Welcome to our 2013 edition of Property Matters.
Property matters. It has always had and will continue to have a lasting impact on London's identity: physical, cultural and social. Which is why the word "legacy" features so prominently in the sector's vocabulary, whether we are talking about great historic buildings or the latest additions to the city skyline.
As new developments (Earls Court, Battersea Power Station, King's Cross and the Queen Elizabeth Olympic Park) spring up across the capital, the challenge is combining new and old and creating the best legacy for future generations. With co-organisers, Central, we staged The Big Think for this very reason: a series of high level discussions to stimulate industry debate about the issues that really matter to the future of London.
Of course, the word "legacy" has added signif cance for Mishcon de Reya as we celebrate our 75th anniversary. We have come a long way from our Brixton roots. We are now part of an ever-changing global commercial landscape. At the same time, our rise can be traced to the values that have been with the Firm since that day in 1937. We were recently ranked 12th in the Sunday Times '100 Best Companies to Work For' Awards 2013, and will continue to maintain the culture that makes this such a great place to work.
A selection of deals our real estate Department have advised on over the last year
Representing D2 Private on the £218 million sale of 23 Savile Row, a 100,000 sq ft Grade A offce building in Mayfair, to Plaza Global Real Estate Partners, the joint venture between Quantum Global Real Estate and LaSalle Investment Management.
Acting for CBRE on its high-profle acquisition of leading UK commercial real estate investment specialist Franc Warwick – a transaction shortlisted for Deal of the Year at the Property Week Awards 2013. We also advised on the acquisition of independent West End specialist EA Shaw.
Acting for Minerva on the City of London's largest offce letting of a completed building since 2009. Jardine Lloyd Thompson exchanged contracts on a 25-year lease for 287,000 sq ft of space within The St Botolph Building, London EC3. The letting is shortlisted for Deal of the Year at the Property Week Awards 2013.
Capital & Counties Properties PLC
Advising Capital & Counties Properties PLC on its 900,000 sq ft retail, offce and residential portfolio in Covent Garden, central London. This includes a number of high-profle lettings as well as acquisitions valued at almost £90 million in 2012.
Acting for Delancey on the £137.75 million sale of 40 Holborn Viaduct, a 173,000 sq ft offce building in London’s Midtown, to Cityhold Group.
Acting for Almacantar on the acquisition of CAA House and 1 Kemble Street in London’s West End from Tishman Speyer. The two 229,164 sq ft inter-connected offce buildings are leased to the Civil Aviation Authority until December 2019.
The Church Commissioners
Representing The Church Commissioners on the sale of Auckland Castle in County Durham and its collection of 17th century Old Master paintings. The Grade I listed castle, along with 12 paintings by Spanish artist Francesco De Zurbaran and one painting by English painter Arthur Pond, were bought by financier Jonathan Ruffer.
Advising Chelsfield and the Ilchester Estate on their redevelopment of a 3.5 acre site housing the former Commonwealth Institute in Holland Park, west London. The scheme, known as Hollandgreen, includes The Design Museum and three residential blocks. We are acting on the sale of the apartments.
Philip Freedman CBE, QC (Hon) and Mitzi Grant in conversation with Susan Freeman
The 'beginning' was May 1937. I had passed my Final in that month and had therefore qualiﬁ ed as a solicitor and – as I see it now – had the impertinence at the age of 21 to open in practice on my own (such impertinence would not now be permitted!). This is an extract from Lord Mishcon's foreword to the Firm's staff magazine in 1992.
Since its formation in Brixton 75 years ago, the Firm has grown enormously. However, certain themes and values endure. And despite the influx of new talent, it says much for continuity that two partners on the current Management Board together with property partner Philip Freedman were articled at the Firm.
Mitzi Grant, one of the Firm's longest standing employees with 35 years' service, was Lord Mishcon's secretary for 13 years. She has watched the Firm grow from 40 to more than 500 people. "It was only a small firm but it had major clients," she says. "We always punched above our weight." She speaks of Lord Mishcon's old-world courtesy and charm and adds: "It was a real privilege to listen to him negotiate over the phone. He never raised his voice."
High-profile clients who sought out Lord Mishcon for his wisdom and discretion included top entrepreneurs, celebrities and royalty, which is reflected in the Firm's client base today. Freedman comments that the Firm "was always a litigation powerhouse but with a strong property offering". He worked with Lord Mishcon on many matters including Lord Palumbo's controversial No.1 Poultry development. A highlight of Freedman's early career was the sale of the Miss World contest for Mecca Ballrooms although "sadly he didn't get to meet any of the contestants".
Lord Mishcon famously acted as trusted intermediary between King Hussein of Jordan and Israel's Shimon Peres, leading to the 1994 peace treaty between Jordan and Israel. Some meetings even took place in his home. Mitzi tells how during the peace-making process, King Hussein and Shimon Peres were found talking in Lord Mishcon's kitchen, one washing the dishes and the other drying. She also recalls being dispatched to greet King Hussein on a visit to the Firm's Holborn offices. Despite lectures on how to behave, "etiquette went out the window" when his limousine appeared to overshoot the building and she ran down the road after the car, calling "Kingy!"
The Firm has always had a strong sense of community. Lord Mishcon was an officer and supporter of many charities and this philanthropic spirit still permeates the Firm. Its CSR programme Mishcommunity assists, among others, the local children’s charity Coram as well as Kiva, a charity that facilitates person-to-person micro-lending in developing countries.
One of the Firm's key legacies is the calibre of its people. It has always embraced strong personalities and individualists, and encouraged outside interests. One partner chaired the Mozart Society and another, Sir Roy Goode CBE, became a professor of law. Lord Mishcon himself was prominent in local government and, after being appointed a life peer in 1978, was a Labour Party home affairs spokesman, and shadow Lord Chancellor. In 1992, he was the first practicing solicitor to be appointed an Honorary Queen's Counsel on the recommendation of the then Lord Chancellor. Freedman attended the ceremony and – carrying on the legacy – was awarded the same honour in 2009.
In 75 years, a lot has changed. As we grow and the legal, political, social and technological landscape around us evolves, we have adapted as well. However, we will not compromise our values and our unique culture.
It has been a year since the Government frst announced its onslaught against high-value homes held in corporate wrappers. Most of the detail of the proposals has now been fleshed out, and it is clear that the new rules will be with us from April 2013.
By way of reminder, a new 15% super rate of Stamp Duty Land Tax (SDLT) now applies to homes worth £2 million or more that have been acquired by companies and certain other entities. In addition, a new mansion tax – the slightly clunky sounding Annual Residential Property Tax – has been introduced for companies and Capital Gains Tax (CGT) applies to gains made by companies (both UK and non-UK resident), again subject to the £2 million limit.
HMRC have over-complicated the debate in this area. The original (perfectly valid) policy's aim was to stop the avoidance of SDLT on sales of high-value homes by the expedient of selling shares in the non-resident property owner. This policy could have been achieved by seeking to tax the sale of shares in such companies at higher rates: some form of “property rich” stamp duty charge. This was certainly what the author was expecting them to do.
Yet, due to certain concerns about the legality of the rules and enforcement, HMRC instead opted to make owning property in corporate vehicles as unattractive as possible by introducing the three-pronged anti-avoidance rules.
This approach has mixed the SDLT debate with fundamental tax policy issues such as CGT and residence. By all means have a debate about whether non-residents should be allowed to remain exempt from CGT on the sale of UK investment properties, but it has not been helpful to mix this in with what is ostensibly an SDLT anti-avoidance exercise.
However, the Government has genuinely listened to the business representations on the proposals (including those of Mishcon de Reya). It has accepted that owner occupiers are the target of the rules so has introduced extensive exemptions for, among others, property traders, developers and landlords.
While there is still the anomaly that the SDLT reliefs for business from the 15% rate will not apply before July or August, when the Finance Act 2013 becomes law, this has removed most – but not all – of the burden from business.
Whether the rules affect inward investment into the UK remains to be seen. Given the business exemptions, it won’t scare off non- resident landlords or developers, although clearly activity in the last 12 months has been affected and deals have been ‘parked’ due to the lack of reliefs from the 15% charge.
Those acquiring properties in companies for owner occupation will be hit by the new rules. However, the key beneft for non-residents investing into the UK – no tax on capital gains on a future sale – can still be achieved through the use of other structures if this is the key driver. So London remains an attractive market when compared with other EU capitals.
Big thinking for a big city
What legacy are we leaving to the next generation of Londoners? It is such an important question that in 2012 Mishcon de Reya and Central launched The Big Think on The Future of London. Teaming up with our sponsors, Derwent London, Londonewcastle, James Andrew Residential and Capita Symonds, and with Property Week as media partner, The Big Think debates brought together infuential panellists from the worlds of development, telecoms, design and local government to peer into the future and discuss what London really needs. And when they had fnished, our Real Estate department carried on thinking. Here are some of their thoughts on what happens next to our great city.
One question asked in the discussions is the type of offce space we will require in the future because of the needs of the TMT sector with their fexible and more activity-based working. And then what does that mean for London offce space that already exists or is somewhere in the planning system? The possibility of converting offce – or retail – to residential in a big city is an interesting concept. In terms of community, it could beneft areas that are high activity zones during the week but dead over the weekend. But developers are most likely to focus on London for offce to residential conversions, at least in those areas that don't get an exemption, when the reality is the biggest beneft would be to areas outside the capital.
In creative hubs, as offce and residential rents increase, many bemoan the fact that the creative population is being forced to move further out while the white-collar workforce moves in, altering the character and vibrancy of those areas. Some landlords are now starting to look at different ways they can support SMEs, particularly within the TMT sector, to keep them there. We are seeing an increase in landlords understanding their needs and creating a community incorporating ideas such as drop-in hubs/clubs for freelancers and young businesses to both work and network.
Spitalfieds and Boxpark are both good examples of landlords taking a risk, offering pop-up retail space to tenants so that they don’t have to spend much on ft-out. Once you get the retail mix right, the bigger brands come – although there is the risk that this will gentrify the area and force out the emerging brands. Unique concepts such as supper clubs and pop-up restaurants have sprung up in edgy locations. From one perspective, the recession has actually helped the retail market, giving consumers more choice, both online and offine, and encouraging more innovation. Even at the luxury end, brands such as Burberry with its high-tech new Regent Street store are feeding consumer appetite for more creative approaches to shopping.
All public space has to be created and managed to some degree, so it was encouraging in The Big Think discussions that so many developers mentioned drawing on the traditions of London andtalking to local communities when creating space. As a frm we frequently use Red Lion Square for meetings and this refects the growing need to incorporate public space into work environments. Public realm in London is not just about creating new space on major projects such as Earls Court or King's Cross. It’s about making better use of what we’ve got already, whether in the context of living or working. We’re lucky to live in a city where there is such a variety of public space available, from Leicester Square to South Bank, from the markets to the parks.
Housing is one of the biggest issues facing Londoners. The profle of the London buyer is becoming more international, particularly following the 2012 Budget which made local buyers – whether owner occupiers or investors – review their requirements, especially in the £2 million to £2.5 million price range. Much of our business at the prime end of the market is focused on buyers from the Far East, Middle East, mainland Europe and Russia, and these are the people who are sustaining the London market. They are less sensitive to higher tax rates, many being used to higher purchase costs in their own jurisdictions. However, it is important to ensure that there is a supply of housing available for the local community to buy and rent.
Following on from what Beverley says, the tax breaks for foreign nationals investing in UK property remain good so London is still one of the best places in the world they can put their money. The Government does need to ensure that the overall taxation package remains coherent though. The worst thing it can do is create uncertainty and confusion, which it did last year when announcing the rules to tackle perceived Stamp Duty Land Tax avoidance in the high value homes sector. While the Government has now remedied a lot of the problems created last year, the decisions made then certainly froze or delayed many transactions.
It was fascinating hearing from the developers during the debates as to how they go about creating a vibrant community. They look closely at the working and living habits of their proposed occupiers and try to provide the right mix of people to create the desired tone of the environment. There is a growing trend to provide public space with wi-fi in offce schemes so that tenants can engage and hold meetings – and in some cases this is open to people from outside the development.
Because our series of linked debates were attended by such a cross-section of participants, they generated some interesting and thought-provoking dialogue and ideas – and even the occasional confict! Examples of the many useful contributions included those on subjects ranging from how we retain London’s authenticity and culture, the incorporation of technology into public space, and how the Government’s plans for blanket change of use from offce to residential will affect the balance of London’s ecology to how we provide appropriate for sale and rental property for Londoners.
Planning: a blueprint for future review
Judicial review in the planning arena has long been the bane of the development industry because of the time, expense and delay involved in disposing of such actions. The uncertainty created by judicial review challenges can prejudice a developer's ability to secure funding for the relevant project, particularly in today's climate. It is therefore important, wherever possible, to avoid or to quickly defeat such challenges.
Delays caused by such challenges can be substantial. The Government, in its recent consultation document Judicial Review: Proposals for Reform, estimates that in 2011 it took on average around 10 months for a judicial review challenge to reach a conclusion. It has recognised that judicial review proceedings not only create delays and add to the costs of public services, but also impact adversely upon projects that are required to stimulate growth and promote economic recovery.
It is not unusual for judicial review challenges of questionable merit to be lodged as a tactical delaying ploy. The Government is alive to this practice and has rightly indicated that it wishes to ensure that weak or frivolous cases are identifed at an early stage and dealt with promptly, while legitimate claims are quickly and effciently resolved. To that end, it has fagged its intention to promote reforms to three key areas of the judicial review process, namely:
- the time limits within which judicial review proceedings must be brought;
- the procedure for applying for permission to bring judicial review proceedings;
- the fees charged in judicial review proceedings.
Currently the court's permission is required for a judicial review claim to proceed and decisions on permission applications are normally considered on the basis of the papers fled. If the court refuses permission, the claimant may request that the decision is reconsidered at an oral hearing. Where permission is granted, a substantive hearing will follow. However it can often take up to 10 months for the case to reach substantive hearing stage.
In recognition of these diffculties, the Government proposes to reduce the challenge period for planning decisions from three months to six weeks with time running from the date on which the claimant knew – or ought to have known – of the grounds for the claim, effectively bringing the challenge period into alignment with the statutory challenge period for appeal decisions. It also proposes to:
- remove the right to an oral hearing following a refusal of permission where the case is assessed as “totally without merit” or has been the subject of a prior judicial hearing; and
- require claimants to pay a fee for oral hearings.
While these proposals are welcome, they are counterbalanced by a disappointing proposed enhancement of the Protective Costs Order (PCO) regime. A PCO is an option open to the courts which limits a claimant's exposure to the defendant's costs. An application for a PCO can be made at the outset of judicial review proceedings and, until recently, such orders would often be awarded provided the applicant could demonstrate a public interest justifcation for the point at issue being considered by the court. The PCO regime has inevitably therefore encouraged third parties to pursue challenges in the knowledge that their exposure to substantial costs would be limited, leading to an increase in the number of challenges lodged.
Case law (R (on the application of Garner) v Elmbridge Borough Council  EWCA 1006) has developed a presumption that a PCO will be granted where an "environmental case" is brought in the public interest. Environmental cases extend to and include challenges relating to environmental impact assessments – one of the most fertile areas for challenge in recent years in planning judicial reviews. Garner has also encouraged third parties to pursue judicial review challenges.
Side by side with this development, the Government in 2012 published proposals to implement the UK’s obligations under the Aarhus Convention and Directive 2003/354/EC (the Public Participation Directive). The Convention requires member states to guarantee rights of access to information, public participation in decision-making and access to justice in environmental matters. In particular, it requires member states to ensure that the public have access to a procedure to challenge decisions subject to public participation procedures and contraventions of national law relating to the environment, and specifes that those court procedures should, among other things, not be prohibitively expensive.
The Government's proposal, Cost Protection for Litigants in Environmental Judicial Review Claims, which is due to come into force in 2013, limits a claimant's costs exposure to £5,000 for individuals and £10,000 for organisations. A combination of Garner and this proposal may undermine any objective to minimise the scope for weak and frivolous judicial review challenges.
One can only hope that the courts will, if and when the Government's judicial review reform proposals are introduced, rigidly enforce the six-week time limit and vigorously test the robustness of claimants' assertions. In the meantime, the current unsatisfactory position will continue.
Your right to light
Development can leave a lasting legacy on neighbouring properties. One area seeing a re-emergence in the disputes arena is that of rights of light, with several high-prof le judgments in recent years.
A right of light is an easement (a legal property right) that entitles windows in buildings, both commercial and residential, to continue to receive light across neighbour-ing property. These rights can be created deliberately by deed but usually arise by prescription (long usage), protecting light that has been constant for 20 years.
The position of those who want to develop so as to obstruct a neighbour’s right of light has weakened significantly in recent years. Courts are more willing to injunct development and even order demolition of new build, and if damages are awarded to the neighbour, the amount in many cases will include a slice of the developer’s profit and not just the loss in value to the neighbouring property.
To stop commercial developers being held to ransom over otherwise desirable development, the City of London (in relation to The Walkie Talkie) and Westminster councils have recently used section 237 of the Town and Country Planning Act 1990, which enables a local authority to acquire land and override a third party’s rights of light. Compensation for loss becomes payable but the threat of an injunction or profit-based damages is removed.
In February 2013, the Law Commission published a consultation paper on rights of light, aiming to bring more clarity, certainty and transparency to the law and make disputes easier to resolve. The commission’s stance is in favour of development: “We want to ensure that rights to light do not act as an unnecessary constraint on development. The availability of modern, good quality residential, office and commercial space is important to the success of increasingly dense, modern town and city centres, and to the economy more generally.”
The 132-page consultation contains four proposals:
- A new statutory procedure which allows potential developers to notify nearby landowners about their proposed development and imposes a time limit in which they can seek an injunction; a landowner who misses the deadline can then only sue for damages and cannot stop the development taking place.
- A new statutory test to determine when courts may order a developer to pay damages instead of ordering them to demolish or halt development.
- Abolishing the law that allows rights of light to be acquired by prescription. This would not affect rights of light already acquired.
- Giving the Lands Tribunal power to extinguish rights of light that are obsolete or have no practical benefit, with the payment of compensation in appropriate cases. The tribunal already has jurisdiction to extinguish or vary obsolete restrictive covenants.
The proposals are heavily weighted in favour of development and are already being attacked in the popular press. It will be interesting to see what line the Government takes when the Law Commission reports back following the current consultation, which is open until 16 May.
Adding a basement to your existing residential or commercial property may allow you to maximise the square footage and value of your property. However, it needs to be approached properly.
The trend for adding basements to prime residential property continues, but for commercial premises the economics (cost versus value) may limit the viability of adding a basement to an existing property. However, protected sight lines for historic buildings and potential rights of light and air issues may make deeper basements more attractive to developers.
In addition, the idea that basement space in commercial buildings is only good for car parking or plant and machinery is untrue. Fitness centres such as Gymbox and Fitness First have carved out a niche in basement locations, as have restaurants, bars and clubs.
Subterranean living, working and leisure is a viable option for the right residential and commercial properties.
Seven rules for successful conversions:
- Engage with the planning authority early in the process. Whether you are building a new basement or increasing the size of an existing one, you are likely to need planning permission. Do not assume all planners are against basements. Kensington and Chelsea council recently approved an extensive nine-metre deep basement to a residential property in South Kensington, having been satisfied that the associated above ground changes were visually discreet and preserved the character and appearance of the conservation area.
- Take advice from a party wall surveyor. Party wall notices and awards can be complicated if special foundations such as underpinning are needed. You may have to pay money into an escrow account for the duration of the works for any damage you may cause to neighbouring properties. You may also need to negotiate other agreements, such as access and support licences, with your neighbours. These can be difficult to obtain and may involve you paying them a licence fee.
- Agree condition surveys for the surrounding buildings. You don’t want to be blamed for damage that you did not cause.
- Design in accordance with the Building Regulations and current codes of practice and guidance. Basements for Dwellings, the guidance document for local authorities assessing residential schemes for compliance with the Building Regulations, was withdrawn in October 2010 and is being updated by the Department for Communities and Local Government and the Basement Information Centre, so make sure your designers read it.
- Use experienced and competent builders. Take references and ask about their previous projects before you engage them.
- Keep your neighbours informed. Numerous articles have been written on high-profile residential property owners disturbing their neighbours with basement works. Keep reasonable working hours and warn your neighbours in advance of noisy works, possibly even agreeing specific times. Tell your neighbours about the measures that you and your contractor are taking to protect them, such as hoardings and dust and noise control. Acting reasonably is the key to defending any future nuisance claims.
- Make sure you and/or your contractor have in place appropriate public liability and “non-negligence” insurance in case you damage your neighbour’s property.
History in the re-making
It’s clear from conversations with Manhattan Loft Corporation, Argent and Chelsfield, key developers involved in the transformational activity of breathing new life into redundant, heritage buildings, that this activity is not for the faint-hearted. It requires determination, vision and perseverance, as well as flexible funding.
St Pancras Chambers first came to the attention of Manhattan Loft Corporation founder Harry Handelsman in 1996. Sir George Gilbert Scott's magnif cent grand hotel was a derelict off ce building, neglected and unloved. It had, like its New York counterpart Grand Central Station, been narrowly saved from the wrecking ball, in this case by Sir John Betjemen who declared it “too beautiful and too romantic to survive”. Handelsman's Manhattan Loft Corporation, with a reputation for looking at development opportunities “at the periphery of the obvious” and “out of the mainstream”, was undeterred by the challenge.
The painstaking restoration of St Pancras Renaissance Hotel has been described as “a labour of love” but, says Handelsman, “it had to translate into a commercial success as if it was just based on love we would be bankrupt pretty quickly!” After 16 years, it is an understatement to say it took longer than anticipated. However Handelsman, who has won accolades for recreating Gilbert Scott’s Victorian vision as a hotel for the 21st century, is “completely delighted by the result”.
The Grade 1 listing meant “immense interaction between Manhattan Loft Corporation, English Heritage and the building”. The chance find of original wallpaper hidden behind old mirrors proved costly as English Heritage wanted the rooms repapered in the original style, at £60,000 per room. Handelsman admits he may have been naïve, as structurally the property was more challenging than anticipated, but he is convinced that the right thing to do commercially was to put in more money to restore the building’s quality and character. He believes that the result captures “the grandeur of the time”. Although he does not like to mimic things, Handelsman regards St Pancras as an exception because “the modern amenities work so well within the umbrella of the old”.
He reflects that “grand hotels are semi-public buildings so their architecture is important. People can come and relax. It’s egalitarian. The hotel captures the spirit of a train station but is not so transient. It’s a visual museum and true magnet for all to come and enjoy the space.”
What has he learnt from this project? Unhesitatingly, he declares that “carrying out a 16-year development of that magnitude is a once in a lifetime experience”.
The King's Cross story
Just along the road, I spoke to Argent partner Rob Evans about the King's Cross development. Partly a conservation area and with some 20 historic buildings and structures from the Victorian age of railways, Argent has worked closely with English Heritage to ensure that these are restored and brought back into use. Boris Johnson describes The Granary Building as “a stunning development that embraces the past while looking to the future”.
Argent was selected as development partner in 2000. Evans admits that it was a long haul to the grant of outline planning consent in 2006, which he ascribes partly to the sheer weight of aspirations and expectations built up since the site’s development was first planned in the 1970s.
Argent firmly believes that “heritage adds value”, which cannot easily be replicated with new development. In an earlier scheme, The Great Northern Hotel would have been bulldozed to make way for an underground station. Now it has been remodelled to be reincarnated as a 93-bedroom boutique hotel. Its idiosyncratic curved frontage is one of the “delights and surprises of the City”. Evans says they may have considered losing it “but only in the interests of public realm”. Evans reflects on the changed approach to heritage buildings. “It used to be about rescuing buildings, putting them on a pedestal and revering them, treating them like a museum”. Now we are starting to retain and reuse rather than regard them as a problem so that “heritage buildings can have a long term future”. “You need to treat them as the tough industrial structures they are and not be too reverential.” Evans cites The Granary Building, now home to Central St Martins, as an example which he sees as “fantastic for what’s going on inside”.
Argent had great support from English Heritage who grasped quickly its intention to “knit King's Cross back into the City”. The outline planning consent gave Argent and its partners important fexibility. During the consultation process, it became clear that people didn’t want an “antiseptic, corporate culture” but wanted to keep the “grittiness and authenticity” which set the tone of the place, with its street food and art college students.
Although cost planning went out of window when they found asbestos in one of the historic buildings, as Argent moves into its new offces in a refurbished train shed, Evans wishes they had more old buildings. He believes that the old context coupled with the new is attractive to the TMT sector. Argent has always believed that you can be different and Evans points to the recent Google letting as proof that Argent’s approach has indeed added value.
The Commonwealth Institute
In Kensington, another iconic but very different building to escape demolition is The Commonwealth Institute, built in 1960-1962. Following refurbishment by Chelsfeld, it will be the new home of The Design Museum at the end of 2014. This Grade II* listed building has been described as “Kensington’s architecturally extraordinary but long unoccupied white elephant”. With both English Heritage and Kensington and Chelsea keen to see a public building on the site, Chelsfeld was tasked with fnding an appropriate occupier. Director Mark Wenlock credits agent David Rosen of Pilcher Hershman along with Sir Terence Conran with having the vision to see that this would be the ideal site for The Design Museum.
While clearly an important modernist building, Chelsfeld’s detailed research unearthed some myths. For instance, only part of the roof was constructed as a hyperbolic paraboloid structure. Also the poor 1960s specifcation meant that the building required extensive renovation. Chelsfeld employed the original architect and engineer to “fill in the history gaps”. It was able to help persuade the authorities that without massive and costly intervention, the building had no viable use and that residential development was needed to fund the expensive restoration. The building turned out to be in worse condition than anticipated which increased the renovation costs.
Despite the problems and setbacks that affected all these projects, the additional time and costs were judged well worth the end result of bringing historic buildings back into viable use.
It looks like we are again catching up with our friends across the Atlantic. As is the norm in the US, the UK market is seeing a more varied approach to debt provision.
The US has long been used to a competitive market of non-bank lending, with half of commercial lending coming from non-banking sources, compared to a dominance of 90% of the market that the five major clearing banks hold in the UK. This is quickly changing in the UK as a legacy of the recession-driven cut-back of bank lending, greater capital controls imposed on banks (as per Basle III), and government encouragement of debt provision through sources other than banks.
That said, UK lending – taking into account that originating from “non-banks” – is still down. According to the De Montfort report, new lending for the frst half of 2012 was down 12% on the previous year. Whether the rise of non-banks will turn the tide is diffcult to predict. The demand is there; the supply will largely be determined by the success with which these funds capitalise themselves. Borrowers should pay attention to the outcomes of the IPOs of the longer debt funds.
Further, it is not a ‘like for like’ substitution. Non-bank lenders come in various shapes and sizes, with their approach being driven by how their capital is raised. They range from listed debt funds such as Starwood Capital and ICG-Longbow to high net worth individuals. And they will each have their own debt appetites, sensitivities and internal rate of return requirements. This poses interesting issues for borrowers on entry, execution and on-going deal management.
First, the borrower must work out which non-bank lender is going to be right for the deal with the appetite to fund it. Pockets of activity can now be seen where debt investors are matching investment targets to transactions. For instance, the insurance industry is happily banking low-risk, well-let prime commercial, while more bespoke private equity funds are looking towards quick and healthy returns offered by high-end residential. Other types of transactions, however, are not well serviced by non-banks.
In terms of deal execution, the process is different from a bank-led origination. The dynamics of the relationship between, say, a private equity fund and a developer will be bespoke and probably novel on both sides. The debt offered by new lenders is not (yet) a commoditised product. From our experience, the lawyers take on a more involved role in managing the process and ensure that the documentation fits the particular dynamic.
In terms of the long-term relationship, the good thing about banks is that they are generally predictable. That is not to say non- banks are unpredictable; with limited exceptions they are creditable institutions with knowledgeable executives and a firm intention to remain in the market. However, there may be concerns that the relevant lender has little trading history and could pull out of the market. It is vital to get finance documents correct at the execution stage to mitigate these concerns.
The advent of non-bank lending is good for the industry. It is an exciting, rapidly developing market but there are associated growing pains that need to be approached intelligently to ensure each transaction runs smoothly.
Hurry while shops last
Retail: The legacy of the downturn
The downturn and increasing use of technology have changed the way that retailers operate and the public make purchases. Much of the current press coverage has focused on the negative – high streets run-down or empty and a string of high-profle retail failures, most recently Blockbuster, Jessops and HMV. Ethel Austin has been through no fewer than five administrations in five years.
But it is not all doom and gloom. One person’s retail failure is another’s opportunity to realign the business, strip away the dead wood and become more profitable. That, in effect, was the stated aim behind the Government’s appointment of Mary Portas as a ‘high street tsar’.
Real property, with its associated costs in the form of rents on shops and wages to employees, is one of the most expensive assets that retailers have. The downturn and increasing use of the internet for retail has forced retailers to rethink the way in which they use those assets.
The learning curve
Starting with the negative, the multiplicity of retail failures has introduced the property world to the more cynical side of insolvency processes. In the first half of the downturn, there was a trend towards using company voluntary arrangements (CVAs) – that is, a statutory contract between the company and its creditors to reorganise the debts of the company – to wipe out guarantees given to landlords by still-solvent parent companies. Some high-profle cases, in particular that of Miss Sixty, in which the insolvency practitioner was roundly rebuked by the court, seem to have discredited that approach.
Landlords whose tenants propose a CVA have various options:
- If there are arrears of rent or breach of other lease covenants, they may be able to forfeit the lease before the CVA is voted through.
- They can join with other creditors to try to infuence the result of the CVA, for example as they did by turning up in force with their advisors to the creditors' meeting for the Stylo Barrett CVA.
- If the CVA is voted through against their wishes, they can consider a legal challenge on the grounds of unfair prejudice or material irregularity.
Tenants should do what they can to keep landlords onside and assuage their concerns.
In the last couple of years, two property cases – Goldacre and Luminar in 2011 and 2012 respectively – have to some extent clarifed the “rules of the game” where a company enters administration. In short, if the administrator is using the premises for the beneft of the administration in some way (usually but not always by trading from it), the administrator must pay in full any sums including rent as they fall due under the lease, but only if the date on which they are due falls during the period of administration.
The commencement date of the administration is therefore paramount. Administrators have become wise to this and companies now commonly lodge a notice of intention to appoint administrators before the quarter day, when the rent is usually due. This is sufficient to put in place a moratorium, preventing the landlord from levying distress or forfeiting. The administrator is then not actually appointed until just after the quarter day, meaning that quarter's rent is not payable as an expense of the administration, effectively giving the administrator a quarter's trading rent free.
At present this is perfectly lawful, but it is viewed by many landlords as an abuse of the process and is ripe for challenge in the courts. Landlords should:
- keep themselves properly informed about the financial well-being of their tenants and take prompt action if they think there is a possibility of the tenant entering into administration.
- consider requests for monthly rents, as that would cut down the rent-free period that the administrators have in the premises and improve the landlord's bargaining power.
- if the tenant does enter into administration, ask whether the administrator is using the premises for the purposes of the administration or, if not, whether it will consent to forfeiture.
Insolvency practitioners will, of course, say that these are effective and permitted uses of the insolvency legislation to create effciencies and save jobs at retailers that would otherwise have failed. Certainly, where the accountants were prepared to talk to landlords and consider their concerns, CVAs were successfully used to revive failing businesses. Examples include Focus DIY, JJB Sports and, most recently, Alexon. Likewise, administration has been used to keep retailers afloat. At the time of writing, the HMV brand is likely to continue trading in some form.
The future of retail
HMV is a good example of a trend that has changed retail. Many people now prefer to shop online as a result of the increasing pressure to give value for money and the now widespread use of technology in the home. New business models have emerged to deal with this. Concepts such as “click and collect”, “dark stores” (retail outlets not physically open to the public but exclusively servicing orders made online), and “pop-up shops” are on the rise. Coffee shops and small-scale grocery outlets are also thriving.
Retailers are starting to see the value of short-term leases (if capital outlay can be minimised). Shopping centres and high streets are talking more about becoming destinations, aiming to actively entice consumers away from their computers for a day out shopping as a lifestyle choice.
The report of the demise of the high street has (to paraphrase Mark Twain) been greatly exaggerated. Clearly, e-commerce is here to stay, but equally clearly consumers do not wish to sit at home on their computer every day.
The positive legacy of the downturn is that retailers have been forced to think harder about how they put their product before consumers. It is no longer enough to just be. However, that has left a retail scene in the UK where the range of consumer choices and experiences, online and offine, has never been greater. It may well be that the downturn will come to be seen as the spur to creativity that retail needed.
Reorganising your real estate
Have you ever tried to move a property asset around your group but been told that it has insufficient profits to allow this? We have acted on a number of reorganisations where this has been an issue. The good news is that there is often a solution. A revaluation reserve or share capital reserve sitting on your accounts maybe turned into the required profits with a few extra steps.
There are many reasons why real estate groups reorganise. You may be planning a sale of or an investment into one of your subsidiaries, but want to retain prime real estate by first moving it to another group entity. Insufficient profits (known as the "dividend block") may be a hurdle to your goals.
Where an asset is moved intra-group, the common wish is to transfer at book value or less. If the transfer is made at less than market value, your advisers will need to check that there is no "distribution". The concept is similar to paying a cash dividend. If a sister company or parent receives an asset for nothing or worth more than it pays, the law seeks to protect the transferring company's capital by requiring a certain level of profits.
Until relatively recently, the amount of profits required was unclear. However, it has now been clarified that a transfer at book value requires only £1 of profit. Indeed, all is not lost if the company does not even have the required £1. Through legal and accounting alchemy, it is possible to turn share capital and certain other reserves into profits.
Even an accumulated loss on your balance sheet can be reversed into an accumulated profit if the amount of your share capital and reserve accounts is large enough. As an example, if a company has a "share premium account" or a "capital redemption reserve", these can be reduced by following a relatively straightforward capital reduction procedure with the reduced amount being credited to distributable profits.
A revaluation reserve cannot be reduced in this way but there is a possible way around. The revaluation reserve can be capitalised by using it to pay for the bonus issue of shares. The capital reduction procedure can then be applied to the shares created by this bonus issue, with the amount reduced being credited to distributable profits.
The capital reduction procedure is a straightforward process. It requires a shareholder resolution and that each director makes a statement as to the company's ability to pay its debts for the following year (having properly considered its creditor position).
Lack of distributable profits can be a real headache when trying to move assets or restructure, for example before selling a company. With guidance from trusted advisers, companies can avail themselves of the capital reduction techniques to resolve this roadblock.
Five of our Real Estate lawyers were promoted in 2012
Partner, Real Estate
Simon was promoted to the partnership in 2012. A commercial property specialist, Simon has particular expertise in investment work as well as experience in landlord and tenant and development matters. Clients that have drawn on this expertise include Helical Bar plc, UBS Global Asset Management (UK) Limited and residential developer Londonewcastle.
Partner, Head of Real Estate Finance
Nick, a real estate finance specialist, was also made up as a Partner. With more than eight years’ experience in advising financial institutions, funds, developers and investors on all aspects of real estate finance transactions, Nick has extensive expertise in bilateral, syndicated, club, structured, mezzanine and staple financings. He primarily advises on restructurings, refinancings, enforcements, intercreditor issues and general work-outs for clients in the banking sector.
Associate, Residential Property
Julie was promoted to the level of Associate in 2012. She specialises in all aspects of residential property including lease extensions and landlord and tenant work, and advises individuals, companies and investment funds, both on and offshore.
Associate, Real Estate
Helena, who also became an Associate last year, specialises in commercial property and deals with a variety of matters including landlord and tenant work (acting for both institutional landlords and occupational tenants), development work, commercial sales and regeneration projects. She also has experience in real estate support for corporate and finance-led transactions.
Associate, Real Estate
Louise, who was also promoted to Associate, has wide transactional experience in all aspects of commercial real estate, including property investment sales and acquisitions, development work, landlord and tenant and corporate real estate. Her clients include institutional investors and private property companies such as Capital & Counties Properties PLC, Delancey, Lumina and London Business School.
Our Real Estate department has been boosted by a number of new joiners
Associate, Real Estate
My career highlight to date is being responsible for the property contracts for the Olympic Park and Village while working in- house at LOCOG; a role which also meant I could experience ‘Super Saturday’ and the roar of the velodrome frst-hand. Nick specialises in commercial real estate with a particular emphasis on development work and high value investment sales and acquisitions. Prior to working for the London Organising Committee of the Olympic Games and Paralympic Games (LOCOG), he was a solicitor at Macfarlanes.
Solicitor, Property Litigation
I joined Mishcon due to its reputation in litigation. I also wanted to do more professional negligence work and now spend around 70% of my time in this area. Natalie has worked on a diverse range of commercial disputes at High Court level. She is currently acting in numerous cases involving negligent advice given by solicitors, financial advisers, architects and surveyors. Natalie was previously at Finers Stephens Innocent LLP (now HowardKennedyFsi).
Solicitor, Real Estate
My aim at Mishcon? To help our clients complete some of the UK’s most high-profle and interesting property transactions. And to become the top goal scorer in the London Football Legal League... Ed, who joined from Slaughter and May, has expertise in high value investment sales and acquisitions, large development projects and major lettings (acting for both landlords and tenants). At his previous firm, he worked on the development of the Athletes’ Village for the 2012 Olympic Games.
Solicitor, Real Estate
What distinguishes Mishcon from other law firms is the positive culture of the Firm – everyone really is happy to work here! Dilukshi joined Mishcon from Nabarro LLP where she specialised in commercial property. She has a range of experience including acquisitions and sales of investment properties, due diligence on high value transactions and asset management work for landlords of large portfolios including retail, industrial and offices.
Solicitor, Property Litigation
The Mishcon brand excited me; the more I heard about it, the more I wanted to be part of it. There is a genuine tangible buzz about the place. Mark specialises in contentious property with an emphasis on commercial landlord and tenant disputes. He advises on business lease renewals, dilapidations, rent arrears recovery and property related insolvency issues, and has a keen interest in rights of light matters. He joined from Nabarro LLP.
Solicitor, Real Estate
There is a clear sense of identity at Mishcon and this is refected in each client relationship and our approach to each transaction, whether big or small. Kathryn, who joined from Freshfields Bruckhaus Deringer LLP, is experienced in a range of commercial property matters, including large-scale purchases and sales, development work and asset management experience for landlords of office, industrial and retail premises.
Solicitor, Real Estate
I joined Mishcon because I wanted more experience working for a wide range of clients with challenging and interesting work. Mishcon’s clients and reputation made it an easy decision. Olivia, who joined from Herbert Smith LLP, frequently deals with development matters and acquisitions and disposals of investment property. She also acts for commercial landlords in asset management matters, and has provided real estate support for finance and corporate transactions.
Solicitor, Property Litigation
The culture of excellent service really is ingrained here. The extra mile is not seen as an extra. Before joining Mishcon, Richard was a Senior Associate at Hogan Lovells. He has a broad practice in contentious real estate matters with a particular focus on commercial and residential landlord and tenant disputes including dilapidations, service charge disputes, insolvency and debt recovery, alienation disputes, enfranchisement, illegal occupation and party walls.
Career highlight? Successfully defending a judicial review challenge to the grant of planning permission for subterranean development while in-house at Kensington and Chelsea. Andrew has experience in a range of planning matters including planning applications, section 106 agreements, listed buildings enforcement and judicial review. He has a unique insight into planning processes through local authority in-house roles at Kensington and Chelsea and at Merton.
The big think on the future of london
The Big Think on the Future of London is a series of high-level discussions co-organised by Mishcon de Reya and Central. Teaming up with our sponsors Derwent London, Londonewcastle, James Andrew Residential and Capital Symonds, with Property Week as media partner, the debates brought together influential panellists from the worlds of development, telecoms, design and local government to discuss London's future. The following article is an eight-page supplement appearing in the 8 March edition of Property Week.
To download the pdf, please click here.
Click below to view a short film on The Big Think on the Future of London.
The pre-MIPIM Beach Party
Our joint party with CBRE took place in London on 28 February, marking the start of the MIPIM trade show in Cannes. At the beach- themed event, guests drank cocktails under the palm trees while the rest of London shivered.