As published in CoStar on 22 April 2020.

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Will Primrose, Senior Surveyor in the Retail & Leisure Group at Rapleys, looks at the rights and obligations.

Recent weeks have seen massive uncertainty across near enough all business sectors as a result of the Coronavirus, and the Government recently announced a further three-week extension to the lockdown. The majority of retail and leisure occupiers are suffering from a complete suspension of trade and many landlords have announced breaks, rent reductions or rent holidays to aid them during this period. Many operators will have questions regarding their rights and obligations during this unprecedented crisis. Will Primrose, Senior Surveyor in the Retail & Leisure Group at Rapleys addresses some of these key questions.

Can a tenant adversely affected by Coronavirus terminate their lease?

Essentially the answer is no – the only exception in this case would likely be if their lease contained a rolling break clause. Commercial leases generally don’t contain force majeure clauses. The only common factor that would change this is if the tenant went into liquidation.

Can a tenant withdraw from an exchanged Agreement for Lease?

This will depend on the provisions and clauses within the Agreement for Lease (AFL). We will likely see Coronavirus Clauses becoming more common within legal documents. Standard force majeure clauses usually refer to events such as terrorist attacks, wars, acts of God and do not apply here. However, we are seeing Pandemic Clauses become more prevalent. A possible reason for a tenant to withdraw would be on a conditional AFL, with the landlord unable to satisfy certain conditions – for instance delivering a scheme before a long stop date due to issues resulting from Covid-19.

Can a tenant withhold rent or pay a reduced amount due to the financial implications of COVID-19?

The simple answer is no, the tenant is not automatically entitled to such benefits. Rent suspension provisions (common in most leases) don’t apply here as they relate to damage to the premises by insured / uninsured risks. However, Landlords are encouraged to be sympathetic during this time. Covid-19 may lead to CVA’s for tenants, which involves negotiation with all of their creditors, including landlords. A rent holiday can mean a number of outcomes and the tenant is unlikely to be fully released from their payment obligation. It is more likely that a negotiation will result in a deferral / repayment programme. It is advised that these are documented by a solicitor.

Can a landlord evict a tenant for non-payment of rent?

We are now seeing these unfortunate issues coming to the press following the March quarter day. The Coronavirus Act 2020 introduced last month banned forfeiture until 30 June 2020 – or longer if the government deems necessary – for non-payment of rent. However, at the time of reporting they do not prevent landlords from taking steps to force tenants to pay rent withheld because of the lockdown and a number have decided to pursue statutory demand notices and Commercial Rent Arrears Recovery (CRAR). This can be catastrophic for a tenant with little or no income. Whilst many tenants are having open and constructive discussions with their landlords during this difficult, period, others are in danger of receiving statutory demand notices or winding up orders.

Does a tenant have to continue paying Business Rates?

Under a lease the tenant is usually responsible for Business Rates. There have been government initiatives and concessions to assist them, particularly in Retail & Leisure. During a lease, Business Rates are an arrangement between the tenant and Local Authority, not the landlord.

Whose responsibility is it to manage the virus within a let premise?

The tenant, as they will have a covenant within their lease to comply with all acts of parliament, by-laws and regulations; including health and safety of all customers employees and visitors. However, it should be noted of the difference between leases of whole and leases of part. It can get more complicated when common parts are a factor – e.g. within multi-let office buildings and shopping centres.

How are tenants with a Keep Open covenant being affected?

Whilst many leases in the retail sector contain these Keep Open clauses (e.g. shopping centres or with anchor tenants), in ‘normal’ circumstances these are not usually enforced. Courts are typically reluctant to implement Keep Open clauses and you would expect implementation to be even less likely in the current climate – especially with the aforementioned Government protection for tenants affected by COVID-19.

What are some of the Landlord’s obligations in this situation?

A key obligation will be to comply with Government guidelines which will likely fall within their service charge and estates obligations – a situation that has escalated quickly in the last few weeks. In conjunction with Government guidelines, what started as an obligation to provide enhanced hygiene / sanitising products has become full premises closures. Costs for measures such as deep cleaning, hand sanitisers and other items are usually recoverable for the landlord through the service charge.

Any potential risks to a landlord here?

Potentially. In theory the tenant could make a case that the recent closures mean that the landlord would be liable for damages under a lease under derogation from grant – e.g. breach of quiet enjoyment of the premises or loss of profits. Again, if such claims are brought forward, you would imagine the courts would be reluctant to award damages in this climate with the Government’s lockdown and social distancing guidelines as the backdrop.

Summary

As is often the case with landlord and tenant relationships, it is a question of who bears the loss? Whilst a lot of press has been about landlords being sympathetic to tenants, they rely on their rental income for many reasons – to pay borrowings, loans, staff etc. We are now seeing figures published which emphasise the drop in rents that some landlords are receiving and many have as much to be concerned about as tenants. A collaborative approach that focuses more on open discussions and negotiation rather than litigation is going to be key here.

Callum moved to Rapleys in June 2019 with five years experience as a commercial property agency, specialising in the acquisition and disposal of retail and industrial property. In 2019 he graduated with a first class honours degree in Real Estate from Birmingham City University.

Callum is working within the Automotive and Roadside team dealing with a broad range of instructions whilst undertaking the APC.

Recent weeks have seen massive uncertainty across near enough all business sectors, nowhere more so than in the Retail & Leisure sector. An issue that has been well publicised throughout the press is tenant’s obligations on their lease – with many seeking breaks and rent reductions/holidays as the impact of Covid-19, and particularly the ongoing lockdown, on property assets has become apparent. Some common Questions & Answers below.

Can a tenant adversely affected by Coronavirus terminate their lease?
Essentially the answer is no – the only likely exception in this case would be if their lease contained a rolling break clause. Commercial leases generally don’t contain force majeure clauses.

Can a tenant withdraw from an exchanged Agreement for Lease?
This will depend on the provisions and clauses within the Agreement for Lease (AFL). We will likely see Coronavirus Clauses becoming more common within legal documents. Standard force majeure clauses usually refer to events such as terrorist attacks, wars, acts of God and do not apply here.

A possible reason for a tenant to withdraw would be on a conditional AFL, with the landlord unable to satisfy certain conditions – for instance delay to Practical Completion (PC) due to issues resulting from Covid-19.

Can a tenant withhold rent or pay a reduced amount due to the financial implications of Covid-19?

The simple answer is no, the tenant is not automatically entitled to such benefits. Rent suspension provisions (common in most leases) don’t apply here as they relate to damage to the premises by insured/uninsured risks. However, Landlords are encouraged to be sympathetic during this time.

Covid-19 may lead to CVA’s for tenants, which involves negotiation with all of their creditors, including landlords. A rent holiday can mean a number of outcomes and the tenant is unlikely to be fully released from their payment obligation. It is more likely that a negotiations will result in a deferral/repayment programme. It is advised that these are documented by a solicitor.

Does a tenant have to continue paying Business Rates?
Under a lease the tenant is usually responsible for Business Rates. There have been government initiatives and concessions to assist them, particularly in Retail & Leisure. During a lease, Business Rates are an arrangement between the tenant and Local Authority, not the landlord.

Whose responsibility is it to manage the virus within a let premise?
The tenant as they will have a covenant within their lease to comply with all acts of parliament, by-laws and regulations; including health and safety of all customers employees and visitors. However, it should be noted of the difference between leases of whole and leases of part. It can get more complicated when common parts are a factor – e.g. within multi-let office buildings and shopping centres.

How are tenants with a Keep Open covenant being affected?
Whilst many leases in the retail sector contain these Keep Open clauses (e.g. shopping centres or with anchor tenants), in ‘normal’ circumstances these are not usually enforced. Courts are typically reluctant to implement Keep Open clauses and you would expect implementation to be even less likely in the current climate.

Are there any risks to landlords here?
Potentially. In theory, the tenant could make a case that the recent closures mean that the landlord would be liable for damages under a lease under derogation from grant – e.g. breach of quiet enjoyment of the premises or loss of profits. Again, if such claims are brought forward, you would imagine the courts would be reluctant to award damages in this climate.

Summary
As is often the case with landlord and tenant relationships, it is a question of who bears the loss? Whilst a lot of press has been about landlords being sympathetic to tenants, they rely on their rental income for many reasons – to pay borrowings, loans, staff etc. Some landlords can have as much to be concerned about as tenants and a collaborative approach is likely to be key here. It is going to be crucial to look at negotiation rather than litigation between landlords and tenants.

To discuss commercial leases and any other queries arising as a result of the current situation, please contact Will Primrose or James Clark in the Retail & Leisure Team at Rapleys.

Richard joins Rapleys business space team with a focus on lease consultancy services. Having worked across many different sectors, Richard brings experience from residential sales and valuations as well as commercial sales, lettings, valuations, acquisitions and rating.

Richard previously ran a partnership business, Fane and Company, and has been involved in all aspects of property consultancy in the public and private sector, as well as client side. The wealth of knowledge and expertise on this range of services will be instrumental in supporting the business space team deliver added value for each and every client across the full spectrum of their needs.

In February the Competition and Markets Authority (CMA) called for Britain’s biggest supermarket chains to review thousands of land agreements and prove they are lawful. This came to light after the CMA openly wrote to Tesco Chief Executive calling the retailer out on unlawfully preventing landlords from letting properties to its rivals at 23 sites across the UK.

We asked Richard Curry, our food retail expert, for his opinion, specifically asking how permeated is this practice in the industry and do you predict more agreements of this nature will be uncovered? He commented:

The CMA’s ruling will come as no surprise to anyone who has observed the food retail market over the years, as restriction covenants have been a known feature of supermarkets’ strategies for decades.

In the period prior to the rise of discounters and ecommerce, when the race for space still dominated the food retail sector, supermarket operators would often purchase an old industrial site, occupy one of the smaller lots, with a view to establishing a larger-format store in one of the other lots once trading had increased. Restrictive covenants were a crucial part of this strategy. In order to prevent loss of trade to competitors in the meantime, they would sell the other lots with a restriction of use clause, ensuring the subsequent owners could not sell on to another food retailer.

Even when the race for space ended, the covenants continued to protect retailers from loss of trade to competitors and were waiting patiently for another bullish market when rollout of larger stores was back on the agenda.

Restrictive covenants do have their uses – if a food retailer takes a gamble by investing in a new location, such as within a new urban extension or trading estate, they should be able to benefit from their initial financial commitment to an unestablished trading location without competitors coming along and building next door as soon as trade increases.

However, most convenience stores should be up to maturity within five years so they should not need protection further than that. It may even be the case that a food retail store enjoying an unrivalled position on a retail park by for over five years by virtue of a covenant, could have been overtrading, as their levels of traffic were being artificially raised by covenants now deemed unlawful.

In 2010 the CMA limited the length of restrictive covenants to 5 years, after which food retailers must allow competitors to occupy nearby locations. The fact that the CMA claims 20 different agreements by Tesco violated this rule could be seen as evidence of the high-risk strategy the retailer has taken when choosing new locations.

Another point to consider is that the terms of restrictive clauses only prevent nearby spaces being occupied by major competitors, which essentially comprises the other members of the big four food retailers. Up-market food stores such as Waitrose or M&S, and more significantly the discount food retailers such as Aldi or Lidl, were permitted to establish, with the latter taking full advantage. Restrictive covenants may therefore have been one of the factors contributing to the dramatic expansion of discount food retailers in recent years.

The smart money would say that this ruling will not necessarily result in any significant increase in the number of store openings in the retail sector, as this is tied to many other factors, not least the general health of the sector and its main actors, some of which are actively downsizing. However, if the market picks up, and space once again becomes a priority, this ruling could open-up new opportunities for expansion.

It has not generally been possible to assess just how significant an impact restrictive covenants have had on the marketability of key retail sites. That is until now. With the release of these spaces from extended covenants, their performance on the market should indicate just how much of a lead weight these kinds of clauses have been.


Further expert commentary alongside Richard’s can be found in this article from Property Week, published on 28 February 2020.

Peter previously worked within the Telecoms department at GVA for 5 years. At GVA Peter found his passion for the property industry and started studying with the University of Estate Management. Continuing his studies, Peter graduated with a degree in Real Estate Management in June 2019.

Peter is currently working within the Automotive & Roadside department, acting on behalf of a number of national operators, primarily dealing with lease consultancy matters.

Peter is now working towards the completion of his APC in the not too distant future.

Tom joined Rapleys in April 2018 as a graduate surveyor within the Retail & leisure Group and is working towards the completion of his APC in the not too distant future.

Tom has worked within the lease consultancy service with experience in rent reviews and lease renewals for the retail, office and industrial sector both on the client and landlord side.

Rapleys’ property and planning consultancy continues to show the ongoing growth of its business by announcing this week that the Cambridge team will relocate to larger premises, and therefore increase their profile, just nine months after opening in the city.

Remaining in the CB1 business district was of upmost importance to Rapleys and its new and existing client base. The practice has taken a private office at 50-60 Station Road; a modern, high quality environment, next to the station.

The new office will house, amongst other teams, the practices’ Town Planning, Development, Building Consultancy, Business Space and Automotive & Roadside departments.

Stuart Harris, Head of Cambridge Office comments: “Whilst Rapleys’ arrival in Cambridge was far from any ‘cold start’ with our long standing presence in the county, we have been delighted by the traction gained in our opening months in the city. This has necessitated a fairly rapid expansion of both the size and quality of space available to us.”

Robert Clarke, Senior Partner, adds: “I am very pleased with the new office at Station Road and look forward to welcoming our clients to the innovative space. Our move is a direct response to client needs. We are excited by the future prospects in Cambridge and the wider region.”


Full contact details for the Rapleys Cambridge office:

50/60 Station Road, Cambridge CB1 2FB
0370 777 6292 |  info@rapleys.com


Featured in Commercial News.

 

Third-party logistics operators (3PLs) are gobbling up warehouse space like there’s no tomorrow. They account for 35% of all spaces transacted in 2019 – massively up on the more typical 19% share they have had in recent years, according to Savills.

Online retail has been growing steadily and now accounts for close to 20% of the overall retail market…it is difficult for retailers to stay on top of everything and to be periodically investing in this software or that racking system, agrees Colin Steele, partner and head of business space at property and planning consultancy Rapleys.

Uncertain outlook

The sheer uncertainty retailers dace is a further factor inducing them to limit their longer-term commitment and to instead rely more on 3PLs, says Steele. Typically, 3 PLs look for commitment of up to three years, with break clauses, he says.

‘Shorter leases are what the market was wanting anyway and the 3PL approach is an extension of that trend,’ he adds. ‘Retailers are finding it difficult to justify signing up for 10-year plus leases. Even three years is a longer-term position for them now.’.

Onerous lease commitments on balance sheers are a further disincentive for financial directors in retail and manufacturing. ‘If a property becomes surplus, you have to make provisions for the full liability of the lease,’ explains Steele. ‘On some buildings, that can blow a massive hole in someone’s P&L. It’s a major mind-focuser for finance directors.’

However, given the significant demand for space, landlords are in a position to resist demands for shorter-term leases, says Steele, further strengthening the hand of the 3PLs and encouraging their customers to grow their business with them. ‘If anything, I think lease lengths have been edging out and incentives have been shortening.’

‘Another factor in the 3PLs favour is that traditionally logistics requirements tend to come up very quickly in what is a relatively short procurement window. There is a temptation to give the problem to the 3PLs to sort out.’

Growth begets growth. The 3PLs’ greater buying power and familiarity with landlords and developers means they can do multiple deals as well as fast-track construction. ‘Development has been been as quick,’ says Steele. ‘You have very slick procurement now.’…

For the full article go to Property Week (27/09/2019).

Rapleys’ Charities/Non-Profit team continue to be very active in the market and are delighted to share some of our available properties:

 

   

 

A full list is available here.

Apart from our usual consultancy of building and property matters, including landlord and tenant and building surveys, we are also currently engaged in a number of exciting development projects which can be found on the download link. For a no obligation initial meeting to discuss any of your property requirements contact Graham Smith or Adam Harvey

 

We are also delighted to be attending and sponsoring the networking reception again at this years Charity Property Conference. To find out more about this event and to secure your space please follow this link. We look forward to seeing you there!

 

 

Tim joined Rapleys in 1999 and was elected as a partner in 2008. He is an RICS Registered Valuer, member of the Chartered Institute of Arbitrators and is a member of the President of the RICS Panel of Arbitrators and Independent Experts and regularly receives third party appointments.

He advises both landlords and tenants upon lease consultancy matters and also provides valuation advice to clients.

Tim is involved with a wide variety of property types including retail properties ranging from high street shops to large out of town food stores, retail warehouses, drive-to and drive-thru restaurants, as well as industrial, warehouse and office premises throughout the UK.

 

Steven heads up the business space team and has wide-ranging commercial property experience. He has professionally represented a range of institutional landlords, national tenants, private individuals and banks. He is also a RICS Registered Valuer.

He specialises in all aspects of lease consultancy work including the negotiation of rent reviews, lease renewals, lease regears and the preparation of Expert Reports for use in Arbitrations and Court proceedings.

Steven joined Rapleys in 2003 and was elected as a partner in 2011. Prior to joining Rapleys he worked at Luton Council and Lambert Smith Hampton and has over 30 years surveying experience.

 

Rapleys’ Automotive & Roadside team have been very active in East Anglia with support from the recently opened Cambridge office. In the attached newsletter are some examples of recent automotive instructions – you can also click here.

The team can advise on the full spectrum of property services on a confidential basis. For full details of all available properties click here.

 

Based in the Manchester office, Peter is responsible for all aspects of lease consultancy, Expert Witness and valuation instructions for the automotive and roadside sector within the north of the country. This includes motor dealerships, petrol filling stations and motorist’s centres.

Peter has a wealth of commercial and residential experience and has professionally represented a range of institutional landlords, corporate tenants, private individuals and financial institutions.

Peter joined Rapleys in 2002, was elected partner in 2012 and is a RICS Registered Valuer and a Chartered Environmentalist.

 

Adam is a general practice surveyor who joined Rapleys as a partner in September 2015. Adam runs a new department acting for clients in the charity sector.

His particular area of expertise lies in advising church clients on transactional work, lease advisory matters, valuations, development consulting and most areas of general practice.

Adam has vast experience advising churches on funding the replacement of existing, outdated church accommodation through residential development of part of a site. This usually entails an early involvement with regard to the feasibility and financial viability of sites, through to assistance in the disposal of the residential element paying for the new church accommodation.

Adam acts on behalf of a number of Diocese’s of the Church of England, the Thames North Synod of the United Reformed Church, Baptist Union and London Baptist Property Board as well as numerous individual churches.

Rapleys’ property and planning consultancy continue to deliver on their ambitious business development plan with the announcement of the latest office move for the Edinburgh team.

The team moves to Rutland Square this week, after a decision was taken not to renew the lease in Caledonian Exchange. The move provides Rapleys with superior accommodation that better suits their needs as well as a growing client base. By stepping over into EH1, Rapleys are at the centre of the commercial property market in the city and ultimately their valued clients will benefit from this accessible and vibrant location.

The key service lines offered from this hub are Town Planning, Corporate & Investor Management, Business Space, Retail & Leisure and Automotive & Roadside. With local knowledge and national insight from the wider network of offices the professional teams provide comprehensive property and planning solutions on a value-added basis consistently.

Colin Steele, Partner and head of the Edinburgh office, comments: “this move comes at a great time as we continue to expand the team and service lines available here from our Edinburgh hub. On a wider practice level, the last 12 months have seen many of our regional offices move up and on to better spaces, improving the environment for the benefit of colleagues and clients alike. It is great to align ourselves to the overall business development plan and we will continue to offer the excellent, local services that our clients value us for, from this new location.”

Robert Clarke, Senior Partner adds: “I am delighted with the new office space at Rutland Square. It is a recognised and established business address in the heart of the city. Needless to say, we look forward to welcoming clients to, and advising from, our new home in Edinburgh.”

Full contact details for Rapleys Edinburgh

8A Rutland Square
Edinburgh EH1 2AS

0370 777 6292
info@rapleys.com

Property and planning consultancy Rapleys announces the launch of a new office in Cambridge. The new office is Rapleys’ second in Cambridgeshire, with the firm being founded in Huntingdon and maintaining a strong presence and heritage in region since 1951.

The Cambridge office consists of both professional advisory and transactional teams from across Rapleys’ service lines, delivering a joined-up, multi-disciplinary offering to clients in the region. Each team consists of professionals who live and work in the city, with strong established relationships across Cambridge’s range of complementary consultancy services.

Stuart Harris has been appointed Head of the Cambridge office, and joins Rapleys with more than 30 years’ experience working in the industry and region, including roles with Strutt & Parker and Carter Jonas.

Stuart, alongside the existing partnership, will be responsible for promoting and coordinating the delivery of the firm’s core property consultancy and town planning services in the city, including: Town Planning, Building Consultancy, Development, Affordable Housing & Viability, Commercial Agency, Landlord & Tenant and Investment.

Robert Clarke, Senior Partner at Rapleys, commented: “Our new Cambridge office, alongside the appointment of Stuart, represents a key further stage in Rapleys’ evolution, which builds on our long-established heritage, presence and reputation in the region going back to the founding of the firm in Huntingdon in 1951. We saw a real opportunity in Cambridge, which is undergoing substantial growth, and a market opening where we can bring in services – such as Affordable Housing and Viability, Strategic Land, Building Consultancy and Town Planning – which are currently underrepresented in the region or are subject to increasing demand. At the same time, our expanded footprint and capacity in the region further complements our national expansion programme – providing clients access to partner-led teams with both local expertise and UK-wide reach.”

Stuart Harris, Head of the Cambridge Office at Rapleys, added: “Principally I am delighted to join Rapleys at this exciting juncture. There are significant opportunities in Cambridge, which is rapidly increasing in commercial importance and is one of the fastest growing cities in the UK. This looks set to continue – not least driven by the wider strategic plan for the region including the Cambridge-Oxford arc and expressway – and we are seeing an increasing demand particularly for planning and consulting services from businesses seeking to capitalise on this growth. I look forward to working with the wider Rapleys team to help clients seize these opportunities.”

Rapleys’ Cambridge team can be contacted at 20 Station Road, Cambridge CB1 2JD / 0370 777 6292.

James is a senior associate in Rapleys’ lease consultancy team and has a wide range of commercial property experience. He has professionally represented a range of institutional landlords and private individuals, and is a RICS Registered Valuer.

He specialises in all aspects of lease consultancy work including the negotiation of rent reviews, lease renewals and lease re-gears. He also undertakes Red Book Valuations for loan security and other purposes.

James joined Rapleys in 2013. Prior to this he worked at Strettons Chartered Surveyors in London for nine years where he split his time between commercial agency, Red Book Valuations and lease consultancy.

 

Graham joined Rapleys in 2015 and has progressed to be a partner. He shares the leadership of the charities sector within development services. Graham brings together his general practice surveying experience with his skill of working with clients and groups from all backgrounds.

His professional services experience has included real estate consultancy, residential and commercial development appraisal, and investment advice for private clients and charities.

Graham has a broad spread of project management and valuation experience that has been based in London and the home counties, Cambridge and East Anglia.

He leads the professional services valuations team who undertake;

  • Valuations of commercial properties;
    – Office, retail, industrial
    – Investment/owner-occupied
    – Portfolio valuations
  • Valuation for;
    – Secured borrowing
    – Accounting purposes
    – Probate
  • Residential development appraisals
  • Monitoring and interim valuations during construction

Daniel is a partner in the automotive & roadside team specialising in both agency and professional matters including acquisitions, disposals, rent reviews, lease renewals, general landlord and tenant work, and valuations on properties throughout the UK. His particular specialism is within petrol filling stations, motor dealerships, roadside retail and workshop premises. He is also a RICS Registered Valuer and RICS APC Assessor.

Daniel advises a variety of institutional and occupier clients including Pendragon plc, Mercedes-Benz Retail Group, Sytner Group, Network Rail, Columbia Threadneedle, Majestic Wine, Topps Tiles and Universal Tyres.

Daniel previously worked at Mouchel on the Bedfordshire County Council portfolio including general agency and landlord and tenant matters, and prior to graduating in 2003, Daniel completed his placement year at Bidwells, working with the agency and corporate consultancy/valuation departments.

 

The very public collapse of House of Fraser and Homebase highlights, once again, the need for retailers, shareholders and landlords to be realistic about the potential pitfalls and solutions created by property assets in an insolvency or distressed sale situation.

Mike Ashley offered £50m for HoF before administration, but once creditors rejected a Company Voluntary Arrangement (CVA) and it filed for administration, an insolvent HoF was worth £40m more to him and Ashley upped his bid to £90m. Why?

Insolvency versus CVA

The benefits to a purchaser of buying an insolvent company is the ability to jettison existing creditors, to negotiate with landlords to novate leases, renegotiate terms with suppliers, vacate properties and to avoid the costs of dilapidation charges to exit stores and of writing down stock. To Mike Ashley, £40m was the opportunity cost of obtaining all the same restructuring choices retailers are increasingly looking to achieve through a CVA – but with a completely free hand.

In contrast, and possibly even because of what unfolded at HoF, nearly 96% of Homebase’s creditors approved a CVA. These creditors will incur the costs of supporting the proposal but the potential upside to the company and ultimately to them, is a return to profitability and of course continued occupation of their asset.

Monthly rental payments, downsize options, rent concession periods and business rate reductions are all tools the Homebase CVA is seeking to implement. Currently 42 of its 241 stores will shut and head office jobs will go. The business plan to improve financial performance over the next three years across a significantly rationalised store portfolio will be the test of a successful CVA process and will be watched closely by the market.

Step change

CVAs, just like Administrations, are governed by the Insolvency Act 1986 but are more restrictive. Whilst there is a growing trend for retailers to seek the CVA route and categorise landlords into different pots as a means of restructuring, it is nothing new.

A decade ago, retailer The Works was under administration. The purchaser didn’t want all the stores so ahead of the sale, and to facilitate the deal being done, some stores were closed and some taken on a ‘licence to occupy’ for between a month and up to a year, allowing the purchaser to renegotiate lease terms, assess trading levels or trade out stock.

So, whilst not a new phenomenon, the pace and frequency of the CVA process is undoubtedly increasing.

Will retailers use insolvency/CVAs to ditch unprofitable stores?

A perfect storm is brewing; declining sales, increasing costs, rising business rates, Brexit-related currency fluctuations, the introduction of the national living wage and apprenticeship levy, and the rapid growth of online retailing. The result is many retail and restaurant businesses toying with CVA or even administration, as a ‘simple’ way to shed unprofitable stores.

Thankfully, there is nothing to suggest, yet, that operators are jumping the gun and using this tool to get their businesses into better shape. This may be because there is still a stigma that comes with pursuing this route and the increased corporate governance scrutiny means directors risk prosecution if their actions are seen to defraud creditors.

CVAs often allow a company to keep trading, which may prove a better outcome for creditors, long-term, than going into administration. For purchasers, buying out of administration allows an element of wiping the slate clean, enabling fresh negotiations on every element of the business, including property assets. As pressure on the high street continues to mount, it’s clear that flexibility and imagination are needed from both retailers and landlords to use property assets more creatively to prevent sizeable losses on both sides.

To learn more or discuss how Rapleys can assist contact Alfred Bartlett, Head of the Retail & Leisure Group or Russell Smith, Partner in Retail & Leisure Group. This article can also be viewed on the CoStar column

We have restructured our retail and leisure business to operate as a single, dynamic and cohesive entity in the interests of more finely responding to the current challenges, and opportunities, facing today’s market place.

Previously, the partnership’s retail and leisure offer was split into Agency, Development and Lease Consultancy services operating from four of our six offices. Now, the function will combine these services into a single nationwide team as supplemented, where necessary, by the advice of our Investment, Asset Management, Town Planning and other related services. The new retail and leisure offer, with associated services, will be across the entirety of our office network.

The new Retail and Leisure Group focuses on all areas of the sector, including food and beverage, and offers its clients a comprehensive service from deal origination through acquisition, development management, lease consultancy and disposal/exit. As part of its remit the team is addressing an increasing demand to advise and devise strategies to let vacant space, or boost the appeal of new developments or existing schemes, in the face of an ever changing market as fuelled, at least in part, by online competition. Through the combination of our national skill base and regional expertise the new Group has already been successful in working with, amongst others, operators and landlords to either source the right floor space opportunities or attract an appropriate and robust tenant mix across a number of schemes.

The new Group is headed by Equity Partner, Alfred Bartlett, who commented that “This is a progressive move by the partnership and I am delighted to be heading this exciting group within the business: the co-ordination of which has already resulted in some significant wins for national retailers, lifestyle operators, investors, developer and others. The retail market is, clearly, providing opportunities from the widely reported challenges and we look forward to assisting our clients, in the future, in realising their goals and aspirations.”

Alfred is supported by fellow Equity Partner, Russell Smith, in managing the Group. Other partners include Tim Holt and Richard Curry. A number of new appointments throughout our office network have also been recently made within the Group, including Henry Lang in Bristol, Matthew Guest and Jonathan Jones in Birmingham, Thomas Ball in Manchester and Rebecca Hughes in Edinburgh. There will be more to come.

If you would like to know more about the group, or simply wish to discuss your future requirements, please do not hesitate to get in touch. We will be delighted to hear from you.

 

Rapleys’ Automotive and Roadside team are active throughout the UK but with the opening of our Birmingham office in May 2016, our presence and activity has further strengthened in the West Midlands. We highlight here some of our recent successful transactions showing the range of work we undertake in the sector. 

Experience includes site acquisitions, project management, lease renewal, planning services and much more. We pride ourselves on providing an unmatched continuity of service and high level of expertise and knowledge to all, from an independent car dealer to a nationally represented client.

 

The Minimum Energy Efficiency Standards (MEES) regulations come into force in two months’ time. From 1 April 2018, commercial properties must have a minimum Energy Performance Certificate (EPC) rating of ‘E’ or above in order to be let. The MEES regulations will apply to the renewal of existing leases and may also have an impact upon future lease events, such as rent reviews and break options occurring after 1 April 2018.

The changes in MEES regulations are likely to affect property owners and existing tenants throughout the UK. So, to minimise the impact, forthcoming lease event dates for any sub-standard property should be identified quickly.

Firstly, landlords would be well advised to ensure that lease renewals for properties with an ‘F’ or ‘G’ rating are completed before the MEES regulations become mandatory on 1 April 2018.

Landlords should also ensure that new leases restrict a tenant from obtaining a new EPC, other than for when one is actually required i.e. in connection with an assignment or the grant of a subletting. This is because a new ‘F’ or ‘G’ rated EPC obtained by the tenant may place an obligation upon the landlord to carry out improvement works in order to bring a sub-standard property up to the minimum ‘E’ rating. Equally, landlords should ensure that sufficient rights are reserved in new leases to enable them to enter the premises in order to carry out any works that may be required.

Where existing leases contain breaks which may be effective after 1 April 2018, we would advise landlords to establish that the EPC rating of the property is ‘E’ or above. Again, if this was found to be sub-standard it would place an obligation on the landlord to carry out improvements to enable the property to be re-let. Tenants will no doubt appreciate that this situation could also assist them during negotiations with the landlord over whether or not to exercise a break.

For ‘F’ or ‘G’ rated properties that are subject to rent reviews occurring after 1 April 2018, whilst a letting might not be possible in the real world without energy efficiency improvements being carried out, a number of questions may arise in the hypothetical world of the rent review:

  • Where the lease provides an assumption that the tenant has complied with its covenants and/or statutory obligations, this would effectively result in an assumed increase in the EPC rating to ‘E’. In this case, the landlord of a sub-standard property may seek to achieve a higher rent than that which might ordinarily be possible.
  • A tenant may argue that the rental value should be reduced because the landlord will not, in reality, be able to let a sub-standard property.
  • Where the cost of energy efficiency improvements carried out by the landlord is recoverable through a service charge, the tenant may seek to adjust their rental bid to reflect this situation.

It is therefore essential for both property owners and tenants alike to consider the impact the MEES regulations will have on future lease events.

Rapleys can help with this and if you require any further information, please contact Tim Holt.

 

We will soon be 12 months from perhaps the most radical impact on real estate leases and property leasing strategy in over 60 years. January 1st 2019 finally sees the introduction of the International Accounting Standards Board’s (IASB) IFRS16, and preparation will be important.

IFRS16 will bring all leases (as Lessee – Lessor accounting is largely unchanged) on to corporate balance sheets and thereby radically change the reported financial shape of many corporates, whilst introducing ramifications that no company should ignore.

Now is the time to engage with your accountants/auditors to review preparations for this wholesale change in the reporting of lease liabilities – and liaise with your real estate advisers to ensure you are armed with the data and specialist property knowledge that you will inevitably need to have to hand.

What are the changes?

After years of consultation, the IASB have finally implemented their proposals to secure greater transparency for companies’ leasing commitments in company reports and accounts, which will become effective January 1st 2019.

All lease commitments, which include those for cars, photocopiers, even jumbo jets and power plants, will henceforth be treated as a form of financing (and therefore debt) and will come on to balance sheets. Previously, real estate leases have predominantly been treated as ‘operating leases’ and their impact has been expressed only ‘in year’ as a rent expense in the P&L.

Every lease held by a company (with minor exclusions) will need to be appraised and will enter the balance sheet during 2019:

  1. as a liability, effectively a sum equivalent to the capitalisation of the rent liabilities for the unexpired term (at a company’s marginal cost of borrowing) and,
  2. as a ‘right of use asset’, initially a similar value.

The changes will see a significant expansion of a company’s balance sheet, but most significantly a potentially dramatic increase in debt, with a knock on effect for gearing and other ratios.

For companies with multiple leases, such as retailers and pub operators, this could have a significant impact on performance measures, share valuation, loan covenants, executive reward schemes, etc. Further impact arises from the way that the two sides of the asset and liability are ‘unwound’ over time, which impacts operating profits in the early periods, but enhances EBITDA. (Your accountants should offer advice on this matter).

So what does this mean for your portfolio?

We expect that the impact for real estate decision-makers will be far reaching:

Firstly, it will be critical to ensure capture of essential data regarding leasing commitments, which will now be required by auditors. The rent component of a contract will need to be separated from any ‘service’ elements (relatively easy for a traditional lease with rent and a service charge, but more difficult for inclusive leases).

Secondly, sound decisions will need to be made to justify treatment of lease breaks, options, rent reviews, indexed and turnover rents, when the ‘value’ of each lease is initially assessed. Reassessment later, because for example a break option is not, as initially anticipated, then exercised, could be at a cost.

Thirdly, in our view, the unforeseen consequences will need to be considered carefully. Some of these will relate to wider (non-property) impacts, such as breach of loan covenants, re-pegging of executive reward schemes, etc, but there will be a knock-on for real estate.

Possible consequences which need to be considered:

  • Will it drive more shorter term leases, to keep balance sheets in check?
  • Will it see a reduction in companies’ leased footprint overall, as more radical steps are taken to manage the balance sheet impact? (The serviced office providers and co-working operators are certainly banking on this.)
  • Will it further the pain for physical retailers when compared with their ‘virtual’ online competitors?
  • Will it drive more freehold ownership? If a company is to inflate the balance sheet anyway then why not own a real capital asset?
  • Will it drive different decisions in relation to future growth and the exercise of renewals and breaks, because accounting implications will now be added to existing operational considerations? (Some argue that greater cross-functional input from businesses will drive better decision making).
  • For international operators, might it push global locational decisions towards countries with favourable environments, that for example allow deductions of interest payments against profits?
  • Will past sale and leaseback decisions need to be reassessed, and existing leases renegotiated to lessen their accounting impact?
  • Will negotiating strength at a break or expiry be impacted because a counter-party can identify your intentions from your company’s report and accounts?

This will be a voyage to a new world for all.

Just as the introduction of tenants’ security of tenure (England & Wales) changed the relationship between landlord and tenant in 1954, so these changes will transform the way that lessees view and manage their leases in the future.

Rapleys is supporting our clients in undertaking thorough reviews of leased portfolios, to capture all relevant data and to drive early decisions around their initial and longer term accounting treatment.

We are experts in the proposed changes, having been involved in consultations at each step of the emerging standards since 2010.

Please call us if there is any aspect of these changes where you believe our knowledge and expertise may be valuable to you and your business.

 

Rapleys has arrived in Birmingham! In May, Rapleys opened its  sixth office, moving into Birmingham for the first time following the acquisition of Bartlett Property. Led by Alfred Bartlett, the team is growing and will become a significant player in the West Midlands property market over the coming years, offering the full range of Rapleys’ services.

It is a home coming as well as being business as usual for Alfred Bartlett. He first joined Rapleys 25 years ago and left to work in Birmingham. Now back together, Rapleys’ Birmingham office under the leadership of Bartlett, continues to advise on retail and leisure developments across the region. Bartlett’s team in Birmingham has been strengthened with the recent addition of Matt Greenaway as Senior Associate from Bilfinger GVA and Charlie Steele, Surveyor from Steeles Estate Agents.

Matt and Charlie, along with Alfred, will focus on sourcing and bringing both city centre and out of town retail, supermarket, restaurant and mixed use schemes forward and have hit the ground running with some notable instructions including:

  • Advising on two mixed retail student accommodation developments in Edgbaston
  • A retail development for Co-op, close to the city centre
  • A new mixed use development with Marks & Spencer and further retail in Moseley
  • Redevelopment and letting of an existing retail park in Brierley Hill

The team is actively on the lookout for development opportunities for occupiers and developer clients and is also instructed on a number of retail, leisure and development site disposals.

Rapleys is looking to expand its Birmingham office to provide a full service offering including planning, building surveying and project management, office and industrial agency, investment consultancy and rating.

For the time being the Rapleys team is focused on establishing the office as a hub of excellence for Birmingham’s flourishing city centre developments, to provide both developers and occupiers with expert advice to take advantage of the opportunities available during this renaissance that Birmingham is currently experiencing.

Please contact Alfred Bartlett alfred.bartlett@rapleys.com or Matt Greenaway matt.greenaway@rapleys.com for further information or details on how we may assist you with any retail, leisure or roadside opportunities.

 

 

 

As part of Rapleys’ continued investment in the development of employees we are pleased to announce the latest promotions:

  • Alun Jones (Development, London) to Equity Partner
  • Graham Smith (Charities Consultancy, London) to Non-Equity Partner
  • Jennifer Lemen-Hogarth (Lease Consultancy, Bristol) to Senior Associate
  • Jemma Cam (Town Planning, Bristol) to Associate
  • Gary Collins (Town Planning, London) to Associate
  • Jessica Lockwood (A&R/Development, Huntingdon/London) to Senior Surveyor

“The promotions reflect their contributions to the business and are thoroughly deserved. I would like to thank them for all their hard work and support in the continuing growth and success of the practice.” Rapleys Senior partner, Robert Clarke.