not obliged to inform the Tenant that an apportioned amount was unacceptable. Allowing the Tenant to pay an apportioned rent would be commercially unsustainable and would create uncertainty. The Tenant's attempt to break the Lease failed and they were liable for the annual rent bill of £190,000 until 27th September 2014- no small sum.

So a failure to comply with a break clause will leave a Tenant with a broken bank account and stuck in a property he does not want. The above case (and indeed all the recent break clause cases) makes the following clear:

• Landlords (and courts) will interpret break clauses to the letter. Rent is payable in full at the end of each quarter day. Any apportionments will not be acceptable unless there is express wording to the contrary in the Lease. Suffice it to say that Landlords and Tenants should agree the situation, regarding apportionments, at the outset of the Lease.
• The Landlord is not obliged to correct and inform the Tenant if the Tenant mistakenly believes that an apportioned amount is acceptable.
• A Tenant must leave the property immediately, and empty, when a break notice is given in order to comply with the need for vacant possession. S/he cannot assume that the Landlord will have waived that condition so the Tenant can carry out repairs to the premises. This will avoid an Ibrend Estates situation (see my previous case note on this).
• A Tenant should keep records of all payments that they make under the Lease to stop the Landlord claiming default interest on any late payments under the Lease. This will avoid an Avocet situation (see my previous case note on this).

In conclusion, all the cases show that break clauses are heavily weighed in the Landlord's favour. Break clauses will be interpreted very strictly. The Tenant will be allowed precious little leeway. Following the above, will save the Tenant money.

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Cutting the cost of Government

I was interested to read some recent analysis by Knight Frank  (http://www.cabinetoffice.gov.uk/news/3bn-growth-stimulus-london-government-vacating-property) which estimated that the government has delivered a boost to the London property and construction market (to the tune of £3.5bn) by reducing the size of its property portfolio. The work is part of the government's civil service reform plan. The aim is to change the way that civil servants work by sharing office space.

As part of the programme, outmoded government buildings are being replaced, refurbished or adapted for a range of residential and commercial purposes. For example, civil servants are vacating the Department for Business, Innovation and Skills, which shall be adapted for residential housing. The effects of the programme are estimated to be:

the injection of £2.3 billion of new investment capital

the £1.13 billion value of ensuing work for the property and construction industry

£7.5 million per annum of additional business rates and council tax income

£54 million of planning gain and public benefits brought about through additional housing and tax revenue for local authorities, including 1,535 new homes for London (of which 253 are affordable homes).

James Leaver, Head of Public Sector at Knight Frank, states that:

'The release of these buildings has created much needed activity in the London property market and we are now seeing the regeneration of large areas of Victoria and Westminster. Our analysis demonstrates that, despite earlier concerns, which had been raised in some quarters, about potentially “flooding” the property market, this has proven not to be the case. A shrinking government estate has delivered efficiencies for government and opportunities for UK PLC.'

The above demonstrates the effects of a smaller central government property estate on the London market. The funding squeeze for local government will only continue to get tighter. Local government bodies should not see estate consolidation merely as flogging off its wares on the cheap. Selling surplus government properties could deliver massive regeneration benefits in terms of greater housing stock and more commercial properties (and thus more tax and rates revenues). I am sure it will not be long, until local authorities across the country, take a leaf out of London's book and consolidate their property portfolios (if they have not already done so). This could present a new wave of instructions for property Lawyers who specialise in advising local government authorities. Property Lawyers should watch this space.

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Banking on change...or not?

Mark Carney, the incoming Governor of the Bank of England, gave evidence to the Treasury select committee yesterday. How is that relevant to Landlords and Tenants? Inflation at (2.7%) influences people's spending decisions. The Bank of England's monetary policy decisions affect a whole range of factors- lending, business confidence and investment etc. To that extent, I would say it is very relevant and Landlords / Tenants and their Lawyers should pay attention.

What did Carney say? It's more about what he did not say. He promised a more aggressive stance and that the Bank would do more to boost lending to businesses etc. He suggested that the Bank will not increase interest rates until the recovery is on a firm footing (not any time soon then). However, Carney shied away from promising that the Bank will continue with its QE (quantitative easing) programme until employment was below a certain level (thus emulating the practice of the US Federal Reserve) or from targeting a certain percentage of economic growth.

With fiscal policy (tax and spending) remaining constrained it is natural that Osborne wants to pass the ball over to the Bank and let them pick up the slack. Will they? It's difficult to say. Carney's rheotoric thus far suggests that the Bank would not hesitate to expand its QE programme if economic growth fails to deliver. Any attempt though to inflate the economy back to recovery could have an impact on consumer's spending decisions. If inflation is pushed higher it will eat into (already squeezed) pay packets. People will not go out and spend. High street businesses will go bust. That is a disaster for the Landlord, who needs Tenants in his property, trading and making a profit (and paying rent!).

Mark Carney will pick up the baton from Mervyn King in June. We shall have to wait and see the effect his arrival will have on monetary policy. One thing is clear- higher inflation will do nothing to solve the problem of struggling retail Tenants, empty properties and out of pocket Landlords!

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Property Investment- let's go shopping...or not?

Store Twenty One has written to its Landlords appealing for rent relief. The Landlords of the high street chain had already sent in Bailiffs fearing that its rent would go unpaid. Store Twenty One are appealing for half price rent or zero rent until the Lease expires. Troubles in the retail sector are not going to go away. More and more Tenants will appeal to their Landlords in similar fashion. I was very interested to read this article in Retail Week:

http://www.retail-week.com/property/retailers-and-landlords-lease-conflict-time-bomb/5036006.article

What does this mean for retail investment?

Well, the interesting point of the article is this- 50% of high street and shopping centre leases are set to expire by 2015. James Brown of property consultancy Jones Lang LaSalle states that 'in shopping centres and on the high street we are coming to the end of the 1980s-agreed 25-year leases, the 1990s 10-year leases and the sub-10 year leases of the last decade.' The article makes the point that vacancy rates will increase, once Leases expire, as international retailers focus on the top 30 locations.

The article also explains that many retailers looking to move into vacated properties are relatively young compared with those exiting the space. This will make for a dynamic mix of Tenants in a shopping centre. However, it will affect the value of Landlord's investments as new retailers are perceived to be 'weaker covenants' and therefore a higher risk. This could result in less rent. Indeed, many institutional Landlords (such as Hammerson- the Landlord of the Bullring shopping centre in Birmingham), when considering whether or not to invest in a shopping centre, are looking at covenant strength and the length of Leases and adjusting the value of the centre downwards to a level where it believes rental levels will move at renegotiation.

In conclusion, many Leases are due to expire by 2015. New retailers seeking to fill the void will face tough scrutiny from Landlords and investors. It's a grim story- rising rents and rates and falling footfall for Tenants. Leases coming to an end, vacant properties and the increased risk of new Tenants for the Landlord. Will this affect investment in shopping centres? It depends. Centres in big cities, with an attractive mix of strong and reputable Tenants will do well. British shopping centres are likely to remain a popular investment in contrast to their European neighbours. We shall have to wait until 2015, when most Leases come to an end, to see the effect on investment. Of one thing we can be certain- alternative assets, such as student accommodation, offer strong covenants and a stable income (see Legal & General's recent £91m investment in student accommodation). Alternative assets (as above) will continue to attract the interest of pension funds, sovereign wealth funds and International investors.

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Keeping stamp duty

The Organisation of Economic Co-operation and Development (OECD) has delivered its diagnosis on the health of the British economy. The verdict? It's not good. In short, the medicine is right but the dosage may be wrong. The Chancellor's deficit reduction plan remains 'appropriate' but the Chancellor may have to slow its pace and ease up on tax rises and spending cuts. The OECD makes the usual calls for Infrastructure investment to boost economic growth. With that in mind, I was interested to read this latest proposal from Boris Johnson:

http://www.bbc.co.uk/news/uk-england-london-21350729

Boris wants to keep the £1.3bn of London's stamp duty revenues in order to boost housing and provide regeneration and employment opportunities. At the moment, the proceeds go to central government. Boris wants to use his powers under the Localism Act to distribute London's stamp duty proceeds. He also wants the government to raise the borrowing limits of London's councils (so they can invest in affordable housing) and transfer any surplus government land to city hall.

Boris' proposal is sound. It could create the opportunity to build more affordable homes, provide a shot in the arm for the construction industry, increase employment and boost economic growth. That said, the plan was rejected by the Treasury as 'interesting but not something we are planning to take forward at the moment.' The Treasury may well have missed the bus. The OECD (in Paris) tells the Treasury (in Whitehall) to consider Infrastructure investment just as Whitehall brushes aside a proposal from city hall.

Well, I guess its back to the drawing board.

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Rent battles? I'm game if you are.

I note that the Landlords (Land Securities, Hammerson, Capital Shopping Centres and British Land) of Game Group have filed for court proceedings in relation to unpaid rent. They have instructed law firm, Berwin Leighton Paisner, to represent them. The case is important as it could (not necessarily will) reform the law concerning the recovery of rent once a company has been put into administration by its Landlords.

This is a contentious topic. As a reminder the basic position was established in Goldacre v Nortel (Goldacre). In short, administrators are liable for rent due after a quarter day if they continue to trade from the premises for the benefit of the creditors. However, the administrators are not liable for rent falling due before the company is put into administration. Consequently, many companies are being put into administration, immediately after the quarter day, in order to trade from the premises rent free for three months. The Landlord is left out of pocket for three months.

The rent bill in this case was £80m. PWC closed 277 Game stores. The group was later sold to the private equity firm - OpCapita. No small sum then.

In my opinion, the case demonstrates the advantages of monthly rents. If Landlords and Tenants agree to a monthly rent, at the outset of their negotiations, then any 'Goldacre' problems will be avoided because the Landlord will only have to wait a month (instead of three) for their rents. Monthly rents are attractive to struggling retail Tenants and will reduce the situation of the Tenant breaking the Lease (see previous posts on this) in order to look for a more attractive property. A lot of the big institutional Landlords have moved to monthly rents.

We shall have to wait and see whether or not the court swings in the Landlord's favour. The case could establish a 'pay as you trade' principle in which Landlords would pay a daily charge for use of the premises. Watch this space. Until then, the Game case illustrates the attractiveness of monthly rents. Monthly rents are beneficial to both the Landlord and Tenant and are something for the parties' Lawyers to bear in mind during Lease negotiations.

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Mansion tax madness

The Institute for Fiscal Studies (IFS) recently announced that the UK faces a £64bn hole in its finances by 2015. So belt tightening is clearly not off the cards and our cash strapped government is increasingly looking for alternative sources of revenue. Coalition spats aside, the Mansion tax proposal continues to rear its ugly head whenever money's tight. Trouble is its never done. It would be a bad idea. I will explain why.

The Mansion tax is the brainchild of the Liberal Democrats. Nick Clegg is set to make an announcement today that it could involve a one per cent levy on homes over £2m or increased council tax bands for properties over £2m. The problems are:

• How will such properties be valued? A property in say Chelsea may have been bought in 1950 for X but may now be worth Y. Who will value the property and how?
• The policy will affect asset rich but income poor people (e.g. pensioners) who have seen the value of their homes increase over time.
• The policy could deter a lucrative central London market for prime property. International purchasers could be put off from buying a property once SDLT and a Mansion tax (in whatever form) is introduced.

The Mansion tax policy raises more problems than it solves. Politically it sounds good. Politicians playing to the gallery. In practice- we shall have to wait and see its effect. I remain sceptical.

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Empty property rates- Makro v Nuneaton Council

Empty properties are a nightmare for the average commercial Landlord in this economic climate. I thought I would take the opportunity to write about an important 2012 case, Makro v Nuneaton Council (Makro), concerning empty property rates.

The general rule is that an empty property is exempt from rates for three months. After that, it must start paying full business rates. The period is six months for industrial units. A Tenant can get a further six months once it has occupied the premises for six weeks or more. Makro argued that they were entitled to a further six months exemption by virtue of their occupation of the premises between November 2009 and January 2010. During that time, Makro had stored pallets (containing paperwork) at the premises, which occupied 0.2% of the floorspace. The question boiled down to whether or not they were in sufficient occupation so as to attract a further six months exemption from business rates. It was held that Makro were sufficiently in occupation and were able to benefit from a further six months exemption from rates. It is interesting that Makro used just 0.2% of floor space and gained a saving of £117,000- no small sum.

This decision will undoubtedly provide relief to Landlords who are struggling with business rates on their empty properties. Makro shows, that even a small use of floorspace, can amount to occupation which will then lead to eligibility for another six months exemption from rents. So if Landlords and Tenants want to gain another six months exemption from rates, Makro would appear to suggest that even storage use of the property would satisfy the requirement for occupation.

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The nightmare of CVA's

I was interested to read, in The Times business section yesterday, that fashion chain Republic is entering into negotiations with their Landlords. Republic want to review their unprofitable stores and propose a move to monthly rents (see further posts on this subject).

It is likely that 2013 will see a number of retailers announce that they are reviewing their property portfolios. Whilst the recent PMI showed growth in the services sector, the economic outlook still remains uncertain and inflation is hardly on a downward trend. When you factor in business rates, restrictive parking and Internet dominance the fact that stores are reviewing their less profitable Leases is hardly surprising. A Lease may not be generating profit for a variety of reasons:

• The property is in a difficult / less attractive location
• The store may be smaller than other shops in the portfolio
• Footfall at a particular store may have been particularly week
• Some stores may stock products which are less popular

However, there is one issue that still poses a problem for many Landlords- CVA's (it should be noted that Republic have not entered into a CVA). Bodies such as the British Property Federation (BPF) have proposed reform of the CVA regime. The problem is that CVA's are perceived as letting Tenants off the hook by walking away from their Lease obligations. A CVA needs 75% of the votes from its creditors in order to be agreed. Some Landlords (those with less profitable Leases) have more to lose than others but still get the same vote as the other Landlords. Either way, the Landlord is left out of pocket whilst the Tenant is free to walk away.

So what's the answer? a solution to Landlord's CVA concerns could be a solution that was used in the CVA of Travelodge. Once a CVA is agreed, the Landlord could take a share of any future profits made by the business. In other words a 'claw back' clause. That way the Landlord still has an interest in seeing the business (and the Tenant) succeed. The administrators of Travelodge offered the Landlords an extension of their Lease terms. This had not been offered in any CVA before and was designed to offer as much value to the Landlords as possible.

Problems in the retail sector are not set to go away any time soon. Retailers will continue to review their less profitable Leases. A 'Travelodge solution' may be a way of getting round the problem of CVA's whilst still offering value to the Landlords.

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Banking on change

Today's post will focus on George Osborne's recent announcement regarding banking reform. You may ask why this is important to Landlords and Tenants? Well Landlords need Tenants in their premises. Tenant businesses will only be able to stay in their premises if they are able to trade, make a profit and (crucially) obtain the necessary finance from lenders.

Osborne announced the 'electrification' of a ringfence separating retail from investment banking. This would give the Bank of England power to separate the retail and investment arms of banking. The argument is that this could lead to uncertainty and effect the ability of banks to lend. Some of the biggest losses, at the beginning of the global economic crisis, were retail banks e.g. Northern Rock. We have seen several schemes from the Chancellor to encourage business lending- credit easing, funding for lending, a dedicated business bank etc. The effect of these schemes has been non existant at worst and negligible at best. We will have to wait and see the effect of Osborne's electrification. But it is important for Landlords, Tenants and their Lawyers to be aware of these changes. Tenants need access to finance in order to continue to trade (and pay their rent on time!). Let's hope that Landlords and Tenants can bank on change for the better.

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Service with a smile

I was interested to read that the services sector grew in January. The MPI (Managing Purchasers Index) for services recorded growth of 51.5. Anything above 50 shows growth (a reading below 50 shows contraction).

Why is this important? It's important because services i.e. everything from shops, restaurants to hotels comprises three quarters of the British economy. Thus, the services sector is a good indicator of the health of the British economy.

But what does it have to do with commercial Landlords and Tenants? Landlords need Tenants in their properties. Above all, they need their Tenants to make a profit and pay their rent on time. Tenant businesses can only make a profit if people are buying their goods or services. That is why the services PMI is important.

Will the growth continue? Some would argue that the figure would have been higher had it not been for the snow in January. That said, economic growth was disappointing (at 0.3%) in the last quarter. Inflation still remains above the Bank of England's target. The services MPI may have pursuaded the MPC to put its quantitative easing (QE) programme on hold. But this may not be the case for ever. Mervyn King will step down as Governor this year. His successor, Mark Carney, has indicated that the MPC could focus on nominal GDP or Employment targets. We will have to wait and see whether or not Carney advocates a more liberal use of QE. If he does, inflation could be pushed even higher- which will have a knock on effect in the services sector!

For now, the services sector remains resilient and Landlords can rest easy that their rent will be paid and that their Tenants will continue to trade and make a profit. That said, the economic outlook remains uncertain- not least in the Eurozone. Let's hope that Landlords and (crucially) their Tenants can continue to provide service with a smile. For their own sakes and for the sake of the wider economy.

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Back to school- Investment in student accommodation

I was very interested to read this article in Property Week:

http://www.propertyweek.com/news/lg-cements-£91m-student-accommodation-deal/5049713.article

The article covers Legal and General's (LG) £91m investment in student accommodation due to be let to Southampton University. The deal involves a 38 year Lease with no breaks and fixed inflation linked rent increases. This is the fourth deal that LG has made into the student accommodation sector.

Gordon Aitchison, Director of Investment and Development at LG, stated that the 'sector offers our funds an attractive opportunity to invest in index-linked income on very long leases to strong covenants...our focus remains on funding high quality developments that are backed by premium universities and located in first class locations.'

Why is this important? It further highlights the importance of student accommodation as an attractive asset class in which to invest. As stated before, Institutional and (increasingly) International investors seek stable currencies, sound economies and favourable political regimes in which to invest. Student applicants have remained steady. International students are attracted to the UK's world class universities. When you factor this in (along with long Leases, reputable university Tenants and index linked rental income) it is no small wonder why investors are opting to go back to school!

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Planning for change

I have recently covered the Government's proposals to make it easier for commercial properties (use class B1a) to be converted into residential property (use class C3). I have written about the Government's proposals to streamline the planning process for free schools. However, this does not benefit the commercial Landlord. That said, the following changes might.

The Government aims to simplify and streamline our byzantine planning system by encouraging greater flexibility in the use of buildings.

Firstly, agricultural buildings may be converted for other uses with the exception of residential dwellings.

The thresholds for permitted development rights will be increased for changes of use between office (B1) and warehouse (B8) classes and from general industry (B2) to B1 and B8 from 235 to 500 square feet.

To encourage more start ups, a range of buildings may convert temporarily for an alternative use including shops (A1) financial and professional services (A2) restaurants and cafes (A3) and offices (B1 for up to two years) for up to two years.

Lawyers should plan for change and be aware of the planning rules that will assist commercial Landlords and Tenants. However, they should also be aware of the potential problems. The above changes concern permitted development. However, councils still retain their Article 4 powers. In other words, they can still override permitted development. I recently said that councils would have to prove significant economic detriment in order to overrule a change of use from B1 (office) to C3 (residential). The city of London has already successfully applied for an exemption and we will have to watch this space as to whether other cities will successfully gain an exemption. Some Leases and Lenders may not permit a change of use.

Whilst, the above may oil the wheels of the planning process it remains to be seen whether or not the changes will have any significant effect.

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Squatters target commercial properties

I thought I would take the opportunity to come back to a topic that certainly attracts alot of ire amongst commercial Landlords.

As stated before, s144 of the Legal Aid Sentencing and Punishment of Offenders Act (LASPO) 2011 makes it an offence to squat in residential premises. Anyone found squatting in residential premises will be liable for a £5000 fine or six months imprisonment. However, squatting in commercial properties remains a civil matter. Squatters in commercial properties can only be removed by a possession order which is subsequently enforced by a court enforcement officer. As a result, squatters are targeting commercial properties (pubs, warehouses etc) and inserting notices on doors and windows to remind people that the premises are not residential AKA s144 notices (which they can download from squatter's rights campaign groups websites).

Removing squatters is a waste of time and money for Landlords. As a result, any Landlords of commercial property have to be vigilant. An empty property should be securely locked. The Landlord should invest in an alarm system and make good use of signs (e.g. 'private property - do not trespass') and CCTV. The Landlord would also be well advised to visit the property at least once a week (preferably twice). In short, the Landlord should give the impression that the property is well attended and not empty. S/he should try to make the environment as unappealing for squatters as possible.

Whilst the government is aware of the problem, and has promised to keep the situation under review, it is unlikely that the law will change any time soon. Following the above will mean that the Landlord will avoid the major expense of having to remove squatters from their premises.

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Rolling out the red carpet

I have argued in this blog that property investment must consider wider economic factors. That is why I was interested to read a post in Knight Frank's Twitter feed which stated that the French are now the third largest buyers of prime central London properties.

This is not surprising. Why? Because the policies of France's Socialist administration hardly embrace the country's high income earners. The French government proposed a new 75% top rate of tax for those earning above 1m Euros. It was struck down by the French Constitutional Court because it would apply to individuals as opposed to households. David Cameron promised to 'roll out the red carpet' for wealthy French exiles. The French PM (Jean Marc Ayrault) promised that the French government would look again at the measure. Anglo / French spats aside, quite a few French celebrities (the most notable being Gerard Depardieu) have left France.

In light of the above, the fact that wealthy French people are flocking to London is hardly surprising. Why shouldn't they? 45% is better than 75% and at least British politicians do not seem so hostile to wealth creation. If I were French I know where I would want to live. Whilst the prime residential market, has seen most of the action, I would be surprised if it did not soon come to encompass other prime commercial assets- retail/ leisure developments, office buildings etc.

The above illustrates the importance of a favourable political climate to property investment. High taxing / regulating governments cannot be surprised if their citizens head to distant shores to store and invest their gold.

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Relaxing planning rules- free schools

Today's post concerns something which may be of interest to any property Lawyers who advise, or are in the process of advising, a body that is interested in setting up a free school.

Free schools remain a central plank of the Government's education policy. Any private sector provider or charity or any other body may establish itself as a free school. Eric Pickles, the Communities and Local Government Secretary, has announced new permitted development plans. This will allow free schools to set themselves up, in disused office buildings and other commercial properties, without having to gain planning permission (for a year). A limited impact assessment will be carried out (by the local planning authority) which will consider noise and traffic issues. This will give free schools greater time to win the planning permission that will be needed after their first year. It will allay concerns, that the 100 free schools set to open, will not be able to do so on time.

The Government has even opened a website containing details of empty Government properties for potential free schools at:

https://www.epims.ogc.gov.uk/fmsgspublic/Home.aspx

The changes are part of the Growth and Infrastructure Bill which already states that local planning authorities must consider new school developments when considering planning applications. No doubt the above measure will help to streamline the process and is part of the Government's wider goals of simplifying the planning system. We shall have to wait and see the full effect of these measures. However, some disused commercial properties may not be suitable for use. Say for example a free school wants to set up in an old disused warehouse. What if it has to make substantial repairs to make the environment suitable for its students? Surely it will have to gain planning permission after its year is up? What if it cannot obtain planning permission for any alterations? In that instance, the whole affair will be pointless. No doubt, Lawyers will still carry out environmental surveys. My point is that not every commercial building will be suitable for use as a free school. If a free school cannot obtain, planning permission after one year, will it have to leave?

Any attempt to streamline and simplify the planning system is deeply welcome. The jury's out as to whether the plans will help or (eventually) hinder free schools.

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Monthly rent payments- the Landlord's perspective

In my case note on MK Airlines v Katz I suggested that monthly rents (as opposed to quarterly rents) would help Landlords and Tenants. From the Landlord's perspective s/he would only have to wait a month (instead of three) if the business is put into administration immediately after a quarter day (as has been the practice since Goldacre). Monthly rents would also assist Tenants with their cashflow- particularly in the retail sector.

The quarterly rent payments date back to medieval times. They fall on the Christian Holy days- the days when, historically, the King appointed his servants and rates were due. Many Tenants have demanded a change to this archaic practice. Some big Institutional Landlords (such as The Crown Estate, British Land, Lend Lease etc) have already made the switch to monthly rents. However, the practice of quarterly rents does still exist and is being used by Landlords. The case for quarterly rents is:

• Landlords owe duties to other persons/ bodies such as lenders and pension funds. A Landlord may have a mortgage with a lender. The lender may not be willing to tolerate a change from quarterly to monthly rents.
• If the Landlord does accept monthly rents then they will be liable for extra administration fees and bank charges. This will then be passed onto the Tenant through the service charge- another expense for the Tenant!
• Quarterly rents have existed and worked for centuries.

The practice of quarterly rents will raise strong passions from both sides of the divide. My opinion? quarterly rents are archaic. Many smaller Tenants are struggling- depressed economic growth, 2.7% inflation eating into wages. Landlords must decide- do they want quarterly rents or a Tenant. A Tenant may well be advised to look for a better Lease if quarterly rent payments are not forthcoming. That is something that the Landlord and their Lawyers may want to bear in mind during Lease negotiations.

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MK Airlines v Katz- recovery of rent

My very first post on this blog covered the decisions in Goldacre v Nortel and X Leisure v Luminar. Both cases established that rent accruing during an administration (where the premises were being used for the benefit of the creditors) was to be treated as a 'priority expense' of the administration. This did not apply to rent that accrued prior to the administrators being appointed.

The 2012 case of MK Airlines v Katz (MK) follows these cases. MK concerned the administration of a company and the appointment of provisional liquidators. The provisional liquidators initially used the premises to store the company's assets. It was held that rent was not to be treated as a priority expense during this period. However, once the premises started to be used for the benefit of the liquidators, the payment of rent was to be treated as a liquidation expense. So once the premises started to change use (and thus be of benefit to the liquidators) then the rent was treated as a priority expense.

The conclusion? Landlords should get into contact with the liquidators, as soon as they are appointed, and try to ascertain what use the liquidators will put the premises to. If the liquidators just intend to use the property for storage then rent will not be a liquidation expense. If the liquidators gain from the use of the property then the rent will be a liquidation expense. Landlords- get in touch and talk with the liquidators as soon as they are appointed. This will save both time and money!

Goldacre, X Leisure and MK make one thing clear- Tenants could well have the upper hand in Lease negotiations by insisting on the payment of monthly as opposed to quarterly rents. This will benefit the Landlord too. If a business is put into administration, shortly after a quarterly rent day, the Landlord will have to wait a month for their rent instead of waiting until the next quarter. Monthly rents may also help with Tenant's cashflow- many of whom struggle with quarterly rents (and have demanded an end to this archaic practice). Property Lawyers are well advised to suggest monthly rents to their Landlord/ Tenant clients. Monthly rents may help to alleviate the problems caused by Goldacre etc.

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Ibrend Estates- broken hearts not broken clauses

Today's post concerns something of the utmost importance to both Landlords and Tenants- the operation of break clauses in the commercial Lease. It will examine the 2011 case- Ibrend Estates v NYK Logistics (Ibrend).

In this climate the Landlord will not want an empty, unproductive rates attracting property. The Tenant may want a less onerous Lease or simply to move to a better location. Either way, the Landlord will not let the Tenant get away so easily and will interpret break clauses strictly.

The case of Ibrend concerned a break clause, in a Lease, subject to a pre - condition. The pre -condition was that the Tenant had to give 'vacant possession' in order to break the Lease. When breaking the Lease, the Tenant was carrying out repair works to the property (in order to avoid any dilapidations claims). The Tenant stayed in the property, after it had attempted to break the Lease, carrying out the works. The Tenant believed that the Landlord had waived its obligation to leave the premises immediately. This was not correct. Vacant possession meant that the property was empty (at the moment it was required to be given) and that the purchaser could enjoy immediate and exclusive control of it. Thus, the Landlord was able to successfully argue that the Tenant had not given vacant possession and could not break the Lease.

What does this mean for Tenants? the Tenant must leave the property at the moment he is required to give vacant possession. He cannot assume that the Landlord has waived the obligation on the Tenant to leave the property immediately. Obviously, the Tenant should comply with its repairing obligations throughout the Lease term, but the property should be in the same condition as it was at the start of the Lease. The Tenant should take a set of signed and dated photographs of the property at the start of the Lease (which should then be put into a 'Schedule of Condition' and annexed to the Lease). This should therefore save time and money as the Tenant will know precisely what state the premises should be left in. A failure to leave immediately means that the Tenant will be stuck in a property that s/he does not want. Landlords will treat break clauses strictly. Tenants should save time and money by compiling a Schedule of Condition and by leaving the property immediately (once s/he wishes to break the Lease). Suffice it to say, that the Tenant should have records of all payments s/he has made under the Lease to avoid an Avocet v Merol situation (see earlier post on this case).

Following the above will ensure a broken Lease and not a broken heart!

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High street woes

Most of us are familiar by now with the recent troubles on our high street- HMV, Jessops, Blockbusters. One by one falling prey to the administrator's axe. However, I was interested to read this article in the Daily Telegraph:

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9844112/We-are-fighting-in-the-trenches-says-Blockbuster-administrator.html

The article is an interview with Lee Manning- Accountant at Deloitte and appointed to lead the administration of Blockbusters. He makes the point, rather eloquently, that the mission of administration is that of rescue akin to 'fighting in the trenches and being shot from all sides.' Manning argues that there is a role for businesses like Blockbuster on the high street- albeit in a rather different form. The above businesses have failed to keep pace with 'click and collect' delivery methods. Manning states that different delivery methods (i.e. click and collect) have worked wonders for businesses like Argos who would not survive in its present form without it. Manning also points out that 'John Lewis is very good at using technology to get people into the shop. That way, bricks and mortar shops, still make sense.'

So there is hope for the high street (and of course the Landlords) yet.

However, Manning also takes a swipe at restrictive local authorities whose 'restrictive parking regimes' and 'vulture like ticketing practices have made popping down to the high street in a relaxed way a thing of the past.' He could also have mentioned business rates. As explained before, in an earlier post, business rates are a tax levied on commercial property to fund local services. In some areas they can be higher than rents. The next business rates revaluation is not until 2017. Business rates are a major expense for high street businesses- hence the campaign by high profile business figures to have them cut. That's not likely to happen at any time soon. However, Landlord and Tenant clients should be aware of any available reliefs. I shall summarise the reliefs briefly:

• Small business rate relief- if the rateable value of your business is £6000 or less you are eligible for 100% relief from business rates. This percentage decreases once the value of the property falls between £6001-12,000. You can also get rate relief if you own other properties and the rateable value of each of your other properties is less than £2600. The rateable values of the properties are added together and the relief will be applied to the main property. You should apply to your local council for small business rate relief

• Charitable relief- charities and amateur sports clubs can get up to 80% relief if a property is used for charitable purposes. Landlords and Tenants should check with their local council to see whether or not they are eligible for the relief. Clients should also check whether or not they are eligible for 'discretionary relief'' (up to 100%). This is sometimes provided by local councils to 'top up' certain reliefs to give businesses and charities extra help.

The dark cloud hanging over our high streets is unlikely to give way to a ray of sunshine any time soon. Restrictive parking, ticketing and business rates present a challenge for high street businesses. Advising clients of the above reliefs, will ensure that the battle fought in the trenches is both fought and won.

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Eurozone Investment- more clouds on the horizon?

A recent article in PropertyWire (see below) has further piqued my interest in property investment. The article mentions a recent survey carried out by the Royal Institute of Chartered Surveyors (RICS). The survey states that European commercial property sectors, especially France, are deteriorating. This is in marked contrast to the so called 'BRIC' economies.

http://www.propertywire.com/news/global-news/global-commercial-property-markets-201302017403.html

Its easy to think that a property Lawyer's work is restricted to dry and archaic principles (like overriding interests!). I would argue that it is equally important to understand wider economic factors. For example, an international investor will only invest in a shopping centre/ retail and leisure complex if it can be sure that the shops in the centre will enjoy high levels of footfall. Frequent footfalls= regular rent paying Tenants. Suffice it so say that strong covenants (i.e. reputable and successful Tenants) will be attractive to both Landlords and investors. This will depend on the wider economy. A country in the depths of recession means that consumers are less likely to go shopping and spend their money!

If you were an international investor (pension fund, sovereign wealth fund etc) would you rather invest in Greece or Brazil?

Ah but the UK seems to be heading towards a triple dip some would argue. They may be right. The economy contracted by 0.3%. Inflation is at 2.7%. Wages are lagging behind prices. However, I would still want to put my money in a large British shopping centre full of reputable Tenants. Why? Because the UK has an independent currency with stable governance.

The same cannot be said of our European neighbours. We have yet to see the colour of their money.

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Overriding interests- time to call it a day?

Today's post will concern something quite archaic but nonetheless of the utmost importance to both property Lawyers and clients. On 13th August 2013, at the stroke of midnight, some rights/interests in land will lose their overriding status.

So what are overriding interests? They sound like a throwback to some bygone era. To an extent they are. Overriding interests are unregistered interests (i.e. those not registered on the title registers at the Land Registry) which survive first registration of property and will bind any subsequent sales, purchases or other dispositions of land. The central purpose of the Land Registration Act (LRA) 2002 was to make the register an accurate version of title as possible. The LRA tries to reduce the number of overriding interests by replacing them with registered entries. On 13th August 2013 the following rights will lose their overriding status:

• A franchise
• A manorial right
• A right reserved to the crown on the granting of any freehold estate (whether or not the right is still vested in the crown)
• A non - statutory right in respect of an embankment, river or sea wall
• A right to payment in lieu of tithe
• A right in respect of repair of a church chancel

Pretty ancient then. The most important right, so far as Lawyers and clients are concerned, is the last one- a right in respect of repairs to a church chancel. If a property is located, in the vicinity of a medieval church, the owner may be liable for repairs to the chancel- the space around the altar in the sanctuary of a church. The Parochial Church Council (PCC) may charge property owners to carry out repairs to the chancel. The PCC are, in effect, Trustees and must discharge their duties to the church. The famous case of Aston Cantlow v Wallbank showed that chancel repair liability could even run into the thousands- a major expense for any property owner. Lawyers have therefore always done chancel searches and taken out Insurance policies should a risk arise.  From 13th August 2013, a right in respect of chancel repairs will lose its overriding status. This means that it will cease to bind subsequent purchasers of land. If a purchaser buys a piece of land/property, ignorant of this right, then after the 13th August they will not be liable for the chancel repairs.

The LRA seeks to call it a day on these ancient unregistered rights in land by removing their overriding status. About time some would say.

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