On-line precedents: Help or hindrance?

The  internet has brought many benefits to lawyers and particularly to firms who wish to avoid (or cannot justify) the employment of a Knowledge Development Lawyer (aka a Professional Support Lawyer). Whereas previously in order to keep up with the latest legal developments one had to subscribe to countless hard copy journals; constantly receive updates from publishers; then spend time updating the loose leaf guides (often a job for the unsuspecting summer student) now this all happens on-line saving significant time (and paper for the more environmentally conscious of us). None of this is a bad thing and is of great benefit to large and small firm alike. This is further enhanced by the availability of automatic updates notifying you of changes to law, recent case updates and similar.  Keeping up to date has never been easier and, frankly, I wonder how we ever managed without - perhaps we were blissful in our ignorance?!?

Courtesy of Rev Dan Catt via Flickr

However there is another development which is in my experience is less than helpful - the emergence of the on-line precedent. On the surface what could possibly be wrong with on-line precedents? Apart from anything else, I hear you say, they result in much more standardisation; who needs 10 different forms for the same transaction. Surely this is a good thing and will help save time and reduce costs?  I even suggested something similar myself in respect of standardising leases, did I not?
Well having recently run a transaction involving a significant number of properties across a portfolio with multiple other small firms involved I can say that this is not the case. Part of the transaction involved obtaining licences from landlords and due to the nature of the properties most often the landlords were represented by small firms. What we noticed was that the same clauses were appearing on almost all the licences we were receiving and the same problem clauses at that.

Why were these clauses a problem?  Let me outline the two most major issues the "standard" precedents caused:

1. In some cases the clauses were not commercially acceptable. Whilst in the context of a simple transaction involving two individuals or a company owned by its directors they were probably okay, on anything more complicated they became onerous and unworkable. The clauses were not something we as a firm or the other large firms involved have in our standard institutionally accepted forms of documentation. However by including it in their on-line resource the resource provider has created the impression that it is standard in the market. I lost count of the number of times we were greeted with a, "This is a standard requirement of our client and is standard in the market" response. If your client's precedent is an on-line resource I suspect your client is pretty oblivious to most of its terms and just because it is in a precedent does not make it market standard!
2. The guidance provided by the on-line resource can be unhelpful and, at worst, obstructive. Suggesting a clause is necessary because without it your client's insurance is at risk when in reality the clause is asking a tenant to take on a risk it cannot mitigate with no obligation on the landlord to assist when it could easily do so is hardly a recipe for productive negotiation. Whilst some firms adopt an aggressive first draft and look then to compromise that only works when the draftsman understands what is necessary and what is unnecessary. We spend a significant amount of time going through our precedents with new joiners explaining the purpose of each and every clause.  The purpose of this training is to ensure that they understand why the clause is there and, by extension, if and how it can be amended or, in certain circumstances deleted.  On-line precedents do not come with this level of training.  Therefore, when an amendment is sought, fear sets in because the lawyer does not have the confidence that they fully understand why a clause has been put into a document.  Whilst the argument we put forward may sound convincing what if we are ignoring another reason for the clause's existence?  Conceding the point might result in their client being exposed and the lawyer being negligent.  Therefore, better to resist and rely on the "it is a standard clause" defence.

There is no point complaining unless you propose a solution.  The first solution would be to get rid of on-line precedents but I accept this would be a step backwards and not particularly helpful to the legal fraternity.  If I am honest I think the issue really lies with the draftsmen of these precedents.  In some cases it is my suspicion that the draftsmen are not transactional lawyers but rather professional KDLs.  Whilst this works within a transactional firm this is because the KDLs have the benefit of engaging daily with the transactional lawyers.  This creates a necessary and mutually beneficial exchange of thoughts and ideas.  Draft clauses which show themselves to be commercially unviable fall on the lawyers' equivalent of the cutting room floor.
However, some of the on-line precedent providers loudly and proudly claim that there precedents have been drafted for them by lawyers and law firms so lack of transactional experience cannot along explain the issue.  The problem with this source of precedent is that, whereas within the law firm there exists a peer group within which a proposed amendment can be discussed, evaluated and agreed/amended/rejected with the benefit of the collective hive mind, for the smaller practitioner such support simply does not exist.  Therefore firms providing these drafts must ensure that their drafts are commercially and legally unbiased.  If the starting point is a reasonable one then the fact that a lawyer is less willing/confident to concede a point is not likely to be such an impediment.

Don't get me wrong.  This blog is not intended to be a criticism of my peers who work in smaller firms.  Frankly I think that they do an incredible job.  It is easy to forget how much I rely on the support I have from KDLs, peers and, indeed, as much on-line resource as I could possibly ask for.  Lawyers in smaller firms simply do not have that level of support and yet provide as excellent advice and client service as many a large firm.

No, my criticism is of the providers of supposed tools aimed at reducing the burden of the small firm lawyer.  As I have mentioned previously the role of the transactional lawyer (and by extension his drafting as his tool) is not to seek to screw the opposition.  Those who provide resources to enable the lawyer to do this need to ensure that those resources truly assist the lawyer in furthering his goals and do not, instead, become an unnecessary and unwelcome hurdle to be overcome.

In defence of sale and leasebacks post Southern Cross

The Southern Cross collapse has cast a very strong spotlight on the use of sale and leasebacks in the care home industry and in property heavy businesses in general. Southern Cross is not the first well known name to collapse with a sale and leaseback business model; remember Woolworths? Or going back further the Forte group? But, whilst all these collapsed entities share a common theme in having utilised sale and leasebacks it is flawed to conclude that any entity which undertakes a sale and leaseback is primed for collapse and, as a response, call for such arrangements to be heavily regulated or outlawed.
How do you justify a sale and leaseback?
First of all it is important to understand the rationale for undertaking a sale and leaseback. In simple terms it is about efficient and productive use of equity. Simply put owning a property outright means your capital is tied up in an illiquid asset. It also means that not only are you running an operational business but you are also exposed to the property investment market with the value of your property fluctuating with property values generally. When the building comes to the end of its useful life (which modern buildings appear to do in a very short space of time) you then have to go to the expense of redeveloping it or selling the land for development.
Extratracting value by borrowing and securing the loan against the property might deal with the immediate issue of cash being trapped in an illiquid asset but it does not deal with the other issues highlighted above. Further owning the property outright and mortgaging has a very negative effect on a company's balance sheet something which, under current accounting principles, a lease does not.
In fact, failing to use sale and leasebacks to some extent might have hampered Southern Cross' expansion.  Whilst one might argue this would have been a good thing one has to consider how, with an increasingly ageing population, having less care beds available is necessarily in the public interest.
I have been involved in a number of sale and leaseback transactions and also acquired and sold properties which have been investments created by them including some Southern Cross properties.  Sale and leasebacks come in all shapes and sizes but I can confidently say that it is not the sale and leaseback model that is the problem but rather the way it is structured and its misuse.
A lease is a very flexible instrument and property valuation more of an art than a science.  Accordingly, by varying the lease inputs in relatively small ways the capital value of a property can be increased or decreased significantly.  But sometimes you can change the same variable without getting the same results.  For example, altering the initial rent on a sale and leaseback transaction will have a greater appreciable effect on capital receipts where rent reviews are index-linked than if they are open market.
Let's consider the Southern Cross approach.  Anecdotal evidence suggests that most of their leases were relatively long term (30+ years) on a full repairing basis with index-linked rents subject to a cap and collar.  Analysing these inputs and whether they were sensible choices for Southern Cross to make I would conclude:

• Term - on the basis that you are not going to move residents around homes you need a long term.  Further the large scale capital expenditure needs a long enough period to be amortised over the life of the lease
• Full repairing - SX would need to maintain the homes in order to comply with CQC and Care Standards so this covenant is not imposing a more onerous obligation on them.  Leasing a commercial property is not about being relieved of the financial implications of repairing it it is about best use of available cash
• Index-linked rents - SX's business model was based on local authority spending.  Historically this has always risen in line with a pricing index.  Therefore linking rents to such an index is more logical than relying on either fixed uplifts or open market reviews where true comparables are very difficult to find
• Cap and Collar - These are important for certainty.  From SX's point of view a cap limited its exposure to higher levels of inflation (and bearing in mind the concerns on inflation in 2007-2009 this was a good call).  The quid pro quo to a cap is a collar to provide the landlord with some comfort that there will always be a rise.  Frankly bearing in mind actual inflation you cannot blame the collar for the failure.

So why did SX fail and is the sale and leaseback structure blameless?
The sale and leaseback structure is not blameless but the issue is more likely that SX agreed rents that were too high in the first place.  The incentive for this is clear.  Within reason the higher the initial rent the higher a price a buyer will pay.  SX extracted maximum value for each property by agreeing to pay the maximum rent which it was felt the business operated at that care home could bear; it left no room for drops in income.  Had their assumptions borne out no one would have questioned their actions and everyone would be marvelling at what a fantastic job the board had done.
However, before singling out the board of SX for criticism regarding their assumptions let's not forget the following:

• landlords had their own advisors who were as well placed as SX to study the demographics, macro- and micro-economics behind the business and lease structure and highlight concerns - did they?
• we had a Labour government which had continued to increase year-on-year its public sector spending in key areas including elderly care and shown no interest in reducing it (even after the credit crunch hit)
• we had Gordon Brown as chancellor telling us he had "abolished boom and bust" and many were happy to believe him
• we had banks with apparantly endless resources able to lend at high leverage

In reality SX was as much a victim of the lax lending practices and flawed belief in our own perpetual success than a totally flawed and unjustifiable business model.  That others have survived where it failed may be more a matter of luck than judgement.
Jamie Buchan, SX's soon to be ex-Chief Executive, said in an interview with Adam Shaw on BBC Radio 4 Today this morning, that he expects changes in the sale and leaseback model in the future after their troubled experience.  Paul Pressland who responded to @AdamShawBiz's tweet said "it is simple, agree a rent you can sustain not one that gives you the greatest capital sum!".  Whilst it may not be that simple it certainly would be a good start.

Drafting advice . . . from Princess Leia

I enjoy a bit of sci-fi every now and again and sometimes think that much can be learned from the sage advice of Yoda and friends ... well not really but it can be fun imaging how Yoda would dispense legal advice:

"Enter into that contract will you hmm? Difficult to see the future is. Trust him I do not!"

However, when recently remembering some of Princess Leia's appearances (stop thinking bikini in Return of the Jedi guys) I remembered this line from Episode IV: The New Hope responding to Governer Tarkin's claim that the Death Star meant no planet would dare oppose the Emporer:

"The more you tighten your grip, Tarkin, the more star systems will slip through your fingers"

What on earth is the relevance of this to drafting I hear you ask (not in space of course since sound cannot travel in that vacuum)?

There are some lawyers and, indeed, some clients who believe that in order to make every contract watertight (I am yet to see any contract which achieves this aim) it must cater for every possible event. They will spend painstaking hours trying to conceive every possible (and impossible) "what if" and then seek to draft a provision to deal with it.

However, too much specificity (might be an abuse of a statistical defintion this) has negative consequences. It is next to impossible to draft for every eventuality. The more specific your drafting ("the more you tighten your grip") the greater the risk that events not specifically mentioned will not get caught ("the more star systems will slip through your fingers").

So not only will you have spent a lot of time and cost on legislating for events that will probably never happen, you have quite possibly reduced the chances of dealing properly with the unpredictable one that does.

Identify the real commercial and legal risks (not the distant "what ifs") and draft specifically for those. The rest cover with more general drafting; it's cheaper, more efficient and better for your client in the long run.

Beware the dark side of the law and may the force be with you.

“Good Harvest” now been tithed?

The Court of Appeal today issued its judgment in K/S Victoria Street v House of Fraser (Stores Management) Ltd & Ors [2011] EWCA Civ 904 (27 July 2011).  Some might call this case “son of Good Harvest” and it was the Court of Appeal’s first chance to consider the decision made by Mr J Newey in Good Harvest Partnership LLP v Centaur Services Ltd.  Those of you who have been reading my blog for a while may remember that I got excited about the first instance decision in House of Fraser as Mr Randall QC opted to follow Good Harvest even though he felt that the reasoning in it was flawed!

I will not bother to go into the detail of Good Harvest and what it means to both landlords and tenants as to do so would simply trod over such well-trodden ground that it is a bit of a quagmire.  I have read the decision of the Court of Appeal and, unsurprisingly bearing in mind the Court in this case was headed by the Master of the Rolls, LJ Neuberger, an exceptionally well respected judge with particular expertise in Real estate, it is a well reasoned decision.  In some ways what is most fulfilling about this judgment is that it has expressly been given to address the uncertainties created by the Newey J decision in Good Harvest.  In fact in one part of the judgment it reads:

“We would hope that those responsible for drafting leases are aware of these conclusions, and that, as a result, the 1995 Act should not lead to many practical difficulties of the sort discussed above.”

The Court is speaking to me and my peers and telling us clearly, “we have told you what the law means now you have no excuses for further screw-ups”!

The decision of the Court of Appeal provides much needed clarity and confirms the following:

1. Any agreement which seeks to require a guarantor of a tenant under a lease to guarantee the obligations of an assignee of the tenant will be void.
2. Even where a landlord merely require a guarantor of a proposed assignee and it is the assignee/assignor who suggests the current guarantor (i.e. the landlord did not require it) as a guarantor of the assignee, that will be void.
3. Any guarantee entered into as a result of an agreement along the lines suggested in points 1 or 2 will not be enforceable.
4. A guarantor can, where reasonable so to do, be required to guarantee the obligations of a tenant as assignor of a lease in an authorised guarantee agreement (the GAGA survives).

Of biggest comfort to landlords (and commercially minded tenants) will be point 4.  It had been suggested in Good Harvest that a guarantor could not be required to enter into an AGA.  If this view had been repeated then it would have resulted in landlords always insisting on the assignee being the most financially sound entity in any group.

The judgment did raise some issues which need to be considered practically so that practitioners seek to ensure that they do not run unnecessary risks with their drafting.  I would highlight the following:

1. Provisions in leases which effectively allow intra-group assignments where the TopCo remains on the hook cannot be made to work.  It seems to me that they simply become unenforceable since the tenant cannot comply with the obligation to provide the guarantee and without it one would revert to the usual consent provisions in the lease. So tread carefully here.
2. The Court has blessed the concept of the current guarantor guaranteeing the outgoing tenant’s covenants in the AGA. However, it did not bless a guarantor guaranteeing the assignee’s obligations directly but less this open.
3. A provision in the original guarantee which seeks to extend the guarantee to a guarantee of any covenants by the tenant in an AGA on an assignment may be vulnerable to challenge.
4. The court cast doubt as to whether a landlord can automatically require on any assignment the outgoing tenant to enter into an authorised guarantee agreement.  This is potentially interesting in the insolvency scenario where landlords often seek to rely on such provisions to refuse consent on the basis that an administrator will not enter into an AGA.

So, Good Harvest has been suitably tithed by the Court of Appeal.   The law has been clarified for the better and the investment community can sleep a little more soundly tonight.  However, a word of warning, there are many existing leases out there which will fall foul of the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 even after this decision.  The clarity afforded by this decision means a discount in value must be applied to those leases that do.

My computer might have broadband but my brain is still on dial-up

I was chatting with a partner of mine last week who has been in practice for nearly 40 years. He made a comment which highlights a major issue facing lawyers the world over:

"Whilst the speed with which we can send and receive documents has increased thanks to the internet, the speed with which we can review them has not."

We now live in an instant society. Everything is "on-demand". Modern technology has allowed us to perform many more tasks in a much shorter space of time. Financial calculations which took hours 30 years' ago can now be done in seconds. However, one thing has not changed - the human mind cannot go through its thought processes any quicker. Despite what the Government might want us to believe, more A's at A-Levels does not mean the next generation are all super-computers.
However, it is a fact of life that clients expect that a document can be 'turned' quicker now than 30 years' ago. True, we get it quicker. True we can print it out quicker. True it is easier to create mark-ups and identify changes. However these are all time saving factors in terms of delivery and readability. It still takes the same length of time to read, digest and consider the implications of any given clause or amendment.
Modern technology is also one of the causes of another factor which affects documents of today - length. @LegalBizzle has often tweeted regarding the "mega-contract" which in his line of work does not surprise me. But even in Real Estate, contracts continue to get longer. 30 years ago the average lease was probably 10 or 15 pages maximum. Today it would be 50 pages minimum. Just reading it takes 5 times longer, never mind amending it.
So where do we go from here? Well forget about asking clients to relax.  They are under pressure internally to get the deal done and, frankly, they pay us to transact the deal for them.  But there are things that lawyers can do for themselves and here are my suggestions:

• Use plain english - too many contracts I come across continue to use complex terms for no reason other than to appear intelligent.  However, this inevitably increases the review time and the negotiation time.  Why are we so scared of using language which is intelligible to the average man on the street?
• Use punctuation - I cannot believe that there are still lawyers who believe that not using punctuation assists in interpretation.  Not using punctuation results in multiple re-reads of the same paragraph simply to grasp what it is trying to say.
• Use short sentences - there are no prizes for drafting the longest sentence in the world.  Each sentence should be trying to say one thing.  If it has to say more than one thing at least break it down using sub-clauses so that the drafting visually reflects the thought process.  This also means that any amendment can be more easily understood.
• Be collaborative - as per my previous post on the role of a transactional lawyer, our clients are paying us to get the deal done.  In most cases they view the other party as a partner in some shape or form and their aim is not to shaft them.  Therefore, drafting should be balanced and not seek to screw the other side.  If you adopt an unbalanced approach the other side will probably (i) spot the try-on anyway and (ii) adopt a similar approach resulting in entrenchment and the deal stalling.  A balanced draft is not a sign of weakness but rather a sign of comprehension and commercial nous.

We cannot turn the clock back to a time before everything became such a rush and we are not going to be able to act as if the time pressure does not exist.  So, if we are to avoid all checking in to the nearest facility for stress affected lawyers, we must find ways to reduce the time in negotiating documents.  There will always be negotiation but we should make sure that it is as straight forward and painless as possible.

Changes to Competition Law: An end to "good estate management"?

Many thanks to Adrian Magnus, a partner in BLP's EU and Competition Law practice for his input in this blog.

From 6 April 2011, the Chapter I Prohibition under the Competition Act 1998 will apply to land agreements.  This might come as a surprise to a lot of people.  What on earth does competition law have to do with the ownership of land and why have land agreements hitherto been exempt?


Another legal tightrope for Landlords?
Photo by Donald Judge



I do not want to carry out a detailed analysis of the history of competition law and land agreements.  In summary competition law should apply to any agreement the effect (whether intended or not) of which is to be anti-competitive.  This can, for example, be by creating barriers to entry by preventing competition or by two competitors carving up markets between themselves.  Up until 6 April 2011 land agreements were exempt from the legislation.  However, the Government, in its wisdom no longer sees any justification for such differentiation and so now all land agreements will be caught.

Be warned, this change is not forward looking only and does not have any grandfathering provisions.  Even an agreement entered into 100 years ago could be in breach.

One area of particular interest for the real estate industry is the management of large retail estates especially shopping centres and retail parks.  It is not uncommon in these estates to have leases which contain different restrictions including:

• very specific user covenants limiting the use to, say, a shoe shop or a coffee shop

• allowing the landlord a right to refuse changes of use in the interests of "good estate management"
• exclusivity arrangements whereby the landlord agrees not to let other units for a specific use or to specific identified entities

Are these restrictions in breach of the law? 
Can tenants seek changes of use and threaten the landlord with reporting them to the OFT if they rely on "good estate management" as a reason for refusing the change?

Thankfully, the revised guidelines published by the OFT is an improvement on and much clearer than the first draft.  It recognises the fact that there are many legitimate reasons why a land owner might seek to impose or agree restrictions on the use of land and that only a minority of such restrictions will infringe competition law.

The OFT Guideline specifically recognises the need for user restrictions in leases in order to ensure a good mix of tenants and notes that such provisions are unlikely to be in breach of competition law.  Therefore limiting use to or prohibiting use as, for example, a shoe shop or allowing the landlord to refuse consent to a change of use in the interests of "good estate management" should not cause concern.  There are exceptions to this especially where the owner of the land is also a retailer.  For example, if Boots owned a shopping centre and in all leases for that shopping centre had an absolute restriction preventing the sale of pharmaceuticals, perfumes or personal grooming items this is much more likely to be considered an infringement.

Furthermore, exclusivity arrangements which place restrictions on the landlord's ability to let other parts of the same centre or park to a competitor carry with them bigger risks.  These can take a number of forms.  Let's take the Boots example again (nothing personal I promise).  If in a lease to Boots the landlord covenanted that it would not grant any leases within the same centre to other chemists and/or would include in all other leases of the centre a restriction on the sale of pharmaceuticals, perfumes or personal grooming items then there is a real possibility of an infringement of competition law.  The reasoning is that if no one else can sell these items in the centre this will result in reduced choose, potential for higher prices and worse service; there is no competition to encourage best practice.

Whether or not such provisions do in fact infringe competition law is not a black and white call.  This will depend on a number of things including:

• the geographical area (market) affected - for example a shopping centre such as Bluewater or the Trafford Centre may well be considered differently to the shopping arcade at Bond Street Station
• the market power of the parties concerned - for example Boots as opposed to a 5 shop franchise

There are also exemptions which may be able to be relied upon which are relevant for the shopping centre/retail park scenario.  These are applied on a case-by-case basis if the criteria is met rather than being blanket exemptions for certain types of agreement.  For example, exclusivity being granted to an anchor tenant could be justified since without the anchor tenant the proposed centre/park would not be economically viable.  Of course, this does not give a blanket exemption and the specific provisions relating to the exclusivity being granted need to be carefully considered in context to ensure that they do not go further than necessary to achieve the desired results.

In summary, the removal of the exemption from land agreements of the effects of competition law have wide ranging implications for land owners.  Shopping centre and retail park owners should carefully review and consider their agreements and developers need to consider how to operate within the rules when setting up new developments.  The good news is that "good estate management" can continue but the ability to restrict uses for the benefit of certain occupiers or the landlord is severely restricted and has become another legal tightrope for landlords to walk if they are to avoid expensive and image-damaging litigation and negative publicity.

Suits you, sir: The art of bespoke drafting

Almost a month ago I wrote a blog entitled "Transactional Law: a bit like being a London cabbie".  Recently I have been involved in a transaction where I felt like a cabbie with a passenger constantly changing its mind as to where he wanted to get to.  This was an unusal transaction requiring some pretty bespoke drafting which in turn got me thinking about how one should approach drafting for bespoke transactions.  Here's what I came up with:
1.  Be clear on your purpose
Drafting anything, even if it is just one clause in an agreement, is no different to preparing a piece of coursework.  If you simply start drafting you will land up in a mess.  You need to set out what the clause is intended to achieve and also consider any interrelationships with other clauses.
2.  Use decision trees
When trying to draft a more complicated arrangement that requires notices, approvals and inter-connected decisions it is often beneficial to create a decision tree which maps out the process clearly.  This serves two purposes.  First, you can show this to your client before drafting anything to ensure that you and they are on the same page.  Secondly, your drafting will be a lot simpler.
3.  Keep it simple
By this I do not necessarily mean keep it short.  Sometimes draftsmen try to be to clever and express in one sentence too much.  Rather do it in steps.  Think like a mathematician in a logical manner.  Each sentence of drafting should contain only one concept, obligation, effect, etc.
4.  Do not draft for every possible outcome
This is the road to madness and also more likely to result in something being missed.  Lawyers are not omnipotent (despite what some might claim) and cannot predict the future.  Sometimes more general language is safer than being specific as the use of the specific can lead to the exclusion of the general.
5.  The importance of the "cold towel".
Probably the most important aspect is when you have finished the document put it away for 24 hours.  Then re-read it but with the following thought in mind - if I know nothing about this deal can I understand the agreement, the obligations on the parties, the processes involved, etc.  This is not about trying to spot another area for further expansion or loophole to be closed nor about spotting errors (although this is pretty important too)!  Rather it is about whether or not the document is an accurate map of the journey the parties intend on taking.  Remember, the parties will only look at the map when they are lost and cannot agree what direction to go.  If the map is unclear what use is it.

No doubt some will argue with my views whilst others will suggest I have missed something else fundamental.  Their comments and views are more than welcome.

Transactional law: A bit like being a London cabbie

This blog was encouraged/requested by LegalEagleMHM and is being co-hosted on her fantastic blog : Diary of a Diploma in Legal Practice student which contains many thought-provoking and inciteful blogs and the latest of which on "What makes a 'great' lawyer and do clients want 'greatness' or savings?" clearly shows someone thinking about the actual facts of the job.

Every six months we have a new intake of trainees.  These trainees were generally signed up at least 2 years' previously either in the September of their final year in University or immediately prior to their embarking on the CPE (commonly known as the Law Conversion).  Every six months I find myself asking the same question:

"What do I expect from the new intake?"

You might think I am pretty daft constantly considering the same question but in reality I believe it actually reflects the constantly changing nature of the role lawyers perform.  The graph shows two important attributes that are required from lawyers today - legal knowledge and commercial acumen.  Most law students probably believe (and I admit I am guessing to a certain extent) that legal knowledge is fundamental and that commercial acumen is a distant second.  However, this is very wrong and here is why.

I am a transactional real estate lawyer.  My clients do not care about the law they merely care not to fall foul of it, or if they do, to reduce the negative effects.  My clients come to me with a vision, a transaction they wish to transact, and I am a facilitator seeking to turn their vision into reality.  What matters to my client is getting the deal done.  In order to be able to service them I must understand their commercial drivers, what it is they are trying to achieve.  Without that understanding I cannot possibly enable them to achieve their vision.  With that understanding I am more than merely a facilitator, I am someone who can help develop the vision and improve on it.

So does that mean that legal knowledge is not important?  Absolutely not.  I must know the potential pitfalls that could destroy my client's vision but not so that I can then tell him all the issues but rather so that I can manage the transaction so that the vision is realised whilst avoiding the issues.  Like the London cabbie - I tell him the destination and expect him to get me there in the swiftest, safest and cheapest way.  Sometimes I might ask why he went a certain way but I do not want to hear from him a running commentary on why he did not go a different way.

Back to my fresh intake of trainees joining next week; which is more important - commerciality vs. legal knowledge.  Well, when I started as a trainee in the 20th century(!) my first seat was with a senior property partner at Berwin Leighton called David Rhodes.  On my first day David turned to me and said:

"Barry, you undoubtedly know more law than I do, but I know how to use it better"

This thought has remained with me throughout my career.  Obviously David did know more law than me but that was not relevant.  It is not knowing the law that is important but rather knowing how to use it. 

I expect trainees to know the law in detail and, more importantly, how to be able to research and find out the law.  I do not expect trainees to know instantly when the specific legal point can be disregarded as it does not affect the client's vision.  In fact, I would be very concerned if trainees and junior associates were not considering the full legal picture before telling me what they propose to advise the client.  But that is where the commercial acumen comes in.  I do expect my trainees to show they understand what the client's vision is and how it is our role to deliver that vision whilst negotiating the legal minefield.  They show this by telling me what advice they would give the client after going through the issues.  Clients do not want academic papers; they want actionable advice.  Only commercial awareness allows you to give actionable advice.

So which is more important.  Both and a lawyer missing one or the other will eventually fail.  A lawyer with a lack in the legal knowledge department will lose clients due to negligence.  A lawyer with a lack in the commercial awareness department will lose clients due to failure to deliver the client's vision swiftly, efficiently and safely; a bit like a bad cabbie.

JJB proposed CVA: Will it succeed?

A colleague has just sent to me a copy of the announcement by JJB regarding its proposed CVAs.  Only a month ago I wrote a blog regarding the possibility of HMV proposing a CVA which contained some advice for Landlords.  Thus far it has not happened and, I have been told that my expectations may have been too high since HMV remains profitable despite its troublesome retail sites.
However, from the sidelines JJB is now proposing a CVA the mainstay of which appears to be an attempt to get rid of underperforming sites.  The announcement states the following:

"The key objectives of the CVA proposal will be to:

• enable the closure over the next 12 months of up to 45 stores which are underperforming (the "Category 1 Stores");
• enable a review to be carried out in relation to the remaining stores, with an option to close over the next 24 months up to a further 50 stores which are also underperforming (the"Category 2 Stores");
• enable the Company to continue to pay rates on closed stores in the period up to the first break date under each lease;
• vary the terms of the leases of the Category 1 Stores and Category 2 Stores such that rent will be payable on a monthly, rather than a quarterly, basis;
• reduce the amount of rent payable in respect of stores which will be closed in due course for a period of up to 12 months for the Category 1 Stores and a period of up to 24 months for the Category 2 Stores (if the stores are closed after the end of the relevant period, no further rent will be payable);
• enable landlords of the stores for closure to require the Company to vacate and determine or assign the lease of the relevant property upon at least 30 days notice; and
• vary the terms of the continuing leases such that rent will be payable on a monthly, rather than a quarterly, basis for a period of 24 months."

In November 2009, following the first successful CVA by JJB I blogged on "Tenant CVAs - what makes them successful?".  In this blog I identified a number of common themes which ran through the successful CVAs.  Let's look at those in the context of the JJB announcement:

1. No additional store closures over and above those that had already closed (i.e. landlords knew if their site was closed) - the new JJB proposal leaves 95 stores at threat of closure.  The landlords of those stores may or may not be identified at the outset creating significant uncertainty.  New JJB Proposal fails the test
2. No rent reductions on stores remaining open although movement to monthly rent payments - the new proposal is that rents will be reduced on Category 1 and Category 2 Stores and that on these stores rent will be payable monthly.  On the remaining 150 stores the rent will remain the same.  Double whammy for landlords of Cat 1 and Cat 2 stores.  New JJB Proposal largely fails the test
3. On closed stores the tenant would continue to pay the rates (landlords were protected from this oppressive liability) - this appears to be the proposal on the JJB CVA.  Test passed
4. A pot of money (normally equal to 6 months' rent) was distributed between the landlords of closed stores as compensation - there is nothing in the announcement suggesting such a pot and the implication is there will be none.  Test failed

Therefore, based on my previous views as to what makes a Tenant CVA proposal acceptable to Landlords it is doubtful that the JJB proposal passes the test.

So what should you do if you are a Landlord who has a property let to JJB?  Well, all I can do is re-iterate what I said in my blog on the possibility of an HMV CVA:

• first and foremost do not go it alone - unless you are a significant creditor your ability to block or seek changes in the proposals will be fruitless unless others share your views. Therefore find out who the other landlords are and talk to them
• take legal advice - CVAs amount to binding contracts on both the company and the creditors. Some proposals can mean that the CVA is liable to challenge for "unfair prejudice" but the law is complex
• take valuation advice - especially if your property is one which JJB seeks to dispose of as you need to understand what this would mean in terms of reletting
• act quickly - waiting until the week before the meeting to read the proposals and ask a lawyer to advise you on what it means for you is a case of too little too late. My advice to all of JJB's landlords is to take action now so that you are well prepared in the event a CVA is proposed
• beware breach of your loan covenants - if you have borrowed against the property then any action you take is likely to require the endorsement of your bank.  Also, agreeing reductions in rent could put you in breach of interest cover tests so you will need to check your loan documentation too

Of course the formal CVA proposal has not yet been published so the final form may differ from the outline proposals.  If you are a Landlord who is affected then please feel free to contact me.

Legal Process Outsourcing: A crime against . . . ?

The news that Herbert Smith and Allen & Overy have opened offices in Belfast followed by further news that Addleshaw Goddard is opening a depot in Manchester to do due diligence and less complex legal tasks has resulted in a tumult of comments across the twitter- and blog- sphere.  Everyone is entitled to their opinion on this subject but I take issue with those whose opinion is that the only reason that these law firms (or indeed any law firm) undertakes a form of outsourcing is to cut costs and line the partners' pockets as if that was a heinous crime.  All businesses must manage their cost bases in a sensible way in order to remain competitive.

Let's be a bit more analytical about this. The UK does not lack law firms and, whilst this might surprise some, competition between firms is pretty fierce.  Whilst repeatedly in surveys of buyers of legal services pricing is not at the top of the list of reasons for choosing a law firm personal experience tells me that in reality price is often the factor (it's just that price knocks you out before the race can even start!). Therefore firms must be competitive and that means cutting costs so that fees can be maintained at a level the market will bear.
 

Because it is a market, lawyers will charge what they believe their services are worth. Where a law firm has a recognised niche it is normal market forces which allow them to charge more. This is no different to Apple setting the price of its iPad - set it too high and only the die-hards will buy it.  Therefore, the so-called Magic Circle can charge more for services which the market perceives only they can provide.  Proving that the perception is wrong is a completely different point but simply charging less is unlikely to win over those clients.

The second point is that law firms are not only competing against each other for work but also to hire and retain talent. A firm which fails to maintain its PEP is going to start losing its higher billing partners and seem less attractive to associates and even prospective trainees. Again this is no different to any other business seeking to attract the highest quality staff.  The argument regarding banks and bonuses is not a million miles away.

Therefore to attack Legal Process Outsourcing on the basis that the sole purpose is to line the pockets of partners with no benefits to clients shows a complete lack of understanding of the competitive legal market of today. Part of the end result and indeed the aim may be to increase profitability but to achieve this a firm has to remain attractive to its clients and be competitive.

There are issues with LPO as a concept especially in terms of quality of the product being provided and potential negative effects on training. In terms of quality the main concern is how do you ensure that the output is good enough.  This is a serious reputational issue but I find it hard to believe that the likes of A&O have just said "Who gives a damn about quality just show me the money".  Reputation is everything.

The training issue is more difficult.  Addleshaw's PR blurb highlighted that their new project would mean "No more drudge work for associates".  This was followed quickly by a remark that whilst associates do need to undertake due diligence exercises to understand the processes they do not need to do 500 of them.  The problem is that once you have a system in place which means associates do not need to do any of them you automatically go from 500 to zero with the result that associates have no experience.  This would seem to suggest that there must be a level of sacrificing associate experience to cut costs.  Full experience of the process and work is a necessary step to managing the process.

In my area, Real Estate, this is a real issue.  A significant proportion of Real Estate work could be considered relatively straight forward - basic leases, licences to assign, licences for alterations and even simple sale and purchases of pieces of land.  Pricing competition in these areas is intense and it is difficult to compete against regional firms on price.  The obvious answer would be for us to open a regional office and send all the low value work to that office.  However, unless we forced every trainee and associate to spend a proportion of time in that office (thus losing a major cost save in terms of lower salaries in the regions) our office in London would be populated with Real Estate lawyers who do not have proper hands-on experience of the nuts and bolts of the assets they are dealing with.  That would be failing our associates and failing our clients and putting at risk our status as the go to firm for Real Estate.  Whilst it might be possible to reach a happy medium by sending out some of this work and retaining some the temptation will always be there to send it all out to improve the bottom line.

In summary:

• Competition amongst law firms has never been greater
• All firms are looking to create competitive advantage and LPOs are just one way of creating that advantage
• Successfully creating such an advantage over competitors should result in increased profitability afterall that is the primary function of any business (as opposed to a charity).

Whether the short term gains offset the long term risks remains to be seen but criticising it simply because it might mean some law firms become more profitable as a result is like criticising Tesco for driving down prices and becoming more profitable at the same time. 

The client-lawyer relationship - can we fix it?

This blog really continues a debate that was started by @legalbizzle and @legalbrat a few weeks ago.  There are a number of postings relevant which you might consider pre-course material including:

• What lawyers can learn from call centres by Legal Bizzle
• It's not about the biscuits by Legal Bizzle
• It's client care but not as we know it by Legal Brat

In truth this is not a new debate, in fact it is not really a debate.  It is obvious that relationships can only exist between individuals and not between corporate entities - a relationship is not a contractual bond it is an emotional bond and entities do not have emotions.  A CEO or Group Counsel might say "We use BLP for our Real Estate work" and it might be true that Berwin Leighton Paisner have been appointed but the reason for that appointment will be due to that same CEO/Group Counsel having a relationship with individuals at BLP.  As a firm we cannot take the relationship for granted and as with any relationship it must be constantly worked on.

I have often pondered why it is that people can be in a relationship for years and even living together but then get divorced relatively quickly after getting married.  I believe the answer is obvious - prior to getting married both parties worked at the relationship to maintain it.  Both realised that in order for the relationship to be sustained it required effort and sacrifice on both sides.  However, once the couple are married they fall into the trap of thinking that the marriage certificate is proof of their commitment and no more effort to maintain the relationship is required.  However, the opposite is clearly true, the marriage is simply a new phase to the relationship and the parties must still go to great effort and make the same sacrifices if the marriage and thus the relationship is to survive.

Leaving the sphere of marriage counselling and returning to client-lawyer relationships, it is clear both from the articles above and personal experience that the same is true.  During the courting phase lawyers will spend a large amount of time talking to and supposedly getting to know the prospective client.  Then once the appointment has been made many lawyers will simply stop with the "idle chatter" and only talk business.  It should hardly be surprising that the client, in such circumstances, wakes up in the morning and views his lawyer in a negative way.  His lawyer is not interested in helping him achieve his goals.  His lawyer's sole motivation is acquiring instructions for the purpose of making money.

So if it is so obvious why are so many lawyers bad at it?

The answer to this is not so clear but I believe it may lie partially in the traits of the average lawyer and partially in the billable hours tradition that has built up.

In terms of the billable hours tradition I think that this is something which has been mentioned before.  From a young age it is impressed upon the junior lawyer the importance of the billable hour.  That is how firms have traditionally made money.  Your associate's salary is a fixed annual sum but the more billable hours you can get out of them the more profit you will make.  The problem is that in the associates' minds this translates into anything which is not billable as being evil.  Accordingly, said associates do not want to "waste" their time in "idle chit chat" with clients when they could be billing another client.  By the time the associate has reached a more senior level the habit is embedded and breaking that habit is significantly harder and requires effort.

Therefore, this part of the problem is systematic and within the power of the profession to address by better recognition of the non-billable hour at the most junior level.  Certainly at BLP we actively encourage our junior associates to engage on a social basis with clients.  But we have not solved the problem because, at the end of the day, there continues to be the pressure to record time, leaving associates making bad cost-benefit analysis decisions and probably not investing sufficient time in building the relationship.  But it is a start which will hopefully better equip our associates as they move towards partnership or into in-house roles.

The traits issue is less tangible but I want to throw it out there as a thought for discussion.  I just wonder whether law attracts a certain type of individual who is not as comfortable with developing personal relationships with multiple contacts.  As with everything there are exceptions to the rule and these exceptions are found in the rainmakers.  Whilst some of what these rainmakers are good at can be learnt, their success is due in a large part to their personal character traits.  Whilst we might be able to provide training and alter some bad habits fundamentally it is unlikely we can ever change (nor do I believe we would want to) a person's character to such a large degree.  If that is correct then there may be an argument that whilst small improvements will be made in client-lawyer relationships, fundamentally if you expect all the lawyers to suddenly become the best relationship people around it just ain't going to happen. 

What category do I fall into?  I suggest you ask my clients.

I didn't do it so I am not helping tidy up

The usual line from my 5 year old when we ask him to help his 3 year old brother tidy up the toys which his 3 year old brother has tipped all over the floor is "I didn't do it so I am not helping tidy up".  If only life was so simple.

I have my suspicions that I will come in for a certain amount of criticism for some of the things I write in this latest instalment.  However, I am man enough to take it (bullet proof vest and bodyguard now in place) so what the hell.

This morning I woke up to Radio 4 and then Radio 5 (two alarms because I am rubbish at getting up and my wife gets up 15 minutes after I do and hates Radio 4).  Radio 5 started talking about how the Unions are having a big meeting to discuss potential collective action (aka General Strike) to stand up the Government and oppose the huge cuts being imposed across the economy and resulting in, as they called it, "attack on our public services".

One of the people Radio 5 spoke to was a businessman whose argument was that whilst it is true that the bankers bore most of the responsibility for the financial crisis that we are in, everyone has to shoulder the burden of getting us out of it.  He went on to say that bankers have paid a price (I believe he meant financially as well as in terms of increased regulation), that the private sector generally which is no less blameless than the public sector has swallowed an incredibly bitter pill in cuts, real time wage cuts, job cuts, profitability cuts and therefore the public sector has got to swallow its pill too.

Mr. Private Businessman, I salute you.  In truth I salute you because of a specific point that many have failed to pick up on.  The current mess we are in will not be solved by playing the blame game.  The UK is in dire straits.  It is in dire straits for lots of reasons.  Labour would have us believe that it is in dire straits solely because of reckless activities by the banks and global events.  Of course they would, after all, the downturn happened on their watch.  The Tories are just as happy to bash the bankers.

Personally I expect more from my Government.  When I make a mistake (never happens of course but when it does) I do not seek to place the blame on external events.  Instead I turn around and say, the mistake has been made for which I am obviously sorry.  That cannot be undone.  But what matters now is taking the right action together to rectify the mistake.  If I am prepared to take credit when things go well due to my actions I must also take responsibility when my actions result in things going not so well.

But more than that.  When I am acting for a client and the client makes a bad decision even if that decision was made against the best of my advice I do not turn round and say, it's not my fault and therefore I am not gonig to help you out.  On the contrary, I say to the client, this is the position let's see what WE can do to sort it out.  My success is linked to my client's success.  If my client's deals constantly go stale it does not bode well for me.

Unfortunately, more and more, both in business and in politics all we see is the blame culture.  All anyone is interested in doing is passing the buck.  We are more than happy to claim the credit when things go well but the minute it does not go according to plan we just point the finger at someone else and look to walk away.  Gordon Brown was more than happy to claim the credit for the boom times but the minute the bubble burst it was not his fault but due to "global events".  He was right, the bust was due to global events but so was the boom.

So, we are all in it together and must all shoulder the pain.  Except for one thing, and here is the real kicker, the painful part, the part which everyone hates.  We are not all in it together.  Because there is a certain group of people who have the ability to rise above it all and walk away leaving the rest of us behind; that is the very rich and beyond.  Herein lies the problem.  We live in a global economy where the richest among us have the ability to literally pick themselves up and move to another place at their leisure.  What this means is that it is impossible to get them to pay their "fair share" all we can do is get them to pay the share they are prepared to bear.  There is nothing we can do about this so forget about it.  Life sucks at times.

However, for the rest of us, including working, middle and even some in the upper class who may not be quite as upper class as they like to think, we genuinely are in this together.  I do not believe that the current Government wishes to destroy public services.  They are making difficult choices and will be certainly getting some of them wrong.  But it will help no one if every individual simply points the finger and says it was not my fault and so I should not pay. 

We may not have made the million plus holes in the dam but if we don't all stick our fingers in the holes we will all drown in the flood. . . except for the rich who can afford the helicopters to escape it.

It's Tuesday: I'm a lawyer, get me outta here!

This blog was initiated by the article appearing in The Lawyer on-line today entitled: Lawyers can't handle Tuesdays, survey reveals.  The "research" in question was commissioned by Michael Page International and its results are summed up by their marketing director Eamon Collins as follows:

"This research has told us that 10am on a Tuesday is the most stressful time of the working week, and it isn't a coincidence that this is also when traffic to our website peaks."

Gimme a break.  The article does not mention who carried out the research or how but it is likely to be as scientific as the intendance research ranking law firms by Twitter use which gave rise to huge debate  Let's accept that the research could actually come to the conclusion that 10am on a Tuesday is the most stressful time of the working week.  Does Michael Page really expect us to believe that the first thing a stressed out lawyer does is say:

"F*&k this, I am out of here.  Let's see what Michael Page has on offer this week".

What a pile of dog poo (sorry still can't bring myself to swear on-line).

What's worse is that this kind of marketing dressed up as serious research does immense damage by belittling what is a very real issue in law firms today (and I suspect in the in-house world too).  Lawyers are under incredible stress for all different reasons.  All this article does is make a mockery of the issue by giving Michael Page cheap advertising space.

So here is an attempt at a more helpful review of stress in the legal world today; its causes and perhaps a stress reliever or two for all you stressed out lawyers out there.

So here are some causes I have noted in my long and illustrious career to date :

1. Technology - yes we all thought that technology would make our lives easier but the incessant stream of information, e-mails, red-lines, twitter, IMs, iPhones, internet browsing actually add up to an impossible mix that our brains do not have the time to digest.  Top of my list is e-mail.  In the old days lawyers and clients communicated by letter (or fax if really urgent).  It was recognised that it took time for letters to arrive and letters to be sent as well as time for documents to be typed.  However, the advent of immediate correspondence has led everyone to believe that if a question is asked by e-mail at the push of a button then the answer should come back at the push of a button.  We might use computers to communicate but the answers still come from a human being who may need to analyse, annotate, review and meditate before responding.
2. Lack of support/supervision - this means poor management by us, partners and senior associates of those we instruct further down the seniority chain.  It is right that associates should not need constant hand holding.  On the other hand giving over the instructions is only half the job.  Junior fee earners (and senior ones) need to be provided with proper supervision and support if they are to fulfil their potential.  They need to be pushed but not off the top of a skyscraper!
3. Poor client management - how easy it is to complain regarding unreasonable client demands but is that really the client's fault?  The client is buying a service.  Whilst it would be nice to think that when asked the question "when do you want it for" the client will respond with an answer relating to when he needs it, that was not the question asked.  Perhaps the question we should be asking the client is "how does this piece of work fit in with your deliverables at so that I can ensure that we can revert in a timescale that enables you to meet your deadlines?"
4. Poor working habits - also known as "rabbit in the headlights" syndrome.  This is the person who faced with a number of different tasks keeps on jumping from one to the next without actually finishing any of them and at the end of the day feels they have accomplished nothing (which is actually true).

And now for some self-help remedies (one for each issue):

1. Just because you get an e-mail does not mean you need to respond to it immediately.  Turn off that annoying "ding" and the pop-up window.  Clients know that you are not necessarily at your desk and that sometimes you need to think about things.  If something really is urgent they will pick up the phone and call you so if it rings you better answer it.  If it is not urgent ask the client if you can call them back.  Tell them you are just in the middle of something and want to be able to give them your full attention which will be easier once you have finished what you are doing.  Make sure you say when that will be.
2. If you feel unsupervised then say something.  Don't send an e-mail to someone asking them to look at a document.  Get off your backside, print it out and take it in.  9 times out of 10 the person you go to see will be happy to help and you will learn far more.  Contrary to popular belief partners do not eat their young (I believe that's even true in the "eat what you kill" firms).
3. Manage your client's expectations - well this just goes back to the whole client care debate.  When you get a new instruction how about you pick up the phone to the client and talk it through with them.  Understand what their drivers are; what internal pressures they are under.  Even if this does not change the timetable you will develop a much better relationship with the client and the better the relationship the better the chance of sensible timetables being issued in the first place.
4. Sorry but all I can say to this is "Get a grip".  You simply need to force yourself to complete one task at a time.  Look at what you have to do and ask which is the most Urgent and Important.  That is what you do first and you finish it before you look at your e-mails or any other task.  If two tasks rank equally then just pick one; just go with your gut.

Well that's it for the tips.  One last word on stress.  The fact is that doing what we do for the people we do it for stress is a fact of the job.  You can take positive steps to avoid it but there will always be times when you are under stress.  But at the end of the day it is only a job.  Don't let it ruin your life.

The client care debate - an out houser's view.

Let's get one thing straight.  This is meant to be controversial, it is meant to stimulate debate.

There have been a number of excellent posts in the last couple of weeks by stalwarts of the in-house blogging circuit on the provision of legal services by law firms and lawyers.  Specific examples include:

• "It's client care but not as we know it" by @legalbrat
• "Crossing a (red)line" and "It's not about the biscuits" by @legalbizzle

These blogs are excellent and provide a singularly valuable resource to the out house lawyer who wants to gain a better understanding of how in-house lawyers (and by extension) clients view their legal advisors as well as the do's and don'ts likely to result in praise or a swift disinstruction.  My message to them and all in-house lawyers who blog on these subjects is "keep it up".

Clearly one of the purposes of the above blogs is to encourage debate with the providers of legal services, Big Firm LLP.  And yet, for example, @legalbrat is failing miserably to get any response from any out house blogger to his challenge despite it being featured in @legal_week (see here).

In fact, out house blogs generally fall into the following categories:

• recent legal developments/statutes (yawn!)
• anonymised (amusing) anecdotes of a day in our life (some of which are a joy to read - @magiccircleminx being one such example - but hardly are just there for enjoyment)
• random musings on some news with possibly a connection to the law (does anyone really care about my opinion on interest rates?)

However, what I have failed to find is a single blog by an out houser which considers the challenges facing private practice firms in their provision of legal services to the world and ways these challenges could be addressed.  Why is this?

A number of possible answers spring to mind:

• The "It's a wonderful world" answer - There are no challenges.  Life is just about perfect and we happily are able always to meet if not exceed our client's expectations; associates are completely satisfied and would work for free with no job expectations; our fees are always agreed because we unerringly get it right and our clients love us to bits and gleefully pay all bills because they see the value ooze out of every penny like a BOG10F would in a supermarket.
• The "We haven't a clue" answer - what do lawyers know about addressing the challenges?  Of course there are challenges but we went to law school not business school and so have not got a clue how these challenges should be addressed.  All we can do is employ expensive consultants to tell us the same thing they have told every other firm they have provided consultancy services to: cost-cut, outsource, commoditise, value-add; show the client you love them.
• The "We are afraid of corporate espionage" answer - Behind the scenes we are working very hard at changing the way we do business and work with our clients.  When we think we have discovered the secret then we will tell the world with a front page splash all over @thelawyer or @legal_week but until then we daren't breath a word because one of our competitors might latch on to the idea and steal it from us and of course they could not possibly be considering the same things we are.
• The "Bury our head in the sand" answer - we are aware of the challenges but hope that if we wait long enough either they will go away or we will retire before they are big enough to kill us. 
• The "Too scared to engage" answer - we have some ideas and would really like to engage with our clients to discuss them but we are afraid that in order for our clients to work with us on developing those ideas we would need to have a full and frank discussion regarding our feelings as well as theirs.  They might not like some of what we say and we can't afford to upset them.

In truth the answer is likely to be a bit of all of the above.  Many law firms are engaging with their clients on a one-to-one basis and in doing so are improving the level of client care and client satisfaction.  But even in these closed discussions one has to wonder how much is raised of what a law firm expects from its clients and focuses almost exclusively on how the law firm can improve the service it gives to the client.

Maybe I am naive but in my view the law firm-client relationship should be symbiotic as opposed to parasitic.  As such, would we (clients and firms) not be significantly better off if we could actually openly talk to each other about what we both like and dislike about each other; about what we each could do to make the other's life easier and more fulfilled.  I know that my firm's success is intrinsically linked to my clients' success but do my clients think that their success is in any way dependant on my firm's success?  I doubt it and yet I believe it is.  A successful firm, full of fulfilled lawyers who feel appreciated for the work that they do (and I do not mean in pure financial terms) will provide a much better service.

This kind of fulfilled relationship requires openness on both sides.  But how can we ever expect our clients to help us achieve such a level if we do not even tell them what we genuinely want from them.  How it would be nice to be thanked for working through the night and cancelling dinner with your wife.  How, having done the deal and invoicing at the agreed fee it would be nice if the bill was paid without any need to chase.  How, fundamentally we accept and appreciate that we are service providers who must always be at their best but that it would be nice if the service recipients recognised that this is not always easy.

At the moment it seems to me that all the input is from the in-house lawyer setting out what they want with no input from the out-house lawyer setting out his stall.  We tell the client what they want to hear and listen to what they have to say about the services we provide.  But do we ever tell them how they could change the way they work to help us?  So my challenge to my fellow out housers is let's engage with our clients in a more meaningful manner.  They do not have all the answers and we are not solely responsible for all that is ill with the client-lawyer relationship.  Do this and then maybe together we will reach new heights in the provision of legal services.

Then again, maybe not. . .

HMV appoint KPMG - CVA on the way?

In my post earlier this month on VAT increases and snow - the Perfect Storm I noted how HMV had plans to close 60 stores.  What I did not mention at the time were my suspicions as to how they might seek to achieve this - through the use of a company voluntary arrangement (CVA).  The unconfirmed news today that HMV have appointed KPMG as debt advisors increases the likelihood of this significantly; in my mind KPMG are the Kings of CVA.  From a restructuring point of view I hope that is viewed as a compliment (as if not I expect to be getting some irate calls from people I know there!).
KPMG were behind the successful CVAs for well know names including JJB Sports, Blacks Leisure and the Suits You shops.  Prior to these successes the general view was that CVAs were inappropriate for retail businesses but these successful CVAs changed all that.  See my blog on what makes a retail CVA acceptable back in 2009.

So why am I so convinced that HMV will attempt a CVA?  Well the facts are all lined up perfectly:

• a business model suffering from a serious squeeze on all sides
• an internet business which is probably being dragged down by the retail units
• a significant number of unprofitable retail sites which HMV needs to close

Why will a CVA work well?

• it will allow HMV to cut a deal with all the landlords on the sites it is closing without needing to agree individual deals
• a handful of difficult landlords (especially likely where some of the landlords are in effect individuals) can be forced to accept the terms of the CVA
• trade creditors and suppliers can be left effectively untouched ensuring they will support the proposals and the business which is crucial

What should I do if I am a landlord affected by a CVA proposal?

• first and foremost do not go it alone - unless you are a significant creditor your ability to block or seek changes in the proposals will be fruitless unless others share your views.  Therefore find out who the other landlords are and talk to them
• take legal advice - CVAs amount to binding contracts on both the company and the creditors.  Some proposals can mean that the CVA is liable to challenge for "unfair prejudice" but the law is complex
• take valuation advice - especially if your property is one which HMV seeks to dispose of as you need to understand what this would mean in terms of reletting
• act quickly - waiting until the week before the meeting to read the proposals and ask a lawyer to advise you on what it means for you is a case of too little too late.  My advice to all of HMV's landlords is to take action now so that you are well prepared in the event a CVA is proposed

Whether or not a CVA is proposed it will be fascinating to see how HMV deals with its current woes - will it rock or will it bomb? 

Lost in translation: The joys of international clients

I was talking to a friend who described to me a fascinating exchange he had had with a foreign client.  Below is a hypothectical (but based on real events) transcript of an exchange between a UK real estate lawyer and a South East Asian investor client looking at buying some pretty expensive real estate in London.

Client:  I need to understand the risks associated with tenants exiting the property?
Lawyer:  The lease is for a 20 year term and there are more than 17 years left to run so the issue does not really apply to this property.
Client:  I know the term has more than 17 years left but what if the tenant leaves early?
Lawyer:  If Leman taught us anything it is that no tenant is too big to fail but this tenant has a triple-A rating so it is very unlikely that it will fail in the short term.  The assignment provisions ensure that any new tenant would need to be at least A-rated.
Client:  But what if the Tenant just walks away?
Lawyer:  There are no break options in the lease so he cannot.
Client:  But what if he just does?
Lawyer:  It is a major listed plc, it would be easy to pursue it for the rent and liabilities.  It is very unlikely as there would be reputational damage to the tenant as well.
Client:  But what if he just tore up the lease?
Lawyer:  The tenant does not have any right to tear up the lease.
Client:  Yes he does, he has a right to walk away whenever he wants.
Lawyer:  There is no right in English law to walk away from a lease.
Client:  There is in South East Asian law.
Lawyer:  Okay, now I understand your concern.  You do not need to worry.  As this property is in England and there is no right under English law for a tenant to just walk away this is not a risk for you.
Client:  But in S.E.A. there is; how do we deal with this risk
Lawyer:  I'll get back to you.

Any suggestions for the poor lawyer how he should get his S.E.A. client comfortable that English law is relevant and that the risk he perceives to exist does not actually exist?

Why social animals will preserve the City of London

I heard on the news today that officially today (17 January) is the most depressed day of the year.  Post-Xmas debt is at its maximum; the weather is invariably dark and dreary; the newness of the presents has worn off and, frankly, there is just nothing to look forward to.

View from Paramount in Centre Point

This evening, as a bit of a pick-me-up on such a depressing day, I went with a few colleagues to the Paramount Club which is based on the top floors of Centre Point above Tottenham Court Road Station.  Before you think "how pretentious" this is not some private members' club and this was my first visit (but will not be my last).  The views of London are truly stunning (see rather poor BB photo) and, probably, unbeatable although once completed The Shard might give it a run for its money.

Looking down across the West End and to the City and Canary Wharf I considered the following issue:

As businesses constantly consider ways to drive down costs and as technological advances continue to increase the ease with which work can be carried out in any geographical location how can expensive areas such as the City of London and Canary Wharf expect to be around in, say, 50 years time?

The truth is that I do not know the answer but I can posit one possible reason to remain optimistic - human beings are social animals.  Nothing proves this more than the growth in the use of social media over the last 2 to 3 years.

It might be thought that it is that same growth in social media which threatens the very bricks and mortar I believe it is likely to save.  But this all depends on how you view the various social media platforms (e.g. Facebook, Twitter, LinkedIn).  Are they intended to replace physical proximity or to facilitate it?
From personal experience I believe that they cannot replace it.  They can replicate some of the closeness originally only available by talking to someone face to face or, since the invention of the telephone, at the other end of the line.  With improved video conferencing face-to-face will be possible without leaving your desk.

However, no matter how much they improve and become part of our lives they cannot replicate one important element - the shared experience that comes in being in the same place at the same time.
Being a social animal is not about simply talking to and communicating with others.  It is about sharing experiences with them.  If this were not the case why do banks have huge trading floors?  It cannot be just about the communication but rather the need for physical proximity.

This human requirement is something which resonates particularly within the client-adviser relationship.  The uninitiated might have thought that with all the forms of communication available today there is no reason why an adviser should ever physically meet a client.  Yet, I am confident that if you ask most (if not all) clients which of their advisers they "trust" the most it will be the ones who they meet up with every now and then.  The others might e-mail them; might link with them on LinkedIn or follow their tweets on Twitter but none of that is a replacement for sitting together at a table just chatting.

So for as long as human beings remain social animals the City and Canary Wharf will be well populated.

Real Estate investors and the VAT increase: a non event?

The great thing about value added tax (VAT) is that, unlike other taxes, for many involved in business the tax represents a cash flow issue as opposed to a hard cost.  The ability to offset input tax against output tax and recover your VAT means that for those providing B-2-B services the impact of the VAT rise on them and their customers is significantly more limited.
On the face of it the commercial real estate market should be similarly protected.  After all, once a property has been opted to tax the owner can charge VAT to its tenants and recover its VAT that it incurs from its suppliers.
But, as always with tax, the position is not quite so simple.
First of all it is not always possible to opt to tax and, in some cases, an option to tax can be disapplied.  Where this happens the owner of the property may not be able to recover its VAT costs relating to the building and where it has claimed it may be forced to pay the monies back to HMRC.
Secondly, there are certain classes of business that cannot recover VAT.  From the city perspective the one encountered most often is financial institutions.  This is a significant issue since for these class of tenants any VAT on the rent is a hard cost and not a mere cash flow issue.  Therefore before deciding whether to opt to tax a property (if the choice exists) it is important to consider what sort of tenant you are targeting.  In a mixed use scenario this can be quite complicated and you need to balance all the drivers before making a decision.
Another reason the VAT position will affect property is because stamp duty land tax is calculated on the VAT inclusive consideration.  So where a property is being acquired and it is not a transfer of a going concern (TOGC) SDLT will be calculated on the price plus VAT.  In that scenario the effect of the 2.5% increase in VAT is an additional SDLT liability.  In the lease context the effect is larger since you are considering the NPV of all future rental payments including the VAT element.  In both cases it does not matter that the buyer/tenant can recover the VAT.
So whilst the increase in the VAT rate on the face of it might not seem that important in the real estate context when you look at it in a bit more detail you realise that getting your VAT decisions right at the outset could have a significant effect on the financial performance of your real estate assets over the long term.

VAT Increases and Snow: The Perfect Storm

It appears that two elements in play in the last couple of months might help create an atmosphere which will result in an increase in the number of retail failures over the next year.  One of these is man made and the other a natural phenomenen.
What George Osbourne could not have contemplated at the time of the budget when he decided to increase VAT from 17.5% to 20% was that the UK was going to be hit with the worst winter for decades with much of the country practically shut down during what should have been the busiest shopping period.  Whilst the post-Christmas sales might have recouped some of the losses there is no doubting that retailers will have been hit extremely hard and the VAT increase coming immediately after this hit is likely to cause further difficulties - at Christmas people often over extend themselves but with Christmas now over people will be less likely to buy even if they did not over extend themselves.
For retailers this is very much a double blow.  It would be wrong to say that the VAT rise will stop people spending but it will limit how much they can buy and/or affect how much of the money spent goes to the retailers' bottom lines.
So, what does this mean?
Unfortunately this must increase the risk of retailers considering or being forced into restructurings.  There is already news of HMV closing 60 stores; Clinton Cards and Mothercare have issued negative profit statements with more retailers still to report.
Historically business failures tend to peak after a recession rather than during it as businesses that have used up their reserves just to survive do not return to health quickly enough to replenish those reserves in time.  The snow and VAT rise may have created the perfect storm to ensure that history repeats itself in 2011.