onerous leases – a presentation to the tma presented by edward symmons 7 may 2008

Onerous Leases – A presentation to the TMA

Presented byEdward Symmons

7 May 2008

Edward Symmons – Your Contacts

Steven SkinnerSteve is head of Edward Symmons LLP Fixed Charge Receiver’s group dealing with LPA Receiverships for a wide range of banking and private clients across the UK. Stephen has over 20 years of experience acting for client such as HBOS, RBS, Kaupthing Singer and Freidlander, Fortis Bank, State Securities, Barclays Bank and HSBC.

02380 743 776 steve.skinner@edwardsymmons.com

Robert StokelyRobert is a Chartered Surveyor with over 15 years experience both as an advisor and as a client. Robert currently leads Edward Symmons’ West End Corporate Services team based in Piccadilly and acts for a wide range of occupiers from small regional companies with just a couple of properties to pan-European companies with multiple sites.

0207 344 4601 robert.stokely@edwardsymmons.com

• Chartered Surveyors

• Private partnership regulated by the RICS

• Established over 60 years

• 200 staff across 9 UK offices

• International coverage through associations with Valliance (35 European offices) and the Valuation Research Corporation

• Partner led solutions

• Operate in niche areas

Who are Edward Symmons?

What can lead to an onerous lease liability?

• Economic Conditions• Planning Requirements• Structure and Condition• Legislative Changes• Lease Terms

Economic Conditions

• Many diverse views on economic outlook• Clearly Banks sensitive re: property investment• Capital values falling almost without exception• With uncertainty comes opportunity• Cash rich investor well placed to take advantage

Planning Requirements

• After location, perhaps most important• Can have major influence on value• Extensive due diligence required• Any outstanding obligations?• Unconsented alterations or modifications

Structure and Condition - Design

• Pace of obsolescence increasing• Innovation to address environmental concerns• Focus will shift from new to existing properties• Other forms of obsolescence• Sometimes opportunity to mitigate losses

Case Study – Asbestos

Structure and Condition - Contamination

• Caveat emptor, buyer beware• Polluter pays• Next in line is person ‘benefiting’ from

building• Contamination can take many forms• Innocuous acts can lead to major claims• No substitute for due diligence

Structure and Condition – Other Issues

• Disability Discrimination Act 2005• Control of Asbestos Regs 2006• Fire Risk Assessments• Energy Performance Certificates• Air Conditioning Inspections from 2009• Flood Risks

Structure and Condition - Dilapidations

• Potentially major expense• Recommend obtaining interim costings• Beware dilaps liabilities can be transferred• Worth buying out lease in extreme cases?• Consider diminution in value of reversion

Case Study – Dilapidations

Legislative Changes and Other Issues

• Changes to Empty Rates• Accuracy of Rateable Value?• Reputation of Landlord• Unauthorised Tenants• Boundary Disputes• Undocumented Rights of Way

Lease Terms

• Break Clause• Rent Review Clause• Restrictive User Clause• Landlord’s Consent to Alterations

Case Study – Unlicensed alteration

Lease Terms

• Alienation• Unexpired Term• Security of Tenure• Lease or Licence?

Case Study – Can you tell what it is yet?!

Case Study – How about now?

Case Study – Guess how many tyres?

Case Study – Somewhere between 750,000and 2 million!

Case Study – Boundary Dispute

Case Study – Boundary Dispute

Case Study – Onerous Lease Terms and Historical Data

Case Study – Onerous Lease Terms and Historical Data

Reducing or Terminating Liabilities

What are the options?

• Assignment• Sub-Letting• Surrender• Renegotiation

Each has pros and cons

Practical Approaches – Assignment and Sub-Letting

Key is quickly identifying tenants

• Need to price property realistically• Be flexible in respect of term• Effective marketing

Practical Approaches- Surrender

Strategies for negotiating effectively

• Identify alternative occupiers beforehand• Threaten closure?• Identify any redevelopment options• Contributions from previous tenants• Understand Landlord’s valuation process• Dilapidations position

Practical Approaches- Renegotiation of Lease

• Re-balance between term and rent• Pricing of flexibility in vogue• 2007 Commercial Lease Code• Other terms may need changing• Improve property for Landlords future benefit?

Practical Approaches- Other Ideas

• Property swap• Package up portfolios• Sale and leaseback opportunities• Use poorly drafted clauses to advantage• Service Charge accounts – rebates• Offer Landlord shares• Explore Landlord’s redevelopment options• Side deals?

Practical Approaches- Other Ideas

• Extend term of long leasehold properties• Offer parent company guarantee• Opportunities to remove guarantees?• Across the board negotiations• Capital Allowances – additional source of

income?• Psychological and financial implications on other

party.

Checklist for Effective Due Diligence:

• Report on Title or Lease• Lease or Licence• Deed of Guarantor• Licences to Alter• Deeds of Variation or Amendment• Rent Review Memorandum or Notices • Rent Demands• Condition and Dilapidations Schedules

How can issues be quickly identified?

Checklist for Effective Due Diligence (Cont.)

• Disability Discrimination Act Audit• Contamination Audit (i.e. Asbestos)• Architects Plans• Planning Consents & Legal Agreements• Service Charge Accounts• Flood Risk Assessment• Recent Valuation Reports• Business Rates Assessment

Not comprehensive!

Online Resources

• www.environment-agency.gov.uk (Flood risk assessments)

• www.voa.gov.uk (Rateable values)• www.propertysnake.co.uk (Information on residential

price reductions)• www.nethouseprices.com (Residential sales data from

Land Registry records)• www.landreg.gov.uk (Title Reports)• www.maps.live.com (Birds eye view of sites)• www.hmrc.gov.uk (Stamp duty land tax calculator)• www.bpf.org.uk/whoweare/commercialleases

(Commercial Lease Code 2007)• Local Authority Websites (Local planning information)• Google Earth (Aerial view of sites)

Conclusion

• Many pitfalls but frequently opportunities.• Value of local intelligence cannot be understated.• Full understanding and appreciation of onerous

liabilities will enable price to be set or renegotiated to reflect the true risks and likely costs.

• A detailed report from a Chartered Surveyor should assist this process as well as minimise risk and maximise opportunity.

Edward Symmons – Your Contacts

Steven SkinnerSteve is head of Edward Symmons LLP Fixed Charge Receiver’s group dealing with LPA Receiverships for a wide range of banking and private clients across the UK. Stephen has over 20 years of experience acting for client such as HBOS, RBS, Kaupthing Singer and Freidlander, Fortis Bank, State Securities, Barclays Bank and HSBC.

02380 743 776 steve.skinner@edwardsymmons.com

Robert StokelyRobert is a Chartered Surveyor with over 15 years experience both as an advisor and as a client. Robert currently leads Edward Symmons’ West End Corporate Services team based in Piccadilly and acts for a wide range of occupiers from small regional companies with just a couple of properties to pan-European companies with multiple sites.

0207 344 4601 robert.stokely@edwardsymmons.com