Commercial Property

I have just read the September Commercial Development Activity for September 2010 and, that coupled with comments made by one of my golfing partners at the weekend to the effect that there are more redundancies coming from residential developers, has deepened my pessimism.

If the market is as bad as it seems I do wonder why more tenants, when looking for commercial premises are not driving harder bargains.  This is an issue that we Commercial Lawyers have gone on about for a number of years but it is worth another airing.

Commercial tenants, even quite large companies, seem to go into the market without proper protection.  Some seem to accept what the letting agent tells them.  The point to bear in mind is that the letting agent is not acting for the prospective tenant but is employed by the landlord to get the best delay.

Some tenants will negotiate to get a rent review but do not think of the other issues. Here are some points that also need to be considered:

1. Why are you taking on a full repairing lease particularly of an old building on a short lease? What happens if you have to meet a major expenditure? Will you ever recoup the money spent?

2. Why are you taking a lease for 21 years? Why not have greater flexibility?

3. Why is the rent review upwards only?  That can mean that even if the rent is right now at review you will be paying too much rent, which means that if you want to move you will find it difficult

4. Why are you paying the landlord’s legal cost? He is lucky to have you interested; he should probably be paying you.

I could blog on for pages about this but I am sure the point is made.

So what is the solution?

The best method is that before you agree the terms discuss them with a commercial agent that you instruct, just to make sure that what you are being told is a good deal. The agent can just point you in the right direction.

You can go back and renegotiate. That is the cheapest course or you can instruct the agent to act on your behalf. The likely cost you will incur in his fees will probably be nothing to the savings you will make over the term of the lease

The Supreme Court has ruled that, for the purposes of succession, a Council flat tenancy held by a tolerated trespasser can be revived.

The case involved a trespasser of a flat who was tolerated, not a tenant!

He had lost a secure tenancy when the Court granted a Possession Order against him.  The Landlord Council, the London Borough of Southwark, argued there was no tenancy to which anyone could succeed.

However, the tolerated trespasser, unfortunately, was terminally ill.  His brother moved into the Council flat to look after him.

The brother, Barry Austin, resisted attempts by the Council to evict him.  He lost in the lower Courts and the Court of Appeal.  However, the Court of Appeal ruled that where a former tenant died as a tolerated trespasser, the person seeking to succeed to the tenancy could apply to the County Court to postpone the date for possession.

If the application was successful, the tenancy could then be revived!

Of course, in practical terms, this is not the end of the matter but an unfortunate situation for Council Landlords and, nevertheless, remains a complex area of the law for tenants!

Communities Secretary Eric Pickles is not everyone’s flavour of the month in matters planning.  The removal of regional strategies and centrally imposed building targets has, for many involved in development and town and country planning, left a void which will result in fewer houses being built thereby exacerbating the current shortage.  However, not everything that Mr Pickles and his Department does is bad.  The Department of Communities and Local Government have produced technical guidance on permitted development for householders.  The intention behind the General Permitted Development Order is to enable small scale development to be undertaken without the necessity of obtaining planning permission thereby avoiding further clogging up the already overloaded planning system.

The document replaces earlier guidance.  The stated objective is to set out the rules concerning what extensions, improvements and alterations a householder may make to a house and the area around it without the need for a planning application.  The new guide is designed to be used by anyone who wants to understand more about the detailed rules on permitted development and the terms used in those rules.

Having read the guide and considered its diagrams, I have to agree that this document achieves its objectives.  In colloquial parlance, it does what it says on the tin.  As someone who has an expanding town and country planning practice, I confess that not only will householders find this document useful but at least one professional, namely myself.

Unfortunately at the time of writing this blog, the 26th August, the document does not appear on the website of the Department of Communities and Local Government nor on the website for national information.  If anyone wishes any information concerning this guidance, please contact me.

Sometime ago I was involved in a refinancing package between two companies which were in common ownership.   Company A lent company B money and as part of a cost saving exercise,  the loan, although recorded in both companies records, was never protected by a formal charge registered at the Land Registry and at Companies House.

Latterly company A has given a guarantee to Barclays Bank in respect of a loan by that bank to company C.   That guarantee is protected by a debenture and charge over company A’s assets. For a variety of reasons, not least the attitude of Barclays,  company B wants to protect its position by having a charge over the assets of company A.

I have had to advise that the only way company B’s position can be protected against Barclays bank is for that bank to agree to postpone its protection. The client is going into negotiations with Barclays, I anticipate more in hope than in expectation.

At the time of the original loan there was good reason to spend as little money as possible and the companies remain in the same ownership, so that the common management knows exactly the financial position.  However,  the story does demonstrate that cost savings can lead to a future adverse position unless those involved remember what happened in the past.

The Government has made much of its proposals stating that these give the Local Authorities “the freedom to prevent over development of neighbourhoods”.

Will this make a difference in Swindon and will it prevent over development?  According to the Government’s latest available figures which relate to 2005/2008, only 7% of all new building in Swindon was on previously residential land.  That is hardly a significant figure.  Whilst the proposals may have an influence in some areas, apparently not in Swindon.

In any event is there a problem with large houses with large gardens being redeveloped to meet modern needs?  Many people no longer want nor can afford large houses with large areas to maintain.  What this change in policy, coupled with the removal of the obligation to enforce national minimum density levels, is intended to achieve is  to ease the problem of the shortage of housing across the country. I doubt that it will have this affect.  I think it will exasperate the existing problem.

Malcolm Poynter, a commercial property lawyer with Charles Lucas & Marshall explains a new Government incentive scheme aimed at making companies more energy efficient.

CRC Energy Efficiency Scheme

The Carbon Reduction Commitment Energy Efficiency Scheme (generally referred to as CRC) came into effect on the 1st April. The Scheme is based on buying CO2 Allowances and is intended to act as an incentive to larger energy consumers to become more energy efficient.

To work out whether the CRC Scheme affects you directly, the first thing to do is to work out the extent of your organisation eg this may include group companies and other legal structures such as joint ventures.

If within the organisation there is one half hourly electricity meter then the Scheme could affect that organisation. A half hourly meter is a form of metering which feeds back data to the electricity supplier on a half hourly basis.

If the organisation consumes in excess of 6,000 mega watt hours of electricity (with some exceptions) then it will need to register and take part in the Scheme. Registration is required by 30th September 2010.

Again, if you have one half hourly electricity meter you will probably need to register and provide information even though you will not take part in the Scheme itself.

The important point to appreciate is that the Scheme is not based on location or building – it is by organisation. Thus a chain of owner occupied shops could result in the overall consumption exceeding the qualification limit, bringing the business within the Scheme.

Currently, qualification is based on the year ending, 31st December 2008 and therefore the organisational structure at that date is the relevant one and the consumption of electricity during that year is the relevant qualification criteria.

It may be your organisation does not receive electricity directly, eg if you are a tenant it is quite common for the landlords to supply the electricity and to recover the cost from the tenants. In those circumstances, even though you may be a small user of electricity, it could be you are affected by the Scheme because your landlord is. The landlord may, for example, seek to pass on costs of the Scheme through the service charge arrangements.

There are special rules for public sector organisations and for franchises.

If the organisation qualifies for the Scheme then it will need to acquire Allowances for electricity to be consumed. At the end of the compliance year the organisation will need to surrender the appropriate number of Allowances to cover the emissions for that period. If you have acquired insufficient Allowances at the outset then you will need to acquire further Allowances on the market, as Allowances may be traded.

A league table will be established based on various criteria as to efficient use of energy within the organisation concerned. The Scheme is meant to be revenue neutral from the Government’s point of view, ie it is not meant as a tax. Monies raised through the sale of Allowances will be repaid to participants in accordance with their ranking in the league table (recycling payments) thus incentivising improved energy efficiency.

Further details are available at the Government website http://www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/crc/crc.aspx or by contacting Malcolm Poynter on 01635 521212 or malcolm.poynter@clmlaw.co.uk

As of April 2011, the Competition Act 1998 will apply to property transactions.  The Act catches any agreement which may prevent, restrict or distort competition in the economic market or where one party endeavours to abuse a dominant position.  The introduction of this Act to property transactions will alter the way that we think.

There are four preliminary points, being:

1.    The Act is retrospective in that it catches not only new but past transactions.

2.    An offending provision will be incapable of enforcement and may render the whole agreement invalid.

3    A breach of the provisions of the Act can lead to fines, disqualifications of directors and claims for damages.

4.    The provisions will not be judged on their wording but against the effect on the market place.  This is a novel concept for us in the property business as it introduces an extraneous element over which there is little or no control.

What Will Be Caught?
The obvious area will be in respect of restrictive covenants but the effect of the Act is very wide and could, for example, catch easements which are restrictive in use.

How Much Will We All Be Affected?
The first reaction is that we will see a major shift in the way in which we consider all deals , in the commercial field and possibly even in some residential matters relating to property transactions, large or small.  A more considered reaction is that many transactions although restrictive may not fall within the ambit of the Act.

The Way Forward
1.    All existing Agreements, Transfers and Leases should be reviewed.
2.    All new transactions should be considered against the Act to see if they are likely to be caught by its provisions or whether they will be within the exemptions that the Act permits.

Conclusion
At present most people in the property field have not had to consider the Competition Act.  This has now changed but the effect on property transactions is still not clear.  We understand that the OFT will be issuing guidelines and we will bring these to your attention as issued.  These guidelines may be helpful in clarifying the situation.

In the meantime if you or your clients would like to discuss the effect of the Act on past, current or future transactions we will be happy to meet with you or them.

Contact us on 01635 521212 or through www.clmlaw.co.uk

Hemant Amin, a commercial property specialist with law firm, Charles Lucas & Marshall, argues that tenants are often at a disadvantage when negotiating a commercial lease.

It has been widely recognised that the tenant is often at a disadvantage when negotiating lease terms. As a result, The Code for Leasing Business Premises in England and Wales 2007 was introduced in 2007. It makes several recommendations as to achieve a fairer balance between the landlord and the tenant and greater flexibility in commercial lease terms.

Typically a tenant will negotiate lease terms with a landlord’s agent. This immediately places the tenant at a disadvantage as negotiation takes place before the tenant’s solicitor becomes involved.

Ancillary to the Code is ‘Leasing Business Premises: Occupier’s Guide’. Its purpose is to give the tenant information which will assist at the negotiation stage of the transaction. From the tenant clients I have acted for, I have yet to hear of anyone who has used the Occupier’s Guide when negotiating lease terms with the landlord’s agent.

In July 2009 the Department of Communities and Local Government published a report on the Code. It concluded that awareness of, and advice in the Code was limited and that it played only a minor role (if any at all) in negotiations.

There still exits a view that negotiations on lease terms are flexible and fair and that the Code was unnecessary. From a tenant’s perspective, it is a shame more is not done to promote the Code and Occupier’s Guide.

Time and time again, tenants who fail to take advice are blissfully unaware of the full implications of taking on a fully repairing and insuring lease. By the time the tenant has agreed the terms of the lease with the landlord’s agent and the heads of terms have been circulated, it is difficult for the tenant’s solicitor to renegotiate terms.

Current market conditions favour the tenant and this has certainly helped the tenant’s negotiating position – rather than the Code. In fact, given the current market conditions, it could be argued that the tenant should expect even more favourable terms than those recommended in the Code.

However, market conditions do change and as the market recovers from the recession we may see a return to the bargaining position which prompted the release of the Code. The Code and Occupier’s Guide could act as a good starting point for negotiations, regardless of market conditions.

One issue raised in the Report was that solicitors do not get involved early enough in a transaction to influence terms. My recommendation would be to discuss the terms proposed with a solicitor, prior to agreeing the terms with the landlord’s agent and the issue of heads of terms.

If you are considering taking on a commercial lease in the near future or are currently negotiating on lease terms contact Hemant Amin of Charles Lucas and Marshall for advice on 01635 521212 or hemant.amin@clmlaw.co.uk

One of the favourite ways of land owners and developers to work together has been the granting of an option by the land owner to the developer under which the developer has the option of buying the land if he secures planning permission for its development.

These have often morphed from simple documents to those many pages long. This is due to the increasing length of the option period, the increasing sophistication of the requirements of both parties and the nature of the planning system.

Of late, particularly relating to land which may take time to be allocated in the Local Development Framework, we are seeing an increasing use of promotion agreements. These agreements contain many of the provisions of a modern option agreement but rather than the developer acquiring the land they lead to a joint sale to another to build out the proposed development.

The developer(often referred to as the promoter) is required to use its expertise and money firstly to promote the particular property in the Local Development Framework and then to obtain a planning permission for development which maximises the value of that property either alone or in conjunction with other land.

Accepting that an option agreement and a promotion agreement will have many similar provisions, what are the advantages of a promotion agreement over an option agreement?

1. The land owner, or indeed owners, and the promoter know the percentage of the sale price for the property that each will receive when it is granted a planning permission.

2. As the promoter knows that he will get a fixed percentage of the ultimate price together with the reimbursement of its expenses this acts as an incentive.

3. Under an option agreement at some time there will be a conflict of interest between the parties. At the time of the exercise of the option the land owner will wish to see the highest value for its land whereas the developer, being a buyer, will wish to see the lowest value of that land.

Under a promotion agreement the promoter does not buy the land but together with the land owner offers it for sale in the open market. That means that both parties are interested in seeing the maximum sale price.

4. In a time of uncertainty as to the levels of taxation and tax regimes the promotion agreement offers a greater flexibility in structuring the ultimate sale of the property to the advantage of both parties.

If you wish to have more information about promotion agreements or option agreements please contact Hugh Ellins on hugh.ellins@clmlaw.co.uk