Sherrards retail team work with client Evapo expand and explore new business ventures

During the course of the last calendar year Stephanie and the team have advised Evapo on the renewal of three leases; the strategic re-gearing of two further leases and the acquisition of three new units.  This is typical of the type of work the commercial property team carry out for a number or retail clients.

The team are also now working with the owners of the company in connection with a new business venture and we have concluded the first, of what we hope will be many, acquisitions of premises for the new concept. 

Sherrards’ Real Estate Litigation team advise property client obtain vacant possession from Rent Act Tenant

One property in the portfolio had a Rent Act tenant, but it was suspected that the Rent Act tenant no longer resided at the property.  A claim was issued on the basis of abandonment.  However, papers were served suggesting the tenant was returning from working abroad

Michael Lewis and the team issued proceedings and the matter went to the High Court. In the days before trial the team managed to agree a successful settlement for our client.

 

Rent Reviews: Not to be disregarded

A landlord can only conduct a rent review if there is a rental review provision in the lease. In modern leases, rent reviews are around every three to five years.

Negotiations over rent clauses are crucial because the landlord will have a different objective to the tenant as the provisions often only allow for increases in rent. It is very rare that the provision allows for a decrease in rent and so at the time of review, the rent will either stay the same or increase.

When the time comes for rent to be reviewed, the process can be instigated by notice (in writing) or by parties entering into negotiations. However it is clearly in both parties’ interest to negotiate a new rent and resolve any dispute early on to avoid incurring unnecessary time and costs. Tenants should remember that often rent reviews can be backdated.

The most common type of rent review falls under the umbrella of open market rent reviews – the rent at which the premises might reasonably be expected to let at in the open market. It enables rent to be set according to market conditions at the time of conducting the review (on par with other rents being charged on similar properties in similar areas at the best rate).

How is open market assessed?

Usually an expert assists in helping both parties and more often than not they will appoint a surveyor to decide on the open market rent and help them with negotiations.

The surveyor will determine the value of the new rent in the fairest way, by considering the ‘hypothetical lease’ basing it on assumptions and disregards. The reason for this is that if the surveyor valued the open market rent based on the actual property it may lead to an unfair valuation (say, if the property was in a state of disrepair because the tenant failed to comply with covenants relating to repairs), so the assumption would be made that the tenant has complied with all covenants. Certain aspects will also be disregarded, for example, if the tenant has built up a good rapport with neighbours or if the tenant has made significant improvements to the property, these can be disregarded to give a general unbiased valuation.

To minimise potential risks, it is strongly advised that both landlord and tenant seek professional legal advice to ensure they are fully aware of the rent review provisions of the lease.

After a valuation has been provided to both parties, hopefully they will agree. If this is not the case and parties cannot come to agree a new rent, the rent review clause in the lease usually stipulates a procedure for alternative dispute resolution (ADR) which involves the use of a neutral third party.

If negotiations fail, parties then often look to arbitration where a neutral party comes in to actually resolve the dispute and make a decision, requiring both parties to comply with the final outcome.

The rent continues to be paid at the old rate until a new figure has been agreed. Once the new amount is agreed, it can be back dated to the review date meaning that an additional sum making up the difference may be owed by the tenant, and interest may also be charge

 

The crash of a retail giant: What is left to be said about House of Fraser’s concessions

Online shopping is growing faster than ever and retailers must find a sustainable way to compete. The collapse of House of Fraser is raising serious questions about viability for traditional and internet businesses relying on concessions to promote their products in malls and shopping centres.

There are key issues to consider if you find yourself caught in the middle.

What is a concession

The concession model involves a designated space in one or more department stores (local or national with multiple locations, such as House of Fraser, Debenhams or Westfield) that operates largely autonomously. The concession brand often benefits from a physical separation, with its own signage, walls, furniture and displays and own staff. It may also be operated independently, although more often than not the store has in place legal and operation controls over distribution, profits and reporting. The benefit of a concession model is that it is moving away from the wholesale model of a distribution, by selling products direct to consumers. Most concessions are subject to written agreements but if you do not have an agreement with a store in writing, then you should contact us.

The Contract

From a legal standpoint, the concession relationship falls somewhere between a landlord-tenant relationship and a supplier-retail distributor relationship.  Contracts can be as long as 200 pages (including annexes). The concession agreement has certain leasing aspects, employment issues, co-branding, intellectual property and privacy matters to address.  The relationship between brand and store is not purely legal of course.

With online retail, brands are trying to move away from the traditional distribution model in order to put their products directly in the consumer’s hands more quickly and efficiently, and to maintain better control. This trend is getting even more more popular as desirable brick-and-mortar real estate has become very costly.  As a result, landlords are continuing to look for long-term commitments from brands.

Sometimes the interdependency between landlords/stores and their concession is such that if the mall or store collapses, then the concession (which can sometimes be nationwide) and their staff suffer.

Termination notice

Brands should carefully assess how a concession may be terminated in the event of the collapse or the repurchase and change of control of the store business and the rights and obligations arising on either party.

Particular consideration is needed if the brand agreed to exclude the effect of the Landlord and Tenant Act 1954 which, in certain circumstances, protects tenants at the end of the lease by allowing them to remain in occupation and request a new lease. These rights are usually excluded in concession agreements.  The agreement may also provide that the area allocated to the concession holder may be changed at any time. This means that a brand may have to relocate with its staff in an area which no one agreed to go to.

You should also read the contract carefully regarding contribution regarding dilapidation costs and other effects of termination (for example on your stock). This means that you will need to consider relocating the stock on termination of the concession.

Consequence on employees and staffing

Staff working in concessions are generally employed by the brand, rather than the store itself. Even though the store may require the brand’s staff to read and abide by the policies and procedures of the store and attend certain training carried out by the store, the brand remains primarily (and legally) responsible as the employer of the staff of the concession.

There are circumstances in which the store is held responsible for the costs of a breach of employment rights, such as discrimination, but the concession agreement should have anticipated such circumstances by putting in place indemnities for their benefit, should one of the brand’s employees bring a claim against them.  Generally, however, any employment claims would be enforced against the brand.

The holder of concessions should therefore consider how to approach small or large scale redundancies, particularly where a large store such as House of Fraser goes bust. If redundancies are necessary, employees with more than two years’ service are entitled to receive a statutory redundancy payment and for their redundancy to be handled fairly. Failure to follow a fair procedure could result in an unfair dismissal claim. In addition, if the store is a big one and more than 20 redundancies are necessary, then the employer must undertake collective consultation and cannot make redundancies for a period of at least 30 days. Specialist legal advice is always advisable in these circumstances.

Insurance

You should consider whether or not you are insured for business interruption and contact your insurer to find out what steps are required to benefit from the cover.

Bad debts and goodwill

Generally, there will be a provision in the concession agreement to the effect that a store will bear bad debts provided that you observe control procedures. However, you may be asked to indemnify stores from any bad debts incurred as a result of non-compliance with such control procedures.

Some stores expressly state that any goodwill that accrues as a result of your operation of the concession will belong to the department store. However, if this is not stated in the concession agreement, then it is likely that you will own any goodwill that you accrue.

Damages

If the store is in breach of the concession agreement, then your chances of obtaining damages will depend on your record keeping of sales, complaints, changes to commission rates, introductions of new lines, footfall, marketing efforts and events, publicity, including on your efforts and success in developing the brand.

When to seek legal advice

On the employment law side, we recommend that the concession seeks legal advice early as part of its plan to reorganise its work force and its business.

For the other cases where there is a potential dispute with the store, it will depend on the type of dispute and whether it is likely to escalate into something which will cause harm to the concessions business. It is very much a question of judgment. Something which starts out small can soon turn into a serious dispute. Contact Mike for more information.

Licences for occupation – is your short term licence agreement actually a formal tenancy?

A recent ruling is likely to have significant consequences for guardian property companies (and other landlords) who use licence agreements to place occupiers into properties to protect against squatters and vandalism.  The case of Camelot Property Management Limited and Camelot Guardian Management Limited v Roynon [2017] highlights the importance of carrying through in practice what a document/ licence has set out to achieve.

The matter of whether a licence is really a licence or indeed a lease has long been debated and for some time now it has been widely accepted (following the decision in Street v Mountford [1985]) that the principles of exclusive possession, rent and length of term govern how a ‘licence’ will be regarded by the courts.

The recent Camelot case did not set to change these principles but has offered valuable insight as to what is required in order to prevent ‘exclusive possession’ from arising and turning a ‘licence’ into a lease or formal tenancy.

The ‘licence’ agreement with Mr Roynon for the occupation of two rooms in a former old people’s care home contained the following restrictions:

  • No overnight guests
  • No unsupervised guests
  • No more than 2 guests at a time
  • All guests to be escorted from the property at the end of each visit

The court held that the provisions of the agreement did not accurately reflect what happened in reality. Whilst the licence stated that no exclusive possession would be given, Mr Roynon had in fact been given keys to two rooms to which no other guardians had access and which no one entered without his permission.

Regular inspections of the rooms by Camelot were not held to be sufficient to counter his exclusive possession and Mr Roynon had therefore acquired an assured shorthold tenancy rather than a ‘licence to occupy’.

The case highlights the need to put into practice what a document/ licence has set out to achieve and where no exclusive possession is intended, landlord’s must make sure that the living arrangements are not contrary to the formal agreements put in place.

Anyone using guardians or short term occupiers to prevent buildings remaining empty should carefully balance the risks of allowing people into occupation with the rise of professional squatters and other unwanted occupiers who could look to take advantage of such situations. Contact Caroline for more information.

Keeping connected

Being connected to the internet is something we almost take for granted these days. Tenants looking to move into new premises are likely to assume that adequate connections will already be available or reasonably straightforward to set up.  This isn’t necessarily the case and before you find yourself unable to get your business up and running in your new premises, check out the position as you may need to enter into a wayleave agreement.  It is worthwhile doing this and getting the landlord involved as soon as you can.

While modern buildings should have fibre optic cabling installed, older buildings may not. Having connection at a level and speed required for business purposes may mean entering into a telecom agreement (a wayleave agreement) with the service provider for the installation, or upgrading, of cabling within the building.  This can take time and involve multiple parties.

While tenants should have rights to connect into existing service media in the building in their lease, this may not extend to new cabling.  This may mean seeking the consent of the landlord to run cabling through common parts of the building. The telecoms provider will also want to know they can access and maintain their kit once installed and connected.

A wayleave agreement or telecoms lease will usually need to be entered into between the tenant, the service provider and the landlord. The landlord will want to be involved in the process to protect their position as far as possible to ensure that the service provider only has the rights they are entitled to and the landlord can control as best they can removal of the kit from their building when required.

Landlords should be aware that telecommunications providers have statutory rights which are heavily weighted in their favour. It can take over 18 months to secure the removal of telecommunications apparatus from premises with the landlord needing to prove grounds to do so.  Operators are also allowed to assign their rights, upgrade the equipment or share with other providers without the landlord’s consent.

Before refurbishing or redeveloping a property in the medium to long term, a landlord will need to factor in the rights of telecoms providers within the building if their equipment is to be removed. There need to be adequate ‘lift and shift’ provisions in place in any wayleave or telecommunications lease to require providers to move the equipment to allow the landlord to refurbish the premises. Contact Isabel for more information.

Testing times: Practical tips commercial landlords should consider when granting a lease

Sterling is weak and Brexit is lingering. Business uncertainty, particularly the risk of tenant insolvency, is undoubtedly one of the biggest concerns for UK commercial landlords in the current climate. 2018 has seen increasing indicators of stress and change in the retail and restaurant sectors in particular, with tenants entering into CVA’s (company voluntary arrangements), administration & negotiating store closures.

All is not doom and gloom – indeed some report that we are seeing an evolution of the “store” and the high street which may present its own opportunities. Whatever the weather, projecting ahead to what are likely to be testing times, commercial landlords might want to consider how better to safeguard their position on grant of leases, going forward.

Here are our top tips:

1. Heads of Terms

Negotiating and agreeing heads of terms is a critical time in any transaction. Getting lawyers involved at this stage can put the landlord in good stead for covering key matters relating to the specific circumstances of the parties, the property and the transaction. Getting it right at this stage often avoids the need for renegotiation later down the line which can carry the risk of a ‘no deal’ and wasted costs.

  1. Rent Deposit

Quite routinely, a landlord will collect a lump sum as security from the tenant on the grant of a lease which is held for the duration of the term. It can be used by the landlord to cover any unpaid rent or damage to the property caused by the tenant. There are various ways to hold a rent deposit but a landlord faced with the increased risk of tenant insolvency will want to consider a requirement for the rent deposit to be held using a charge structure. Using a charge structure means the landlord will be a secured creditor (of the rent deposit sum) in the event the tenant becomes insolvent (such as falling into administration, liquidation, or entering into a CVA).

If a charge structure is not used, there can be greater restrictions on whether and how commercial landlords can draw down and use the rent deposit sum, where valid, if the tenant becomes insolvent.

Of course, the other consideration to factor in is the amount of deposit that will be taken. Depending on the financial strength of the tenant and the term of the lease, a landlord will want to negotiate an amount which is an adequate security buffer – and preferably hold that under a charge structure.

  1. Guarantors

Landlords will often, as additional security, require a guarantee from (1) a personal guarantor or (2) a parent company so that there is a further party to pursue if the tenant breaches the lease. A tenant who is in financial difficulty might fail to pay rent or fail to comply with its repair obligations, leaving a dilapidations liability. In this situation a landlord can often be left with an immediate cashflow problem. Furthermore, long term, if the property is significantly damaged or dilapidated, the landlord could be left out of pocket. Having other parties of financial worth to pursue is essential.

To a commercial landlords dismay, some insolvency procedures can affect enforceability against a guarantor. CVA’s have been criticised for “guarantee stripping” as case law has left some uncertainty as to whether these can operate to release guarantors of their liability owed to landlords (based on terms agreed in a CVA between an insolvent tenant and its creditors which can bind the landlord).

For the avoidance of doubt, landlords should be mindful to ensure that any guarantees taken are on the basis that they will expressly apply in the event that a CVA or any other voluntary arrangement is agreed by the tenant with its creditors.

Whilst there is no guarantee that this will be airtight – as the point in case law remains somewhat uncertain – having clarity of what the parties intend in an agreement is essential and is more likely to help protect the landlord. Generally speaking, it is important that the guarantees the commercial landlord takes are drafted to maximise strength.

  1. Contracting-Out of Renewal Rights

A tenant who has a lease for a term of at least 6 months (or a tenancy without any fixed term) in occupation and operating its business at the property has a statutory right to apply for a renewal of its lease on similar terms. A landlord can only refuse to grant a lease renewal on certain statutory grounds.

If a tenant is financially strapped when it comes to the end of the fixed term, rather than allow a renewal of the lease and have problems trying to evict the tenant, a landlord will understandably want a clear right to regain possession of the property so that it can be re-let on the open market again.

This can be achieved by the tenant agreeing to contract-out of its statutory right of renewal. The procedure for contracting-out is specific and must be followed properly before the grant of a lease to be effective. The reward of getting this right can often avoid unnecessary hassle and costs at the end of the term.

5.Existing Leases & Throughout the Term

There might be some tell-tale signs to look out for during the course of a landlord-tenant relationship which can indicate the tenant is in difficulty. A landlord who sees these signs may well need to start proactively thinking of alternative plans.

The obvious one – late payment of rents – is not the only one to look out for. A tenant might make applications for consent to assign, sub-let or change permitted use. A landlord might simply agree to an assignment or subletting if this means rent is coming in from a more financially reliable tenant or undertenant. Alternatively, a landlord might want to consider agreeing a surrender of the lease with the tenant, at a premium. This can allow both parties to cleanly move on.

The key is to achieve a solution before the tenant falls into an insolvency situation as otherwise the landlord can be at risk of little or no return of monies owed, once insolvency rules kick in. Contact Caroline for more information.

Landlords Versus Tenants!

The government is on a mission to ban private landlords from evicting tenants at short notice without good reason.  Section 21 notices in their current form allow landlords to evict tenants without reason after their fixed-term period ends but according to the Housing Secretary such evictions are one of the biggest causes of homelessness.  Under the government’s new mission, landlords will have to provide concrete and evidenced reasons already specified in law in order to bring tenancies to an end with the aim of preventing unfair evictions. (Click here for Zoopla’s top tips for landlords.)

Without stating the obvious, this new proposed change will not go down well with current landlords and may well put off potential would be landlords too.  It is of course important to explore both sides of the coin.

A survey by Citizens Advice suggests that tenants who made a formal complaint had a 46% chance of being evicted within the next 6 months. The resulting fear of eviction discourages raising complaints relating to disrepair or poor living conditions .

Landlords will argue that they are forced to take the Section 21 route because they have no confidence in the courts to settle possession claims (for example in the case of non-payment of rent) and feel that the system is loaded towards tenants.  As it stands, tenants can be given as little as 8 weeks’ notice after a fixed-term contract comes to an end.  Landlords will no doubt feel that the proposed changes would create a new system of indefinite tenancies and the government should focus on improving the court process instead.

Time will tell whether this proposed change will affect the buy to let market but at a time when the market is somewhat nervous with the “B” word still floating around, it is certainly not helping confidence levels.

A fairer letting market? The Tenant Fees Act 2019

On 1 June 2019 the Tenant Fees Act 2019 came into force banning letting fees in England. Tenancy renewals, reference and administration fees will be prohibited under this law and are now to be covered by the Landlord on all tenancies created on or after 1 June 2019 in the private rented sector.

The Act also prohibits any need for the tenant to enter into a contract with a third party for the provision of services (with the exception of utilities or communication services), for insurance or to make a loan to any person in connection with the tenancy.

The aim of the Government is to make a fairer market place and prevent unfair practices of landlords and letting agents.

Any payment made by the tenant must be a “permitted payment” contained within Schedule 1 of the Tenant Fees Act 2019.  The following payments are permitted under the TFA 2019:

  • Rent;
  • A refundable tenancy deposit or holding deposit;
  • Payments to change a tenancy;
  • Payments associated with early termination of a tenancy;
  • Payments in respect of utilities, communication services, TV licence and council tax;
  • Default fees.

Any payments required by the landlord, letting agent or licensor, other than those listed above, will constitute a prohibited payment under the TFA 2019, and include:

  • Viewing fees;
  • Fees for professional cleaning;
  • Credit check fees;
  • Tenancy set up fees;
  • Requiring payments to third parties, the entering into a contract of insurance or the provision of a service from a third party;
  • Requiring the making of a loan to a person in connection with the tenancy agreement.

The Act also introduces a cap for tenancy deposits. If the annual rent is less than £50,000.00, only 5 weeks rent can be collected and where the annual rent is over £50,000.00, only 6 weeks rent can be collected.

A reminder that Assured Shorthold Tenancies include those rents that are less than £100,000 per annum and are to an individual and also includes student tenancies, licences but not long leases.

Essentially, this means payments such as credit checking fees, inventory fees and professional cleaning services are now not permitted to be re-charged to the tenant.

Trading Standards will enforce the Act together with local councils and the sanctions for non-compliance is a fine of up to £5,000.00 and criminal sanctions may be imposed.  Landlords will also be prohibited from serving a valid section 21 notice under the Housing Act 1988 to obtain vacant possession of a property whilst there are breaches of the Tenant Fees Act 2019.

All residential landlords must make sure precedents are up to date and compliant with the new letting laws.

An immigration reminder

Although this legislation was brought in on 1 February 2016, landlords need to be reminded that they must check the immigration status of their tenants or licencees.

Landlords must check under the Immigration Act (sections 20-37 and Schedule 3) the status of prospective tenants and other authorised occupiers before a residential tenancy is entered into, “right to rent” checks.

Landlords must also make sure that someone’s right to occupy the residential premises does not lapse due to a change in their immigration status (i.e. they have a “time-limited” right to rent), which is an even more onerous obligation. In that situation, the check must be made both within 28 days of the tenancy being entered into and before the time-limited right to rent expires or once 12 months has passed, whichever is later. Failure to comply with the legislation could lead to a civil penalty of up to £3,000. There are exclusions including certain student accommodation and long leases (where a right of occupation for a term of seven years or more is granted).

A person may not occupy residential property in the UK if they are not a “relevant national” which is a British citizen, a national of an EEA state or Switzerland or they do not have a “right to rent” in relation to the property –i.e. if they require leave to enter or remain in the UK and do not have it, or they have leave, but it is subject to conditions that prevent them from occupying the residential premises.

The legislation also applies where a residential tenancy grants a right for other individuals to occupy along with the named tenant, i.e. family members who are disqualified as a result of their immigration status. However, in that situation, there is a contravention only if reasonable enquiries were not made of the tenant before entering into the tenancy as to the relevant occupiers, or reasonable enquiries were so made and it was, or should have been, apparent from the enquiries that the adult in the question was likely to be a relevant occupier.

The Act applies not only to the landlord who entered into the residential tenancy, but also potentially to the person who is the landlord under the tenancy at the time of the contravention i.e. the successive owner. So where a landlord transfers its interest subject to a residential tenancy, the new landlord will become the ‘responsible landlord’ for any contraventions of the requirements. If the tenant has the right to rent at the time the residential tenancy was granted by the original landlord, but subsequently lost that right and follow-up checks were not conducted, it will be the landlord at the time the breach is identified who will be the ‘responsible landlord’ for the purpose of a penalty. The new landlord must therefore confirm with the old landlord that the document checks have been undertaken and retain evidence to demonstrate this. The new landlord must also take careful note of whether and when follow-up checks must be undertaken in order to maintain a statutory excuse. Enquiries must be made on the purchase of a residential property subject to tenants.

Landlords must exercise vigilance on this issue before residential tenancies are entered into, but should also carry out follow-up checks where the occupier has a time-limited right to rent.