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Monday, 30 April 2012

Record Insolvencies, Pressure on Lenders & Lease Guarantees

The outlook for the remainder of 2012 is grim as insolvencies rocket to levels not seen since the 1990s, according to a spring report by the Ernst & Young Item Club.

The report also comments that commercial real estate (CRE) portfolios represent a continuing drag on bank profitability.

The sharp drop in property values and downward pressure on rental income have seen many lenders giving “forebearance” to customers by waiving loan-to-value and debt-service covenants, offering payment holidays and extending debt maturities.

Lenders are trying to sit it out in the hope that loan recovery rates will be higher when property prices and incomes eventually recover.

They are also wary of offloading large volumes of distressed sales on to the market, as prices would be hit even further, creating a spiral.

Not surprisingly, the report concludes, banks also remain cautious about extending additional credit to the CRE sector.

The Bank of England recently reported that the amount of bank credit made available in the CRE sector had seen a further decline in the first quarter of 2012, and was expected to fall “significantly” during the second quarter.

All this is happening of course against the backdrop of a double-dip recession.

In this climate, anyone in the business of granting new leases needs to take whatever additional security they can get.

That might mean insisting on a guarantee from a parent or group company.

With smaller companies, often the only available guarantee will be a personal one from a director of the company.

Take great care when accepting personal guarantees.

They may be unenforceable if the guarantor can show he didn’t know what he was signing, or that he was put under pressure to sign a guarantee unwillingly (see my post What Can You Do if Your Tenant Stops Paying or Goes Bust? for more details of a recent case).

At the very least, you need to get written confirmation from the guarantor that he is aware of the risks and was given an opportunity to take legal and financial advice.

You also need to know if the guarantor is financially sound, otherwise the guarantee won’t be worth the paper it’s written on.

You can do an online insolvency search for free. Also, carry out a credit check and get a reference from a bank or accountant.

What are the most common alternatives to a director’s guarantee?

·         Corporate guarantee from another company (not necessarily related). You would still need to carry out financial checks, but they might be easier to do and the guarantee would be less vulnerable to challenge.

·         Instead of getting a guarantee from a director, make him a joint tenant instead, with “joint and several” liability, so he steps into the company’s shoes if the company stops paying. You still need to check his financial soundness though.

·         Rent deposit. If documented in the right way, these give you a fixed (albeit limited) pot of money on which you can draw in the event of a default.

·         Bank guarantee. Arguably the best of the lot, but given the banks’ reluctance to take on more exposure, how willing will they be to give one?

Of course, a guarantor might look a good bet when the guarantee is given, but by the time of the default he might be worthless too, especially if his fortunes have gone down with the company he’s guaranteeing – which is quite likely.

Sometimes, there's simply no protection against failure and that’s the dilemma banks and many investors find themselves in today.

Wednesday, 25 April 2012

How Is Property Threatened by the Environment?

All land and buildings are affected in some way by the environment.

Here’s a quick look at some of the main risks; both physical and legislative (with links to some earlier posts if you want to find out more).


The risk of flooding has increased because of climate change. 

Indeed, at the time of writing, England is being battered by Atlantic storms of wind and rain in the wettest April for 100 years.

Insurers have warned that insufficient investment in flood defences could cause them to withdraw insurance from some homes and small businesses.

The pact between Defra and the insurance industry, known as the Statement of Principles, guaranteeing cover to businesses and households at risk of flooding, is due to end in June 2013, without any sign of a suitable alternative.

The uncertain future of flood insurance will hit businesses and homeowners from July 2012 as insurance cover starts to be renewed that covers the period that includes June 2013.

If your building is located on a flood plain, or near the sea or a river, check your insurance policy on renewal to make sure flooding remains covered.

If you’re thinking of buying or leasing a property in such a location, check the availability and affordability of flood risk insurance.

Surface water flooding poses a considerable risk in many areas – follow the link for more information.

Are you a landlord? Check your leases. Some leases make landlords liable to make good damage caused by flooding even where flood risk is not actually covered by insurance.

Are you a tenant? You also need to check your lease because, if it doesn’t make the landlord responsible for making good the damage, the burden might fall on you.

Ultimately, the only way of living with this risk may be to take whatever practical measures you can, such as making your property more flood resistant (the Association of British Insurers publishes a free guide to resistant and resilient repair after a flood, although careful technical advice should be sought before committing large sums of money).

Improving local flood defences, through local community forums, such as the one mentioned in this recent article from thisismoney may be another way forward – more information on flood defences is given by the charity, National Flood Forum, which, along with the Environment Agency, also gives details of the latest flood warnings (the links will take you straight there).

Contaminated Land

All local authorities have a duty to identify any contaminated land in their area which poses an unacceptable risk to human health or the environment, and to ensure it is properly cleaned up.

Most contaminated land is cleaned up as part of the planning process. Where this hasn’t happened, the regulators will try to find someone liable to clean it up.

Contaminated land regulations are based on the “polluter pays” principle, meaning that liability for clean up rests primarily with those who polluted or caused the contamination. 

Unfortunately, with historic pollution, it’s often very difficult or impossible to trace the original polluters or they may no longer exist. 

If the original polluters cannot be found, liability for cleaning up the site passes to the current owners and occupiers of the land, whether or not they know about the contamination. 

The rules seek to encourage voluntary clean up through agreement between the local authorities and the person responsible; however, local authorities have powers to issue a remediation notice if agreement is not possible.

You can be fined if you don’t comply with a remediation notice.

The government amended the regulations on 6 April 2012 with a view to speeding up the process.

If you’re thinking of buying or leasing land that because of past uses might be contaminated, take specialist advice and make sure you carry out environmental investigations; that you are satisfied with the advice given in the environmental reports; and that any recommended remediation action is taken as a result. 


Subsidence occurs when the foundations of a building start to sink, and it can have a devastating effect on a building’s structure; often making it uninhabitable.

Make sure you arrange a survey of property you are thinking of buying or leasing. If you’re borrowing against it your lenders will require a survey in any case.

Your surveyors will be able to advise whether any subsidence has taken place.

Even if no subsidence has occurred, environmental factors may suggest the risk of subsidence in future is high.

Coal and tin mining searches are necessary in some areas and will help you assess the risk of subsidence from mining activities.

Coastal Erosion

Buildings situated close to eroding cliff-tops may no longer be insurable or may be at risk of becoming uninsurable.

Check your insurance policies.


If your building was built or refurbished before 2000, it could contain asbestos.

There’s detailed information on the Health and Safety Executive website.

If you’re responsible for maintaining all or part of a business premises, regulations say you must also manage any asbestos in the premises - which means finding out where the asbestos is, what condition it is in, assessing the risk, making a plan to manage that risk and acting on it.

You will be responsible if you own the freehold; if you’re a tenant your lease might make you responsible.

Check your leases to see if you’re obliged to maintain and repair of your premises, which will also make you responsible for managing any asbestos.
In multi-let buildings, the responsibility may be shared between several tenants or it may pass to a managing agent. Again, check your leases.

You must deal with any asbestos waste as hazardous waste.

Could my building become obsolete?

There’s a risk that some buildings may soon become obsolete if they are not sufficiently energy efficient.

Here the risk is legislative, rather than physical.

The Energy Act 2011 could make it unlawful from 2018 to let buildings with poor energy efficiency ratings, which currently applies to around 18% of all commercial buildings.

If your organisation manages a large portfolio of properties, think about carrying out an audit of energy efficiency across the portfolio and improving poorly-rated buildings as a long term investment.

You might be able to take advantage of the Green Deal - a new voluntary scheme to help homes and businesses improve the energy efficiency of buildings through upgrades to things such as loft and cavity wall insulation, expected to take effect in October 2012 (if it survives the recent political attacks made on it from within the coalition government).

Of course there are also many other environmental and energy related rules and regulations that might have an impact on your ownership of property, such as the CRC Energy Efficiency Scheme (currently under a cloud of uncertainty following the Budget); Energy Performance Certificates and waste management regulations.

On the plus side, there are various subsidies that might be available to you, such as if you install solar panels to generate electricity (Feed-In Tariffs); or if you generate heat by renewable energy (Renewable Heat Incentive).

Monday, 23 April 2012

Taking the Profit: BPF Slams Pre-Pack Administration for Ripping Off Pensioners

The British Property Federation (BPF) has launched a campaign, called Taking the Profit, seeking retail insolvency reforms to restore fairness to pensioners, especially with regard to pre-pack administrations.

Pre-pack administration is a fast-track insolvency procedure that avoids a failing business being sold on the open market; instead the sale of the company’s assets is set up by an insolvency practitioner (IP) before the company goes into administration and is then completed immediately after the start of the administration.

A company can even be bought out of administration by its directors or other people closely connected with the company that failed – a so-called “Phoenix pre-pack”.

Representing landlords, the BPF argues that “tens of millions of pounds” is being siphoned out of pensioners’ savings into the pockets of private investors profiting from retail failure.

The BPF has highlighted what it sees as “the growing underhand practice”, mainly in relation to pre-pack administrations, where the terms of the sale are kept deliberately vague, and at the same time landlords are pressurised by an agent of the buyer of the company, with or without the knowledge of the IP, to extract concessions on existing leases of profitable stores.

The BPF alleges this is often under threat that if concessions are not given then that landlord’s property will not feature in the sale – meaning the landlord’s store will end up being one of the ones dumped when the business is transferred to a new concern, leaving it empty and potentially vulnerable to rates liability if a new tenant can’t be found before the concession period expires.

The result, says the BPF, on profitable stores is simply to transfer profits from pensioners’ savings in property to the new buyers of the business, often private investors. It says tens of millions of pounds of pensioners’ saving have been lost in this way.

Another consequence, argues the BPF, is that it puts rival successful retailers at a disadvantage. This reinforces failure, rather than promoting more successful retailers.

Unsecured creditors are particularly vulnerable in the insolvency process and landlords are also at risk of missing out, earlier in the process, on a quarter’s rent if the IP is appointed just after the quarter day (see Free Quarter For Administrators Strengthens Case for Monthly Rents).

As I mentioned in Phoenix From the Flames: Pre-Pack Administrations Live On, earlier this year the government scrapped plans to reform the pre-pack administration process, despite the criticisms of it concerning the lack of clarity, lack of accountability and perceived short-termism.

Defenders of the process will point out it is quick; has lower costs; enables minimum erosion of supplier, customer and employee confidence; and saves jobs.

The latter is a particularly powerful argument, especially as, if the company goes bust, the landlord probably wouldn’t have got anything anyway.

It may seem emotive to pitch this argument, as the BPF has done, as a defence of pensioners’ savings; and those advocating the contrary position could just as powerfully argue for the need to stand up for jobs for the young.

But the use of pre-pack raises difficult questions of moral hazard too.

Liz peace, Chief executive of the BPF, says:

“An enterprise economy works first and foremost on trust and written contracts. If both become worthless that has serious implications for enterprise and economic efficiency.”

And what is the prime role of the IP?

Liz Peace argues it to secure the best result for creditors, not to maximise the profits of the new company.

“We are becoming increasingly concerned that Insolvency Practitioners are acting more in the interests of the buyers than creditors.”

The BPF stresses it is supportive of the rescue culture and has made the following proposals for reform:

·         Amend the IPs’ guidance notes, known as SIP16, so that an IP must be clear which assets are part of the sale, on which it is seeking to negotiate, and which it does not want.

·         Amend SIP16 so that it “frowns on” any collusion between the IP and the buyer or his agent to extract concessions on leases that are part of the sale.

·         Speed up the process of achieving better regulation of the insolvency sector, including a single contact point for making complaints and one that doesn’t involve having to go to court. It is now nearly two years since the OFT called for such measures.

·         Tighten up the rules on advertising by IPs.

These proposals, if enacted, might bring more confidence and transparency to the process.

Meanwhile, if you're an unsecured creditor involved in a retail insolvency, the BPF wants to hear from you.

And for more comment, here is an article from Pinsent Masons.

Thursday, 19 April 2012

Energy Performance Certificates – DCLG Shines a Light on New Rules

The new rules governing the provision of Energy Performance Certificates (EPCs) came into effect on 6 April 2012.

Click on the link if you missed it first time round or want a refresher.

The document also contains a useful further summary of the new rules.

In response to requests from property agents, DCLG and the EPC register operator (Landmark Information Group) are implementing a process which will:-

·         Provide a standard service to enable the EPC to be retrieved from the register and attached to online written property particulars and;

·         Provide an enhanced service where there are confidentiality issues surrounding commercial property transactions, to enable the EPC to be retrieved from the register and attached to online written property particulars with the address removed.

Property agents can request further information about the service from the DCLG at

The requirement for the statutory lodgement of reports on the central EPC register will extend to air conditioning reports.

See the full list of questions and answers for more information, but the following may be particularly useful:

Q. Can 'first day marketing' occur if the EPC is not available?

A. There is nothing in the amended provisions which would prevent 'first day marketing' within the first 7 days if an EPC has not been made available. The amended provisions require that an EPC is commissioned before the building is marketed. An EPC is not required to be available before or at the point that a property is marketed.

Q. How can an estate agent be sure that the relevant person has commissioned an EPC?

A. Agents will have to satisfy themselves that an EPC is either available or has been commissioned before they start marketing on behalf of the seller or landlord. Trading Standards Officers can ask for evidence of this.

Q. What happens after 28 days if the EPC is still unavailable?

A. If the building is still on the market after 28 days, Trading Standards Officers may choose to serve a penalty notice.

Q. Does the whole EPC have to be attached to the written property particulars?

A. No, only a copy of the first page.

Q. Can the EPC be re-sized if the written particulars are produced in A5 format?

A. The EPC can be reproduced in a smaller size provided it is still legible and meets any other legal obligations, such as the Equality Act 2010

Q. Does the copy EPC have to be in colour?

A. No, a black and white copy is acceptable.

Q. Do the regulations also apply to electronic written particulars on internet sites?

A. Yes. The national EPC register operator has provided a technical solution which will enable property agents to retrieve the EPC from the register and attach it to online written particulars. This service has been provided at the request of property agents. More detailed information for property agents is available on request at: (There is more detail in the Q & A document on this).

Q. Do the regulations apply to all property adverts?

A. No. Only the more detailed descriptions (referred to as written particulars) produced for potential buyers or tenants as defined by the regulations. In essence this is where an agent proposes to provide written particulars to a person (i.e. a specific individual) who may be interested in buying or renting the building.

Q. Are auction catalogues captured by the new requirements?

A. If the details in the auction catalogue meet the definition of written particulars, as defined in the new Regulations, then an EPC will need to be included with the details of those buildings. The option of including an energy efficiency rating only will no longer apply.

There are many more Q & As on the DCLG document, which should assist with most issues, although I'm sure those working in the EPC industry will have thought of others. Do let me know.

Wednesday, 18 April 2012

When the Music Stops – How Late Rent Reviews Can Strike a Note of Discord

When your landlord seeks to implement a rent review long after the last review date has been and gone, it can come as a nasty surprise for you as a business tenant.

If you’re a tenant that’s become used to paying rent at a certain rate, the fact that your landlord seems to have ignored the last review date might well have lulled you into a false sense of security.

During a recession or, more euphemistically, a downturn landlords will want to wait for more favourable comparable rents before triggering a review.

Where the lease provides for open market “upwards only” rent reviews, the flexible nature of the vast majority of  those rent review clauses allows landlords to delay the review until it suits them – they are only prevented from doing so if the clause makes time “of the essence”, which is rare these days.

Commercial leases also usually provide for the difference between the old rent and the new rent (the “uplift”) to be paid when the review takes place, and backdated to the review date specified in the lease.

Most leases also go a step further and require interest to be paid on the uplift as well (usually at base rate but sometimes higher).

If the parties are unable to agree on a new rent, the lease will normally provide for the rent to be settled either by arbitration or by an expert.

Horgan Lovells have recently produced a useful summary of the more detailed consequences of late review and I also looked at a case last year in Don’t Bury Your Head in the Sand and at rent reviews generally in The Only Way is Up.

One feature of late review to bear in mind is that liability to pay the whole of the uplift comes at the point at which the new rent is either agreed between the parties, or determined by an expert or arbitrator.

So, to borrow Horgan Lovells’ analogy, settlement of a rent review is comparable to the music stopping in a game of pass the parcel – the tenant left holding the tenancy is liable to pay the whole uplift backdated to the review date, which could be a long time ago and might even be before you acquired the lease (if you took an assignment of the lease from a previous tenant).

It doesn’t matter how long you have held the lease.

Meanwhile, the landlord who holds the reversion of your lease when the rent is agreed or determined receives the whole uplift, even if it has only recently acquired the reversion (although in reality a well advised seller of the reversion would usually make sure it’s entitled to receive its share of the uplift in the contract for sale).

The principle is likely to apply in reverse if there were a downwards rent review (so as current tenant you would be entitled to the whole credit and the current landlord would be obliged to pay it) – but “upwards or downwards” rent reviews are still rare, despite it being an option suggested in the Commercial Lease Code.

What practical steps can you take as a tenant?

·         If you’re negotiating a new lease, try to include a long stop date in the rent review clause, such as the next rent review date, or earlier.

·         If you’re taking an assignment of an existing lease and there’s an outstanding rent review, try to get a retention and indemnity from the outgoing tenant to protect you against any uplift if the review is subsequently triggered by the landlord.

·         If you’re unlucky enough to be faced with a late rent review, look for evidence that the landlord has waived the review or is “estopped” from triggering it (see the Horgan Lovells article and my post last year for more about these technical points).

·         If the review is being settled by arbitration, make sure you get involved, along with your advisors, in the arbitration process to argue your case.

·         If the review is being determined by an expert, use any powers given to you in the lease to make your representations to the expert.

This list isn’t exhaustive; what’s important is that when your landlord tells you it’s going to implement the review, you contact your rent review advisors straight away.

Don’t bury your head in the sand.

Monday, 16 April 2012

No VAT-Free for Old Buildings

Yet another nasty surprise has seeped out in the aftermath of Budget 2012 – the budget that likes to keep on taking – this time in the form of an historical VAT trap.

Alterations to listed buildings, many of which are churches, will now be subject to 20% VAT instead of being zero-rated.

It means VAT charged on alterations to listed buildings will be brought into line with VAT on other repairs and maintenance, which is already subject to the 20% standard rate.

This will catch alterations to churches such as creating new access for the disabled and installing lavatories and catering facilities – all currently VAT exempt.

The BBC reports, in one example of the effects of this measure, Canon Tony Dickinson of St Francis of Assisi church in High Wycombe saying planned repairs costing £250,000 to that church may have to be abandoned.

The Church of England as a whole thinks the change will cost it £20 million a year.

The Church is responsible for 45% of the country's Grade 1 listed buildings.

The rebate scheme that currently exists for repairs, allowing churches to claim much of the money back from a government fund, will be extended to cover alterations.

However, the Church is angered that only £5 million is being added to the pot for this purpose, which they say will be woefully inadequate.

The change will take effect in October.

A government e-petition against this proposal, started by the Church of England on 30 March, has so far attracted over 12,800 signatures. The e-petition will close on 30 June 2012. If it receives over 100,000 signatures it will be eligible for debate in Parliament.

The petition was set up following the launch of a consultation by HMRC, blandly called “VAT: Addressing borderline anomalies”, which closes on 4 May 2012.

In the consultation document the government says the VAT change is needed to disincentivise "change as opposed to repair" as repair works are subject to standard rate VAT. It says:

"Removing the zero rate removes the perverse incentive to change listed buildings rather than repair them and ensures that all alteration work receives the same tax treatment."

However, in a move allegedly designed to stop the rich benefitting from a tax break when installing swimming pools in their Grade II listed fortifications, the government has instead incurred the wrath of a sector comprised in large part of the Church of England, which they used to say was the Tory party at prayer.

Given that pre-budget confidentiality now appears to be as historic as the buildings affected by this tax hike (most of the budget was leaked in advance), why not consult on proposals such as this properly in advance, so they can be designed to achieve their desired effect, rather than pulling them, or rather allowing them to crawl slyly, out of a hat?

Any bets on another U-turn?

Tuesday, 3 April 2012

Digging the Dirt Readers’ Survey

I’ll be taking a break from Digging the Dirt for a couple of weeks and so I thought I’d take the opportunity to conduct a quick readers’ survey.

I’d love to get your feedback.

It’s just a quick multiple choice survey of 10 questions, and will only take a couple of minutes – something to do in between scoffing chocolate eggs (and don't worry, it's anonymous!).

Thanks for taking part and I hope you have a Happy Easter.

Click here to take survey.

Update 25/4/12

A huge thanks to those of you who took the time to respond to my survey. I really appreciate your comments and I'm encouraged by the responses.

I don't propose making any major changes to the blog for the time being as you seem happy with the way it currently works. I'll post as often as I can, depending on other commitments.

Opinion amongst the respondents was split pretty much down the middle on the question of guest bloggers. I'm still open to the idea, if anyone's interested, but I won't actively try and seek any out for now.

I'm not going to make any major changes to the layout as I'm already operating at the limits of my IT skills, and I like to keep things simple! You seem to like the way it looks anyway.

I'm going to keep the survey open for a while longer in case anyone else wants to have a go. 

Thanks again.