The great fixed fee debate - the lawyer's argument

It has been quite a while since I last blogged and even longer since I blogged about a potentially controversial subject so why not kill two birds with one stone.  2013 has been a year of two halves for the legal profession.  The first half of the year firms had it rough and indeed some did not make it through the whole year as a result.  The second half was much more positive overall – deal volumes were up especially in the real estate market in which I largely operate.  Lending has returned partially from banks but also from alternative sources. However regardless of how much improved things are or indeed how much more they might improve there is one thing that is not going to change – the demands for greater price certainty from clients.

First I would like to dispel some myths that many of those not in private practice seem to believe – lawyers do not love hourly rates; most transactional lawyers I know hate the billable hour.  It is seen as a noose around the neck.  We know clients hate it; believing that it encourages us to be inefficient since the more time we spend on something the more we bill.  However, I have never spent more time on a matter than I believed necessary to achieve the result the client required.  Frankly, I rarely have the spare time to time dump.  Even if I did I recognise that there are more valuable things to be doing than being inefficient.

Therefore I welcome the end of the billable hour – it creates a barrier between client and professional; it creates distrust and an assumption that there is padding in any quote given.  But my welcome comes at a price – I am happy to take on more risk in terms of pricing; I am happy to give my clients price certainty.  But I am also a businessman.  I hate to break it to my clients but I am in business to make a profit.  That really should not come as a surprise to many, if any, of my clients since they are all in business for the same reason.  That being said sometimes it feels like clients do not recognise that ultimately law firms exist to make profit.  We do it by providing a service but if the provision of that service is no longer profitable then the ability to provide it disappears.

So what does this all mean in the context of the end of the billable hour and the demands for greater price certainty?  Well here are, what you might call, my wish list of requests to clients when it comes to agreeing price certainty on a deal.

1. Fixed not capped
2. Price the deal
3. Timing is relevant
4. If you want extras pay for them
5. Cash flow quid pro quo

1.  Fixed not capped

When you ask me for certainty don’t ask for a capped fee.  That is akin to having your cake and eating it.  A capped fee seeks to keep the hourly rate open for your benefit but shut for mine.  It is not risk sharing but rather placing all the risk on the law firm for no upside benefit.  At the end of the day agree a price that you are happy with for the transaction.  If your numbers work at that price don’t look to eat away at the potential benefit to me by effectively denying my ability to use efficiencies where I can so that I can try and increase my margin.  It is important to recognise that time specifically spent on a deal may not be reflective of the cost especially where there are efficiencies that I have introduced.  There is an R&D cost to those efficiencies.  If you truly want lawyers to become more efficient and invest in developing processes then the carrot approach will work far better than the stick.

2.  The fee is for that deal

In order to price things we need to know the scope and then once the scope is agreed don’t expect work outside of the scope for free.  Now I admit that law firms can often be their own worst enemies on this front.  There is the tendency to quote on the basis of assumptions or scope that do not really reflect the likely work involved (e.g. when quoting for a property acquisition assuming there will be one turn only of the sale agreement).  We need to be more honest and use our experience to quote properly for the deal; that is a legitimate expectation of our clients.

Further lawyers are always reticent to raise the fact that something is out of scope and the additional charge for doing it.  Part of the reason for this is the response that is often given when this point is raised – the lawyer is made to feel guilty for seeking an additional fee.  But why should they?  If they have scoped the work honestly and legitimately at the outset and something unusual arises resulting in a whole different work stream why should the lawyer not be able to agree a fee for that new work stream?  If I specifically exclude tax from my fixed fee and then the client seeks tax advice because it thinks there might be a VAT angle it is legitimate that as a firm we can agree an additional fee for that advice – it can still be a fixed fee.

Using a non-law example, I ask a stationer to provide me with headed notepaper for which he provides a quote; then I ask him to provide envelopes in addition I would expect him to charge me more.  No one would argue with this because people physically feel the extra envelopes.  The problem is in the legal context clients don’t necessarily see the ‘benefit’ as they picture the legal advice as a single unit.  Fixed price quotes demand the clients change their perceptions as well as the lawyers changing ours.

3.  Timing is relevant

Just because a client is not paying on the basis of hourly rates does not mean that the length of time a deal actually takes is no longer relevant to the quote given.  The longer a deal lasts the more resource it is likely to use up or require to be kept available.  Therefore it is legitimate to quote a price based on the assumption that the deal completes by a given date.  Again the date should be realistic and assume some slippage from the timings given in any agreed heads.  Further the lawyer should seek to agree a fixed fee for each time extension there is not hourly rates for any such extension.  There can be caveats to this such that, for example, a ‘down tools’ period only qualifies for a percentage of the ‘extension fee’.  This needs to form part of the pricing at the outset.

Often time extensions may be associated with or run in parallel with changes in scope.  No one is suggesting you can charge twice for the same thing but the pricing needs to reflect both the resource required and the length of time for which it is required. 

4.  If you want extras pay for them

Clients want pricing certainty and, more often than not, they want the cheapest quote.  To achieve this I need to be able to work in the most efficient manner possible.  Therefore, nothing destroys the pricing relationship more than when a client demands a cheap quote and then insists on the matter being ‘partner-led’.  Partners are more expensive because of seniority.  If you want a ‘partner-led’ transaction you have to be prepared to pay for it.  Again not on an hourly rate basis but rather on a higher fixed price basis.  Clients are entitled to expect their work to be done properly by those qualified to do the job; senior input may be necessary but how much may be a matter of choice rather than need.  If you want the cheapest price this has to come at a cost – you will get less experienced people doing the work.

If you book and pay for a Superior Room at The Dorchester you don’t turn up and demand the Presidential Suite.

5.  Paying the bills

My final point is probably the most important but also likely to be the most controversial.  If clients agree a fixed fee then they should be prepared to pay that fee on, say, a monthly basis during the transaction not merely at completion.  There can still be balloon payments at milestones or at the end of the transaction to avoid a perception of a lack of impetus to get the deal done.  Fundamentally a law firm’s biggest risk is its ability to manage its cash flow (in recent history this has been the biggest cause of law firm failures).  In a transactional department the time taken from matter inception to completion to billing and then payment can be significant.  Law firms need to be able to reduce this time period. 

Even on a transaction that takes two months from inception to completion (about the average expected for a real estate acquisition) then assuming another month for payment of the bill a firm is looking at a minimum of three months before earning a penny for its work carried out three month’s previously; bearing in mind much of the work is front loaded that is a long wait.  In that time it has had to pay all of its overheads.  In the days of hourly billing this was largely accepted as part of the quid pro quo for charging per hour. No pain no gain.  But if law firms are, rightly, to move to fixed fees it is legitimate for them to expect to be able to smooth out the cash flows.  Whilst law firms can be expected to take on the pricing risk they should not also be required effectively to finance their clients’ transactions by being unable to expect payment of anything until completion.  That’s a double-whammy.


So hopefully you have made it through my thoughts on the brave new world lawyers and clients are now entering in the billing arena.  I welcome the need for greater certainty on fees.  I believe it is in both clients’ and lawyers’ best interests.  But if clients truly want to see the end of hourly rates and lawyers to embrace the idea of pricing certainty they need to come to terms with what lawyers need in return.  I do not think that I am asking too much.  I am just a businessman seeking to have an honest and open discussion in the hope that together we can build a new future in the provision of legal services.  As such I would welcome and actively encourage others to express their views.  I openly admit my bias on this subject but do not feel I have been dishonest in my approach; if you disagree then please let me know and why.

Sweet Dreams for trade creditors but nightmares for Landlords

The news (Private equity firm pays Dreams' creditors) that Sun European has paid 75p in the £1 to trade creditors of Dreams, which it acquired from the hands of administrators in March is great news for those creditors.  But unfortunately the story for landlords is not so good - no such pay out for them. 

The commercial logic is obvious - in order to continue trading Dreams needs its suppliers to continue to supply.  Whilst there was no legal basis for those debts owed by old Dreams to be paid by new Dreams the ability of those suppliers simply to stop supplying puts them in a strong negotiating position and in this case they have achieved a result which is not bad.  Landlords, on the other hand, don't generally have the ability to stop supplying in a way that can impact the whole of the business.  At best a landlord may have a few sites and thus be able to negotiate a position on lesser performing sites by leveraging the better sites.  But in most cases the negotiating position is pretty much a one way street. 

It is this unlevel playing field that means landlrods consistently feel they are getting a raw deal on administrations.  Unfortunately it is the very nature of Real Estate that creates this unlevel playing field.  I wish I had an easy solution which could level it out but I have to admit I struggle to see a path at this point.  So for now I predict whilst trade creditors may get some sweet dreams most landlords will continue to suffer nightmares!

Comet, explosive headlines and blame

There are a number of stories which caught my eye in respect of Comet going into administration.  They appeared in many papers and on-line.  I am linking to the Telegraph versions of two of them simply because there is no pay wall and they are easy to find (thanks to The Telegraph for being so helpful).  The stories are:

"Landlords hit out at Comet for failing to disclose finances"

and

"Comet gift vouchers suspended".

Of course the suspension of gift vouchers was turned into something completely more "offensive" by the telling of how Comet staff snubbed a buy suffering from cerebral palsy by refusing to accept a £500 gift voucher given by a charity to his mother to buy an Apple iPad for her son.  A stranger has now stepped in to buy the iPad instead. 
The fact is neither of these are real stories and what the newspapers are doing is using human nature and emotions to create a headline and a story.

Landlords did not get tricked

Let's look at the landlord story first.  The story highlights the amount of rent landlords will lose if they cannot re let sites currently let to Comet.  It then goes on to quote how landlords did not give concessions to Comet because management refused to be open book about their business plan and finances.  I don't get it.  Where is the story?  Comet sought concessions; Landlords asked for information; Comet refused; Landlord said "no".   If landlords had been fed misinformation and then agreed concessions now that would be a story.  If there was evidence that OpCapita had taken on the business with the intention of running it into the ground; now that would be a story.

Gift vouchers are just IOUs

Now consider the gift voucher stories.  First of all let's consider what a gift voucher is - it is simply an IOU.  You are a creditor of the business and an unsecured creditor at that.  When a company goes into administration all its unsecured creditors are likely to be wiped out or get very little return.  There is no separate arrangement for private individuals.
Therefore, when Comet went into administration the administrators could not simply ignore their duties as officers of the Court and tell Comet staff to continue to accept gift vouchers.  But let's not allow their legal duties get in the way of a good headline.  Evil administrators are easy targets especially when the other side is a poor child who is already suffering. 
My question is what on earth is a charity doing taking its donations and handing them over to a company in return for nothing better than an IOU?  That is the angle the newspapers should be looking at.  Is that a legitimate use of charitable donations?

It's not my fault

I suppose you could ask why do I care?  Well the main reason is that there are many similar examples where the media creates a story where there is none.  In doing so they ignore so many more important angles which may not be as attractive to the public.  And all this stems from or points to one major failing in society today - the need to blame someone else.  Everywhere we look, every time we see something not to our liking we have to find someone else to blame.  Now we have a list of targets and whenever something happens we look to find a story which allows us to place blame with someone on that list - the bankers, the politicians, the administrators, the private equity people, the media.  We also have a white list of people who tend to be untouchable and never to blame (a much shorter list) - the man on the street, the charities.

Perhaps this is the cause of so many of our problems that we face today.  Perhaps if rather than always looking to find someone to blame we stop and ask ourselves what could I have done differently?  How much of the fault of what has happened to me is because of me?  What could I do to improve the situation?  If everyone did that and changed how they acted as a result then we might find ourselves in a much better place a lot quicker.

In the case of the vouchers the charity could be reconsidering its arrangements (perhaps it is already).  Perhaps the mother would consider that she could have acted quicker when she got the voucher and immediately gone to Comet (of course I don't know when she got the voucher).  As for the stranger who stepped in - well he has done exactly what I suggested.  He didn't look for someone to blame he asked himself what he could do and he did it.  All we need is 50m more people with that kind of attitude in the UK and we might just get ourselves out of this mess.

UPDATE

This evening (6 Nov) the administrators announced that Comet would now accept gift cards but not corporate gift cards.  I have no idea why this decision has been made (or on what legal basis).  It is possible the administrators have secured funding for certain gift cards from the secured creditor which has allowed them to do this.  In any event clearly shows the impact of a particular story being run in the press.  Question is will the nice man who bought the iPad as for his money back?!?

BPF's "Taking the Profit" - extracting maximum value

The British Property Federation (BPF) is an organisation which represents Landlords.  Therefore it is an organisation which is important to me because it is important to my clients.  It recently launched its "Taking the Profit" campaign.  The target of that campaign is the use of administration particularly in the retail sector as a route to turning a distressed business into a more profitable one with the result that landlords either face shop closures or reduced rental income.  I made one prediction in my blog on New Year's Day and this fight was it.  Thank you to the BPF.
As frequent readers of my blog will know, I have much to say on the insolvency regimes and have blogged many times on the issues facing landlords arising out of administrations and other insolvency regimes as well as the impact of recent case law.  It is good to see the BPF seeking to tackle the issues head on and I cannot argue with the first points the BPF makes that the government has failed to act on tightening up pre-packs and making it easier to complain against Insolvency Practitioners.
However, whilst the BPF is to be praised for raising potential abuse of the insolvency regimes for the benefit of shareholders at the cost of creditors (and particularly landlord creditors) I think that in highlighting certain areas which are, perhaps, most headline grabbing some important areas for review have not received similar attention.  Some of the publicity around this campaign suggests that landlords are the unwitting, weak and undefended party in a war which is being waged against them by a united force of IPs and private investors.  Quite simply, in my experience, this is not the case.  Now it may be that my experience (which I admit is largely at the 'better' end of the retail property market (by better I mean primary and secondary) and involves dealing with the likes of KPMG, PWC, E&Y, BDO, Grant Thornton and others) largely misses out the activities at the tertiary end of the market and perhaps practices at that end are a little more shady.  However, my suspicion is that some landlord practices at that end of the market are not quite 'code compliant'.  Further by failing to identify the real reasons why the current regime unfairly prejudices landlords over and above other creditors risks losing the war.
The bad arguments
1.  It is largely pre-pack administrations where landlords are leant on to agree concessions
This is not the case. A pre-pack is when a deal is agreed and documented (but not signed) before the appointment of administrators.  Some of the administrations where landlords have been pressured to give rent concessions have been pre-packs.  However, most high profile administrations have not been pre-packs yet rent concessions have been sought by the new buyer.  Therefore, the BPF is, in fact and rightly, targeting administrations and not just pre-packs with this campaign.
2.  Administrations are effectively being used to transfer funds from pensioners who have invested in property funds and property companies to private investors buying businesses from administrators and then seeking rent concessions or threatening to close down
Using pensioners in any argument seems to be 'de rigueur' at present.  I think care needs to be exercised in utilising this argument.  Apart from anything else when it comes to unprofitable sites there are arguments that the landlord community carries some of the blame:

• in good times landlords happily agree high rents fully in the knowledge that if trading conditions deteriorate that rent may break the business
• the UK leasing model with relatively long lease lengths, upwards only reviews and full repairing and insuring provisions, whilst providing secure income in the sense of no costs, means that rising service charges add to the burden on tenants increasing the risk of insolvency
• the use of quarterly rents creates cash flow issues for tenants and also creates greater risk for landlords in the light of recent case law
• whilst some landlords have been sympathetic to struggling tenants many others have taken an aggressive route refusing to consider any concessions accusing the tenants of trying to make them pay for a bad business

3.  Landlords are being forced to agree rent reductions
No one is being forced to do anything.  Landlords may not like the threatening manner in which some agents and/or buyers act; saying that unless the rent is reduced a unit will be closed down.  But, at the end of the day, the landlord can call their bluff and refuse to agree the concession.  Landlords are not above being threatening either.  I had one case where a landlord (not institutional) unlawfully re-entered a property through the use of, what can only be described as, thugs because he did not like the possibility of a CVA.  That is far more serious than aggressive posturing in a negotiation.
Landlords are big boys and just as able to use an aggressive negotiating stance.  As advised in a recent blog landlords have quite a good negotiating position albeit limited by the commercial realities affecting each individual property.  In reality landlords are often paying for the fact that they own a property which is not in a prime location and which can no longer command rents at the level originally agreed.  If they could get a better rent then they should refuse the rent concession and get possession.  That is called risk and, without wishing to teach grandmothers how to suck eggs, that risk should have been reflected in the yield when the property was acquired.

The other side of the coin

The BPF is absolutely right to put the issue of administrations on the public agenda.  I think it is important to recognise that there are issues with the system which impact (possibly unfairly) on landlords which should be at the forefront of the campaign:

• the current legal position on payment of rents (especially in the light of the decision in the recent case of the Leisure (Norwich) II Ltd & Others -v- Luminar Lava Ignite Ltd (in administration) & others [2012] EWHC 951 (Ch) gives freedom to tenants not to pay rent and for administrators to trade rent free until the next quarter day.  The Game administration is the biggest example of this.  This flies in the face of the "pay for what you use" approach to insolvency situations and is unique to leases due to a clash between real estate law and insolvency law.
• the moratorium preventing forfeiture without consent - with all other contracts the provider can effectively terminate the contract on insolvency and there is nothing to stop them from doing it.  However termination of the lease can only occur by use of forfeiture which is a form of proceedings.  Due to the moratorium such action requires court approval (or administrator consent).  This exposes the landlord to greater potential future loss than other creditors who, whilst they might lose out on arrears, are not exposed to further losses unless they choose to contract with the administrators or the new business

In my view these are the mischiefs which the BPF should be seeking to undo.  Whilst anti-private equity and pro-pensioner arguments attract good press the reality is that they do not properly encapsulate the issues with a system which, whilst not completely broken, is not working in perfect harmony either.

All that glitters is not Goldacre

In January 2010 I blogged on a very recent decision called Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch.).  In November of the same year I picked up on a Scottish case (Cheshire West and Chester Borough Council -v- Springfield Retail Limited (in administration)) in which the decision in Goldacre was applied and certain parts clarified.
Landlords were very happy with Goldacre.  The principle meant that administrators could no longer calculate rent on a daily basis but rather had to pay for the full quarter.  However, as I highlighted the decision in Goldacre did create a level of uncertainty.  Most importantly it left open the possibility that where an administrator is appointed after a rent payment date and then rent has not been paid that the outstanding rent will be an unsecured claim.
A question answered
That question is unclear no longer.  In the High Court decision handed down by His Honour Judge Pelling QC (oral judgment only) it was decided that where a company goes into administration any unpaid rent which fell due before the appointment of the administrators will be an unsecured claim against the company and not an administration expense.
Whereas after Goldacre landlords were jumping for joy many are now holding their head in their hands and here is why.  On 26 March 2012 that behemoth of retailers, Game, entered into administration.  Whilst I do not know for certain I would countenance that any lease where the rent fell due on 25 March (the March Quarter Day) did not get the rent paid prior to the administration.  Those landlords now have no chance of receiving any payment for the quarter from 25 March to 23 June whilst at the same time they cannot recover possession of the property due to the moratorium.  Going to court is not attractive as it will now require the Court of Appeal to rule on the matter which means losing at first instance just for the pleasure of some time in front of our learned Law Lords.
A bit of history
In truth the whole episode is a rather sorry tale of a silly issue resulting in unhelpful law.  Goldacre was not really about when the liability to pay rent arose.  Rather it was about whether administrators should have to pay the full rent when they were only utilising a part of the let property.  Up until Goldacre both administrators and landlords operated on the principle that you pay for what you use (i.e. for each day you use the premises the administrators must pay).  This is a recognised principle in insolvency law.
The problem is that this principle crashes head-on with the law in relation to rent that rent payable in advance cannot be apportioned (rent in arrears can thanks to the Apportionment Act 1870 - interestingly a piece of legislation enacted for the benefit of landlords who previously could not recover rent arrears having forfeited a lease where rent was payable in arrears).
In effect the court has decided that the non-apportionment principle cannot be overriden by the pay-what-you-use principle and so we land up with a position which neither landlord nor administrator actually want.
Landlords lose out on rent for the quarter in which the administrators are appointed.  Administrators risk having to pay for a full quarter whilst only utilising the property for a small part of it.
So who has the upper hand now?
Almost certainly administrators acting for tenants do.  There is little doubt that where a company is on quarterly rents payable in advance on the usual quarter days that it can provide the administrators with significant breathing space if any appointment is done immediately after a quarter day having not paid that quarter's rent.  The administrators can trade rent free for a quarter.  There is little doubt that the two decisions effectively invite companies to do this and, frankly, they would be silly not to avail of the opportunity.
However, in a lot of cases struggling companies approach their landlords much earlier when in difficulty to seek either rent concessions or changes to rent payment dates.  Many landlords will simply reject such requests or agree to move to, say, monthly rents or staggered payment arrangements to assist with cash flow.  However, landlords would be well advised to use any such approaches as an opportunity to change the balance in their favour.  The law is all about when liability to pay arises and if you can change when the liability arises you can avoid suffering unnecessarily when the tenant ultimately goes into administration.

Game-over for UK commercial real estate investment?

It's MIPIM week and whilst colleagues and contacts are wining, dining and networking on the shores of the Meditteranean, I sit here pondering whether we may be witnessing the end of the UK as an attractive place to invest in commercial real estate.  With headlines such as:

"James Dyson calls for looser employment laws and shorter leases"

it is easy to see that the established UK form of investment lease is under threat.  It is a threat from within and without.  The question is whether this threat is such that it could ultimately destroy the attractive nature of the UK as a place to invest in real property?
In order to understand the threat one must first understand some of things that make the UK such an attractive place to invest in commercial real estate assets.  A non-exhaustive list of the attractions are:

• Long lease terms - historically leases have been for long terms certainly in excess of 10 years and often as long as 25 years or more. This creates long term secure income.
• Landlord friendly law - the concepts of privity of contract and very limited tenant protection mean that once a deal has been agreed between the parties it will bind them for the term.  Again security of income.
• Full repairing and insuring terms (FRI) - in the UK the full costs of managing a property can be recovered from the tenants so the annual rent is effectively a net income save for tax.
• Upwards only rent reviews - apart from at the end of a lease term the landlord is always guaranteed its minimum rent level. It may not go up but it can't go down.
• Quarterly rent payable in advance - a beneficial cash flow from the landlord's perspective.

Looking at the list above you might wonder what the challenges now arising are.  Certainly there is no threat of legislation.  In fact, UK landlords probably took a lot of heart from the change of mind by the Irish government not to introduce legislation imposing upwards-downwards rent reviews.  If a country in as dire property straits as Ireland cannot justify such legislation how much more so would a country such as the UK which has probably seen the worst effects pass struggle to justify such a move.  The 2003 report by De Montfort University and the BPF further cautions against such legislation.
However, there have been changes. These have been subtle and occurred over time.  The cumulative effect of the changes is potentially game-changing.  Let's consider some of those changes:

• Loss of privity of contract - this is the only legislative change aimed squarely at landlords.  The removal, in  January 1996,  of the doctrine that once a tenant signed a lease it would be bound by its terms even after an assignment was a major blow to the investment fraternity.  The risk was that the tenant would assign the lease to a lesser covenant and dilute the investment value of the asset.  Various attempts have been made to try and strengthen the landlord's hand but invariably they either have a negative effect at rent review or fall foul of the anti-avoidance measures as most famously occurred in the Good Harvest decision as approved by the Court of Appeal in the House of Fraser case.
• Shorter lease terms - over the past decade lease terms have become shorter. Tenants are less prepared to sign up to long leases form which they cannot easily extricate themselves.  Some of this is as a result of the "tenant's market" with higher levels of voids.  However SDLT has also had an impact with every additional year on the lease costing the tenant tax up-front.  If lease accounting rules do change this may add further weight to the shorter lease term argument.
• Lower recoverability and greater flexibility- landlords have become much more attuned to the needs and expectations of their tenants.  Further, under the threat of legislation a voluntary commercial lease code has been introduced.  This requires landlords to give optionality to tenants.  It requires landlords to comply with the RICS Service Charge Code.  Invariably this increases the likelihood of irrecoverable costs being incurred in respect of a property which fall to be paid by the landlord denting its income.  Gone are the days when tenants could be charged for everything under the sun including rebuilding the property.

The above are the more tangible changes that have occurred.  There are also less tangible, or at least more spontaneous or reactionary events which take place from time to time which change the playing field:

• Monthly rents - during the recent downturn there have been numerous requests and demands that landlords accept monthly rather than quarterly rent payments.  The argument from the tenant's point of view (especially in the retail sector) is that quarterly rents do not reflect the reality of business where cashflow is not quarterly.  Concessions have been given but the pressure remains for a complete change in standard to monthly.  Whether this will happen remains uncertain.
• Use of CVAs and Administration - the number of retailers failing since 2007 has continued to rise and barely a week goes by without another retailer or leisure operator announcing it is in difficulty and needs to restructure.  To date CVAs have not really been used successfully to reduce rental liabilities but it is only a matter of time before this is tried again.  Administrations are very much in vogue and, as I consider in my piece on La Senza and Blacks, the administration is used to renegotiate lease terms (and in particular rent) with landlords.

Therefore, whilst leases may contain upwards only rent reviews the certainty of maintaining that level of income remains threatened.
So, returning to my original question, is the attractiveness of the UK as a top spot for investment in real estate at serious risk?  In my view the answer remains a no despite all the issues highlighted.  There are some very good reasons why not:

• whilst there is an increase in the irrecoverable nature of some costs the fact remains that FRI leases are the norm and the vast majority of costs are recoverable resulting in the rent being a net figure
• many of the threats and issues are more as a result of the current economic climate and my expectation is that once the dark clouds disappear then "normal" market practice and attitudes will return
• part of the attractiveness of the UK is that it provides a stable political and legal framework.  For foreign investors this is a key attraction and the return generated may fluctuate but the risks do not alter much over a long period of time.

No, I think that the UK real estate market is not truly threatened by these small changes and challenges that arise from time to time.  In reality the biggest threat to the UK real estate market continues to be the ever decreasing amount of credit that is available in the market.  When the credit markets return the above will seem like a bad dream!

Peacocks sold: Seduction again?

Those familiar with my blog will remember my relatively recent blog entitled Blacks and La Senza: Agression v Seduction.  Today we are met with the news that Peacocks has finally been sold out of administratio to Edinburgh Woollen Mill.  This is good news, especially for the 6,000 people whose jobs have been saved and the 338 landlords whose stores will remain open.  It is less positive for the 3100 people who will lose their jobs and the 224 stores that have ceased trading with immediate effect.

A quick note to landlords of those stores - the oft-quoted decision in Goldacre may not assist you in getting your rent paid up to the next rent payment date.  This is because the decision left it woefully unclear what the position was where a company went into administration after a rent payment date - is the rent or any part of it an expense of the administration or can the company in administration effectively trade rent free?
But do not despair completely for it appears that Edinburgh Woollen Mill has adopted the "seductive" approach to its acquisition vis-a-vis landlords.  Philip Day, chairman and chief executive of the Edinburgh Woollen Mill Group, based in Langholm in Scotland, is quoted as saying that he hoped there would be scope to save more jobs and stores from those being forced to close due to performance issues and overhead pressures.
This is a clear statement of intent that once they have had the chance to review all the numbers they will identify further sites they wish to re-open and dangle in front of landlords the carrot of some rent.
Does this mean that seductive approach is now preferred over the aggressive approach or is this just a hangover from Valentine's day?  No doubt there will be a few more insolvencies in 2012 that will reveal more.

OSCRE: Just for the geeks or time for the lawyers to get involved?

On 24 January 2012 I attended a symposium in London to discuss trying to push forward at a greater rate the implementation of the OSCRE standard and its adoption in the Real Estate community.  This is not a new path and many will remember the unsuccessful attempts at doing this no more than 10 years ago with PISCES.  In fact OSCRE is a sort of successor to PISCES.  It is the US version of PISCES and has now been adopted by the UK commercial real estate market following an amalagamation of the two standards boards.  So why does anyone think that OSCRE will succeed where PISCES disappeared into obscurity?
In my view the world is now significantly more advanced than it was 10 years ago making OSCRE a necessity.
1   What is OSCRE?
OSCRE stands for Open Standards Consortium for Real Estate but this does not describe what it is.  It is a universal language intended to allow real estate systems to "speak" to each other.  The ultimate goal is to enable the inputting of data only once and for that data then to be able to be re-used in different systems in the real estate world.

2   What happens currently?

Let's consider a simple property leasing transaction.  The steps are as follows:

a)  The agents agree heads of terms and send a hard copy to the relevant solicitor

b)  The solicitors draft the various documentation and following some negotiation it is finalised

c)  Both solicitors will produce word based reports to their clients setting out the final agreed terms and seeking execution

d)  The documents are executed and then completion occurs

e)  Various SDLT (tax) and Land Registry forms are prepared and sent to the relevant authorities

f)  Both solicitors will prepare a report for the asset management teams at landlord and tenant providing detailed information on the lease

g)  The asset manager will input the information received from the solicitors onto their systems

3   What could happen?

Taking the same transaction:

a)  The heads of terms are sent as data (a wordy version can be created as well)

b)  The initial draft lease is created automatically from that data and issued

c)  The documents are negotiated and agreed

d)  One solicitor updates the data reflecting the agreed terms and the other checks and approves it

e)  Both solicitors generate automatic signing request forms to their clients using the data and the matter completes

f)  The SDLT and Land Registry forms are gnerated automatically

g)  The information required by the asset manager is sent automatically

Is there a difference?

One simply needs to consider the above two lists to realise that the reference to "automatic" pervasive in the "What could happen?" scenario means two things:

1. Efficiency and thus cost savings
2. Reduced risk of data corruption

In a world where data and cost are key drivers it seems to me inevitable that the industry will be forced down the route of agreeing a standard form of "language".  It is incumbent on all professionals within the industry to work together so that we achieve that goal as quickly as possible and create the best possible language.  Lawyers are a lynch pin in this development.  We are the source of much of the base data.  If we do not actively participate in setting it up we will be left with the rest of the industry talking a "language" we do not understand.  I for one would rather help create the language than need an interpretor!

Damned if you do . . . damned if you don't

Reading earlier today the pressure that is being placed on RBS in particular to agree to debt restructuring and help save Peacocks from administration I couldn't help but think how perverse the world is.  I am not a fan of the mistakes made by big banks which led to the collapse of the financial world as we knew it.  It has left one hell of a mess and the tax payer as owner of a number of rather unattractive assets.  However now that we find ourselves in the position of owning or part-owning large banks with significant exposure to numerous enterprises we should be a bit more circumspect regarding what we do with that ownership.
I do not know any of the details of Peacocks or its current financial position save what I can read in the press.  The decision-makers at RBS, however, will have available to them a significant amount of information as well as knowledge regarding the past and predicted trading for the business.  The decision they need to make with all that information is whether it is in the best interests of RBS shareholders to continue to support Peacocks or whether it would be better to force it into some kind of insolvent restructuring with a view to potentially cutting losses and walking away.
The problem for RBS in particular is that, as a state-owned bank, it is no doubt under immense pressure (perhaps perceived rather than real) not to walk away.  I note that Cardiff Central MP Jenny Willott is due to meet Business Secretary Vince Cable later to discuss the retailer's problems.  One can predict the questions that would be raised in Parliament if they do walk away:

"Can the Prime Minister explain why the state-owned bank, RBS, failed to save Peacocks from administration wth the loss of thousands of jobs?  Is not the minimum that the public can expect from the billions spent on saving the bank that it will not desert its borrowers in their time of need?"

What a load of rubbish.  This would be typical political spin using the livelihoods (and loss thereof) of voters as a tool to hit the coalition.  The taxpayers who own RBS are not merely those employed by Peacocks; they are all of the tax payers.  I do not believe any of us would like RBS to make bad business decisions simply because the right business decision will cost jobs.  For RBS to have the potential to see itself returned to public ownership it must be allowed to make decisions without concern that political pressure will be brought to bear.
I have personal experience of this political pressure.  I was involved in an administration a while ago involving a bank with significant state ownership.  The bank made the right decision to enforce its security over the assets of the business as it had concluded that the owner/directors were unable to improve the performance and their continuing management was detrimental to the business and thus likely to increase the bank's losses.  However, the owners involved local MPs and Councillors who wrote aggressively to the senior management at the bank running the argument that it was morally repugnant that a "state-owned" bank would enforce security against the tax payers who "owned it".
Thankfully in this case the bank made the right decision but not without a significant amount of time being spent justifying the decisions to politicians who were more interested in scoring points with their local supporters than protecting the tax payer in general.
Similarly, attempts to stop administrators from seeking to enforce agreements for sale for flats because the value has fallen from when the buyers originally agreed to buy them are just as galling; if buying off-plan was risk free we would all do it.  To a certain extent the same concerns must be raised regarding the constant refrain that if we are to exit this economic downturn we need banks to start increasing their lending to small businesses.  Undoubtedly this is true.  However, I personally, do not want to see the bailed out banks making bad investment decisions just so that they can fill the quotas for lending to small businesses placed on them by the government for good political headlines.
Unfortunately I do not expect the political pressure to disappear and therefore it is most likely that banks will continue to be damned if they do and damned if they don't!

Addendum: As I was writing this blog it was announced that Peacocks has filed a notice of intention to appoint administrators although this has not been confirmed.  This does not mean that administrators will definitely be appointed but makes it significantly more likely.  If this is the case it will be interesting to see whether my predictions regarding the recriminations will prove correct.  Time will tell.

Blacks and La Senza: Aggression vs Seduction?

Yesterday saw the first of what will most likely be a wave of pre-pack administrations of high street names when both Blacks Leisure and La Senza went into administration and immediately thereafter their businesses (or at least the profitable parts of it) were sold to willing buyers.  Pre-pack administrations have come in for a lot of criticism on the basis that they often, if not always, return no value to unsecured creditors or shareholders.  However, they have their merits and, in a lot of cases, genuinely achieve the best result possible overall for stakeholders.  Therefore, much to the dismay of some readers, I am not about to launch into vitriolic criticism of the use of pre-packs to save jobs and businesses with unsecureds being left high and dry.
There is, however, one common thread of both the La Senza and Blacks pre-packs which are worth highlighting and, as a landlord, preparing for: lease renegotiations.  In the case of Blacks, the official press release from JD Sports Fashions stated:

"Following the elimination of any underperforming stores and other cost reduction initiatives we believe the business can be run successfully as independent fascias within the Group."

With La Senza, less than half the retail sites leased by the group were bought out of administration with the majority of sites closing down so, it is likely, only the performing stores were part of the original deal.  However bearing in mind the official press release which stated:

"Today’s announcement represents a first step in a long-term commitment to developing the La Senza UK business, which we believe has great potential."

it seems likely that 'new' sites are on the cards.
My prediction is that in both cases landlords will be approached by the new owners to renegotiate lease terms.  What we have is a difference in approach from the new owners; one is seeking to pressure landlords whilst the other is seeking to seduce them.
In the case of Blacks the new owners have probably taken a licence to occupy all the sites and will now meet with the landlords of "underperforming sites" to seek to renegotiate the leases.  This will be the stick or 'Aggression' based approach; if the landlord does not agree the terms the site will be closed and the landlord left with the void costs, which would include empty rates liability, service charge irrecoverability and an unoccupied site which quickly becomes unattractive.
In the case of La Senza whilst landlords of transferring sites might be approached, bearing in mind the number of up front closures, I anticipate that the new owners will approach landlords of some of the closed sites and propose new terms under which they would be willing to re-open.  This is more of a 'carrot' or 'Seduction' based approach offering to relieve landlords of the void exposure.
As a landlord it is important that you are aware of what your negotiating position is in respect of any approaches.  It is worth keeping the following in mind (and get detailed legal advice in respect of them where relevant):

• an administrator has no right to disclaim or unilaterally surrender a lease or otherwise bring a lease to an end earlier than a solvent tenant (only a liquidator has that power).  Therefore rates liability in particular should not fall on a landlord simply because of the tenant going into administration although ultimately liquidation is likely).
• if the property is still being used (and this is particularly important in the case of Blacks) then the lease liabilities arising are likely to be an expense of the administration.
• due to the decision in Goldacre expect there to be significant pressure to get deals done before rent payment dates as administrators in particular will wish to ensure that they can avoid any risk of the next period's rent being payable as an expense in whole.  My view is that a challenge to Goldacre or an attempt to extend it is very likely this year.
• pre-conditions or requirements set out in the lease as things which the landlord can rely on in terms of refusing consent to an assignment apply to an assignment by a company in administration just as much as they do in non-insolvency positions.  Obviously a balance is to be achieved but if you really do not want to consent to an assignment or the proposed terms don't think you will have no choice in the matter.
• the courts will not be quick to grant consent to forfeiture.  In our experience to date courts have given administrators quite a long time to try and assign a lease so even where the proposed assignee cannot meet lease pre-conditions do not assume the courts will be on your side.

La Senza and Blacks might be the first major retailers of 2012 to go to the wall but, if the reports are to be believed, they certainly will not be the last.  Whether buyers of such portfolios use might or seduction methods to seek new lease terms we can only speculate but what La Senza and Blacks show is both approaches are being considered and pursued.  Either way, make sure you use protection!

Retail 2012 – a showdown between administrators and landlords?

A very experienced insolvency practitioner who has acted as administrator on some of the most high profile insolvencies of well known British retailers recently mentioned to a colleague that:

“The main problem facing retailers today is that rents are too high.  Landlords will need to accept that if they want their businesses to survive they will need to reduce significantly the rents payable.”

There is undoubtedly truth in what this IP says; if landlords reduced rents then margins would increase and/or retailers could reduce prices to make their goods more attractive to you and me.  There we go then; in one foul swoop we can fix the problems of the high street, make British retailers more profitable thus increasing tax revenues for Her Majesty and, as Gordon Brown once said “save the world” .
There is just one small problem with this hypothesis; in reality it is nothing more than window dressing.  Put another way, what is being suggested is in effect seeking to simply alter a different variable in a rather complicated equation where ultimately the same final answer always applies:

TRS = RP + BI + LP + BI;

where

TRS = Total Retail Spending;
RP = Retailer's Profit;
BI = Bank Interest; and
LP = Landlord’s Profit.

This is obviously an oversimplification of where the money spent on the high street actually goes but it is sufficient to highlight that by reducing rent what in effect happens is that LP decreases so that RP increases.
This equation also highlights another important factor; that of Bank Interest.  This affects both retailers and landlords alike and once again highlights that in reality the real issue which is damaging the High Street is debt.
In fact the one common factor affecting all three contributors to the equation (retailers, landlords and, just as importantly, the consumer) is debt.  Therefore the IP quoted above could have been more accurate if he had stated that the main problem facing retailers today is that there is too much debt in the economy.  So why not say this?
A number of answers spring to mind (in increasing accuracy):

1. IPs are generally appointed at the behest of the banks.  It would hardly be sensible for IPs to bite the hand that feeds them.
2. Banks have already taken significant hits so is it realistic to expect them to take further hits?
3. Landlords rely on tenants.  If tenants cannot pay the rent then landlords will ultimately lose out.  High rents can only be justified if there is a willing tenant.

I believe that the IP quoted was expressing the view that the average level of rents on the high street is so high that it is not reflective of the economic realities in which we live and were we to test the market then the average rent would fall significantly.
He is right but averages are misleading.  In reality there are a lot (easily the majority if not the vast majority) of retail sites where the rent is too high and should be cut.  However, there are a lot of sites where the rents could go higher as the landlord could easily re-let the property to another retailer if it became available.  Bond Street is an example but so are certain locations on Oxford Street or in major shopping centres such as Westfield London or Bluewater in Kent.
A recent review of the high street predicted a significant increase in the number of retail insolvencies in 2012.  The prediction is that those retailers with 50-500 stores will be worst hit.  What this is likely to mean is that CVAs which had been utilised a lot in 2007 and 2008 to save a number of retailers (or at least delay their demise by a year or two) is less likely to be successful.  If the IP is right in order to survive these retailers will need to do more than simply close sites; they will need to reduce the rents on a significant number of sites that are to remain open.  This is yet to be achieved through a CVA and the most well-known attempt at such a large scale CVA routed rent reduction (Stylo in 2008) was a total failure.
Therefore we are more likely to see a significant increase in administrations (as we have already in the last few weeks).  The courts to date have provided a significant amount of leeway to administrators by protecting them against claims for forfeiture by landlords even where landlords have been able to show they have alternative tenants to the administrators’ preferred assignee.  However landlords have seen some successes; most notably in the case of Goldacre (Offices) Limited v Nortel Networks (UK) Limited.  Yet even this decision is now being turned by administrators to their advantage with a refusal to pay any rent for the quarter during which they are appointed on the basis that they are appointed after the quarter day.
My prediction for 2012 is that we will see this issue and many other similar issues relating to the rights and obligations of administrators to make use of premises litigated through the courts.  So 2012 may prove bad for the high street but it is likely to provide ripe pickings for the IPs, real estate insolvency lawyers (like me I must admit) and real estate litigators.  Every cloud must have a silver lining; at least for some of us.

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.