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Monday, 22 August 2011

Low Rent

The BPF/IPD Annual Lease Review (which of course you read about first here!) has been presented to TV personality, Queen of Shops and government advisor Mary Portas, as an important contribution to her review of the High Street, says the British Property Federation (BPF).

Separate independent IPD data has also been submitted, illustrating that in real terms high street shop rents have fallen by a third over the past 20 years.

Portas, who is in the midst of her review, has indicated she is keen to understand the relationship between landlords and occupiers, and current trends in leases.

I summarised the main findings of the Lease Review in my post Lease Lengths are Getting Longer.

Looking specifically at retail, the key findings from a study of 47,708 retail tenancies that will interest Portas are that retailers benefit from the most flexible lease regimes ever – with the data showing:

·         Average lease length of 5.7 years.

·         Significant increases in break clauses as retailers look to hedge against economic uncertainty.

·          34% of new leases for high street shops have a break clause, up from 3.9% in 1999.

·         An average ‘rent free’ period of 10-months on a rent-weighted basis.

The separate IPD data on standard shop rents shows that whilst inflation has risen by 94% since 1989, rents for standard shops have only risen by 24%, and in real terms therefore fallen by 37%.

Rental growth for Standard Shops since 1989 has been 51% in Central London, 24% in the rest of London, 10% in the rest of the South East and Eastern regions and 25% in the rest of the UK.

The BPF makes the comparison with rate increases, which because of their link to RPI, has seen the rates bill for shops rise, roughly speaking, by 94% since 1989.

The rates burden on small businesses surely needs to be reduced if we are going to have the private sector-led recovery on which the government is pinning its hopes.

The property industry has had to adapt to the complex issues facing high streets and the difficult economic conditions – so should the government.

The old boy pictured above had some pretty innovative ideas on property too, but I can’t see a self-styled shopping aristocrat, or anyone else for that matter, being too interested in them...yet!

Wednesday, 17 August 2011

Lease Lengths are Getting Longer

The BPF/IPD Annual Lease Review 2011 reveals surprising evidence that, despite widespread economic woe and the travails of the high street, the average length of lease terms is getting longer.

Here’s a summary of the main findings:

·         The average length of all lettings increased from 5.0 years in 2009/10 to 5.3 years in 2010/11, measured on an equally weighted basis and including the first break where applicable. If licences and short leases of four years or less are excluded, then the average length of new leases (again including break clauses) increased from 7.2 to 7.6 years.

·         The average length of all new leases weighted by rent (including break clauses) rose to 9.4 years in 2010/11. This is a slight increase compared with the previous year when lease lengths were at their shortest in the review’s history (8.6 years).

·         2010/11 saw a decrease in the proportion of leases up to five years in length from 72% in 2009/10 to 63% in 2010/11. Although 63% of new leases were less than five years in length, on a rent-weighted basis they make up around 33% of all new leases. The longer leases make up a small proportion by number and a larger amount by rent or in other words, tenants who occupy larger units still tend to sign longer leases.

·         The proportion of leases with break clauses increased in 2010/11 to 31.1% compared to 29.4% in 2009/10. Break clauses became more common in new leases up to 15 years in length. However, the proportion of leases longer than 21 years with break clauses dropped from 31.1% in 2009/10 to 19.9% in 2010/11. The proportion of leases with break clauses also mainly increased in the retail sector and particularly in standard shops (34% in 2010/11 compared with 3.9% in 1999). [And if you want to exercise a break clause or are negotiating a new one – make sure you get it right! See my various posts on break clauses this year.)

·         In the retail sector, the proportion of leases with break clauses increased from 19.9% in 2009/10 to 24.8% during 2010/11; this was the largest increase since 2003. Leases from 11-15 years in length saw the largest increase, followed by 6-10 year leases and 1-5 year leases. On the other hand, the proportion of break clauses in longer leases (above 16 years in length) decreased.

Average lease lengths across all sectors increased in 2010/2011 after two years of consecutive falls. Retail continued to secure the longest leases (yes, really!) with and without breaks, followed by office, while industrial had the shortest lease lengths.

Overall, rent free periods increased to 13.4 months in 2010/11.

Leases granted for terms of less than 4 years were excluded from the analysis.

The review draws upon detailed evidence of almost 102,000 tenancies granted between 1999 and March 2011.

I suppose if one wanted to sound a note of doom (well, caution), you would have to bear in mind that since March there has been something of a downturn in business confidence which might be having a negative effect on the lengths of leases being granted now; not that I have any evidence of that.

Tuesday, 16 August 2011

Drain Speaking – The Big Transfer of Private Sewers & Lateral Drains Gets Under Way

The automatic transfer of private sewers and lateral drains connected to the public sewerage system in England & Wales to the statutory water and sewerage companies will go ahead on 1 October 2011, with pumping stations to follow progressively up to 1 October 2016.

Drains serving a single property and within its curtilage will remain the responsibility of the property owner or occupier.

For more on the background to this transfer, see my July post, Down the Drain – Private Sewers to be Taken Over.

For those who want to be able to talk drainage, mastery of the following vocabulary will give you the proverbial mouth like a sewer:

·         Private sewer – a pipe that carries rainwater and/or wastewater away from more than one property to the public sewer.
·         Lateral drain – a section of pipe carrying waste water away from a single property, but which extends beyond the property boundary. Many thousands of lateral drains run underneath roads or even railways so can be problematic to fix.
·         Drain – a pipe serving a single property.

The transfer will take place under the Water Industry (Schemes for Adoption of Private Sewers) Regulations 2011 (the Regulations) which came into force on 1 July 2011.

The water and sewerage companies should by now have served notices of the proposed transfers, giving the sewer owners only 2 months to appeal against their assets being included in the transfer, if they want to do so. The period for appeal cannot be extended.

Since my last post on this subject, Ofwat has published guidance on appeals against decisions under the Regulations. You can appeal against a decision to transfer a sewer/lateral drain (within 2 months of the notice) or a decision not to make a transfer (in the latter case the appeal must be made before 30 September 2011).

The grounds for appeal are (1) the sewerage company does not have a duty to transfer the sewer or lateral drain (for example it might involve Crown land) or (2) the proposed transfer would be "seriously detrimental" to the owner.

Ofwat’s guidance says that to prove serious detriment, the appellant will need to show it would be significantly worse off, financially or otherwise. The burden of proof will lie with the person making an appeal.

Even if it is possible to show serious detriment, the decision may still be taken to transfer the sewer/lateral drain either as initially proposed or subject to conditions designed to offset or mitigate the detriment.

If an appeal is successful, with the result that a sewer is not transferred, it is likely that the owner of the sewer will have to give assurances relating to its future maintenance.

For more detail and guidance on the appeal process and decision making, see the Ofwat guide.

Drainage assets will only be transferred if they are outside the site’s curtilage. That part of the sewer that is within your site’s curtilage and which serves only your property will be unaffected and will remain your responsibility.

Defra acknowledges that with complex sites this might be a tricky issue to resolve. This is not helped by the fact that although the law and lawyers frequently make use of the term “curtilage”, there is no exact definition or mechanism by which to define the curtilage of a property.  Generally speaking it means boundary, but it might not necessarily be the legal boundary.

The fact that “curtilage” isn’t exactly an everyday word is further borne out by the fact that spell check keeps trying to change it to “cartilage”, on which I once had an operation in my knee as it happens.

Further information and guidance on curtilage and interpretation are given in paragraphs 13 to 22 of a separate guidance issued by Defra. That guidance also contains a useful summary of the transfer process as a whole.

Whilst appeals about whether particular sewers or lateral drains should be transferred will rest with Ofwat, where there are disputes about the curtilage and whether it relates to the legal boundaries of a property, that will be a matter to be determined by the courts or by the The Upper Tribunal (Lands Chamber), which is the successor to the plain old Lands Tribunal.

I wonder if there will be many appeals?

In a large number of cases the transfer may be welcome because it will mean you are no longer responsible for the upkeep of the sewer or lateral drain – that responsibility will pass to the water company.

Yes, before you all write in to complain, the photo used to illustrate this post is not a drain (you try finding an interesting drain shot!) but is of the foot tunnel under the Thames at Greenwich, a propos of nothing other than it is a tunnel.

Tuesday, 9 August 2011

Lease Guarantees: Court of Appeal Delivers Judgement - Is it the End of the Saga?

Whilst I have been away the wheels of jurisprudence have continued to turn and the Court of Appeal (CA) on 27 July 2011 delivered its much awaited judgement in K/S Victoria Street -v- House of Fraser (Stores Management) Limited [2011] EWCA Civ 904.

There has already been a lot of comment elsewhere on the ruling (there is a particularly helpful review of the decision by Mayer Brown). I am a bit slow out of the blocks as I’ve been abroad but, as I have written about the implications of the Good Harvest decision several times before on this blog, here’s my update – so if you’re already bored by this topic, look away now!

As well as giving judgement on the facts of the K/S Victoria Street case itself, the CA has helpfully also carried out a wider review of the decision in Good Harvest and its implications on the Landlord and Tenant (Covenants) Act 1995 (1995 Act), on the grounds that the decision had led to ‘‘controversy” and “uncertainty.”

Here are the key points from the judgement – looking at where a tenant (T) with a guarantor (G) assigns a lease to an assignee (A) and gives an authorised guarantee agreement (AGA) to the landlord. What can the landlord require G to do and what can G do voluntarily?

·         G cannot guarantee the obligations of A.

Good Harvest has been confirmed as correct on this point. The lease cannot oblige G to guarantee A’s obligations and G cannot even do so voluntarily. Whilst that may seem commercially absurd, the 1995 Act deals with the effect of an agreement, not the reasons behind it. To that extent, the 1995 Act does place limits on the principle of freedom of contract.

·         G can guarantee the obligations of subsequent assignees.

So if A assigns the lease to A2, then G can step back into the frame and guarantee the obligations of A2 – even if A2 is the original tenant.

·         G can guarantee the obligations of T under an AGA.

This is sometimes called a parallel or sub-guarantee, or even a GAGA (which, although sounding like a feeble attempt to forge a link between landlord and tenant law and electronic dance music, is quite useful shorthand – so I apologise in advance for using it!)

The ability of a guarantor to guarantee a tenant’s obligations under an AGA had been thrown into doubt by some comments made by the judge in Good Harvest, which caused a great deal of consternation and confusion in the property world, and so it is welcome that the CA has cleared this up.

A small caveat however - the comments of the CA on GAGAs are not binding on future courts as this issue was not related to the subject matter of the case. However, the comments will still be treated as very persuasive by other courts and are very likely to be followed, not least because the lead judge was Lord Neuberger, formerly a distinguished property lawyer.

Commercial property lawyers will be excited by all of this (as an endangered species we have to make our own entertainment) but what will be the main practical implications and do any uncertainties remain?

Two situations where you still need to take care are:

1.    Intra group assignments.

The rule against guarantors voluntarily providing repeat guarantees will continue to have an impact on intra-group assignments where, for example on successive group reorganisations, the landlord would want the main group company to stand as guarantor for each successive tenant.

On the first assignment, being able to use a GAGA will at least help to some extent.

There is unfortunately some doubt about the effectiveness of using a “double assignment” to get the guarantor back on the hook – that is where the lease is assigned first to another company in T's group (without any form of guarantee or AGA) and then immediately assigned again to the intended assignee, guaranteed by G, as part of a single deal where the first assignment is conditional on the second one. Is the second guarantee by G valid or would the deal be taken as a whole to contravene the 1995 Act?

2.    Where the assigning tenant is insolvent.

Where a tenant is insolvent (but has a solvent guarantor), the administrator or liquidator is unlikely to be willing to give an AGA. In that situation, the solvent guarantor cannot give a GAGA, nor can it give a new direct guarantee of the assignee. If that is the case, assignees may be required to provide a fresh guarantor of suitable covenant strength.

Another important point to be aware of is that the decision is not limited to future assignments, and so direct guarantees which have already been given in situations ruled invalid, cannot be relied on. Existing arrangements therefore need to be reviewed carefully.

Despite these uncertainties, the case has improved on the position left by Good Harvest.

Permission was not sought to appeal to the Supreme Court – so that’s that, until someone tries to test one of the uncertainties I’ve mentioned above or a different scenario someone invents.

So it might not be quite the end of the saga yet; there may still be room for an epilogue.