Onerous Leases – A presentation to the TMA

1. Onerous Leases – A presentation to the TMA Presented byEdward Symmons7 May 2008

2. Edward Symmons – Your Contacts Steven Skinner Steve is head of Edward Symmons LLP Fixed Charge Receiver’s group dealing with LPA Receiverships for a wide range of banking and private clients across the UK. Stephen has over 20 years of experience acting for client such as HBOS, RBS, Kaupthing Singer and Freidlander, Fortis Bank, State Securities, Barclays Bank and HSBC. 02380 743 776steve.skinner@edwardsymmons.com Robert Stokely Robert is a Chartered Surveyor with over 15 years experience both as an advisor and as a client. Robert currently leads Edward Symmons’ West End Corporate Services team based in Piccadilly and acts for a wide range of occupiers from small regional companies with just a couple of properties to pan-European companies with multiple sites. 0207 344 4601robert.stokely@edwardsymmons.com

3. Who are EdwardSymmons? • Chartered Surveyors • Private partnership regulated by the RICS • Established over 60 years • 200 staff across 9 UK offices • International coverage through associations with Valliance (35 European offices) and the Valuation Research Corporation • Partner led solutions • Operate in niche areas

4. What can lead to an onerous lease liability? • Economic Conditions • Planning Requirements • Structure and Condition • Legislative Changes • Lease Terms

5. Economic Conditions • Many diverse views on economic outlook • Clearly Banks sensitive re: property investment • Capital values falling almost without exception • With uncertainty comes opportunity • Cash rich investor well placed to take advantage

6. Planning Requirements • After location, perhaps most important • Can have major influence on value • Extensive due diligence required • Any outstanding obligations? • Unconsented alterations or modifications

7. Structure and Condition - Design • Pace of obsolescence increasing • Innovation to address environmental concerns • Focus will shift from new to existing properties • Other forms of obsolescence • Sometimes opportunity to mitigate losses

8. Case Study – Asbestos

9. Structure and Condition - Contamination • Caveat emptor, buyer beware • Polluter pays • Next in line is person ‘benefiting’ from building • Contamination can take many forms • Innocuous acts can lead to major claims • No substitute for due diligence

10. Structure and Condition – Other Issues • Disability Discrimination Act 2005 • Control of Asbestos Regs 2006 • Fire Risk Assessments • Energy Performance Certificates • Air Conditioning Inspections from 2009 • Flood Risks

11. Structure and Condition - Dilapidations • Potentially major expense • Recommend obtaining interim costings • Beware dilaps liabilities can be transferred • Worth buying out lease in extreme cases? • Consider diminution in value of reversion

12. Case Study – Dilapidations

13. Legislative Changes and Other Issues • Changes to Empty Rates • Accuracy of Rateable Value? • Reputation of Landlord • Unauthorised Tenants • Boundary Disputes • Undocumented Rights of Way

14. Lease Terms • Break Clause • Rent Review Clause • Restrictive User Clause • Landlord’s Consent to Alterations

15. Case Study – Unlicensed alteration

16. Lease Terms • Alienation • Unexpired Term • Security of Tenure • Lease or Licence?

17. Case Study – Can you tell what it is yet?!

18. Case Study – How about now?

19. Case Study – Guess how many tyres?

20. Case Study – Somewhere between 750,000and 2 million!

21. Case Study – Boundary Dispute

22. Case Study – Boundary Dispute

23. Case Study – Onerous Lease Terms and Historical Data

24. Case Study – Onerous Lease Terms and Historical Data

25. Reducing or Terminating Liabilities What are the options? • Assignment • Sub-Letting • Surrender • Renegotiation Each has pros and cons

26. Practical Approaches – Assignment and Sub-Letting Key is quickly identifying tenants • Need to price property realistically • Be flexible in respect of term • Effective marketing

27. Practical Approaches- Surrender Strategies for negotiating effectively • Identify alternative occupiers beforehand • Threaten closure? • Identify any redevelopment options • Contributions from previous tenants • Understand Landlord’s valuation process • Dilapidations position

28. Practical Approaches- Renegotiation of Lease • Re-balance between term and rent • Pricing of flexibility in vogue • 2007 Commercial Lease Code • Other terms may need changing • Improve property for Landlords future benefit?

29. Practical Approaches- Other Ideas • Property swap • Package up portfolios • Sale and leaseback opportunities • Use poorly drafted clauses to advantage • Service Charge accounts – rebates • Offer Landlord shares • Explore Landlord’s redevelopment options • Side deals?

30. Practical Approaches- Other Ideas • Extend term of long leasehold properties • Offer parent company guarantee • Opportunities to remove guarantees? • Across the board negotiations • Capital Allowances – additional source of income? • Psychological and financial implications on other party.

31. How can issues be quickly identified? Checklist for Effective Due Diligence: • Report on Title or Lease • Lease or Licence • Deed of Guarantor • Licences to Alter • Deeds of Variation or Amendment • Rent Review Memorandum or Notices • Rent Demands • Condition and Dilapidations Schedules

32. Checklist for Effective Due Diligence (Cont.) • Disability Discrimination Act Audit • Contamination Audit (i.e. Asbestos) • Architects Plans • Planning Consents & Legal Agreements • Service Charge Accounts • Flood Risk Assessment • Recent Valuation Reports • Business Rates Assessment Not comprehensive!

33. Online Resources • www.environment-agency.gov.uk (Flood risk assessments) • www.voa.gov.uk (Rateable values) • www.propertysnake.co.uk (Information on residential price reductions) • www.nethouseprices.com (Residential sales data from Land Registry records) • www.landreg.gov.uk (Title Reports) • www.maps.live.com (Birds eye view of sites) • www.hmrc.gov.uk (Stamp duty land tax calculator) • www.bpf.org.uk/whoweare/commercialleases (Commercial Lease Code 2007) • Local Authority Websites (Local planning information) • Google Earth (Aerial view of sites)

34. Conclusion • Many pitfalls but frequently opportunities. • Value of local intelligence cannot be understated. • Full understanding and appreciation of onerous liabilities will enable price to be set or renegotiated to reflect the true risks and likely costs. • A detailed report from a Chartered Surveyor should assist this process as well as minimise risk and maximise opportunity.

35. Edward Symmons – Your Contacts Steven Skinner Steve is head of Edward Symmons LLP Fixed Charge Receiver’s group dealing with LPA Receiverships for a wide range of banking and private clients across the UK. Stephen has over 20 years of experience acting for client such as HBOS, RBS, Kaupthing Singer and Freidlander, Fortis Bank, State Securities, Barclays Bank and HSBC. 02380 743 776steve.skinner@edwardsymmons.com Robert Stokely Robert is a Chartered Surveyor with over 15 years experience both as an advisor and as a client. Robert currently leads Edward Symmons’ West End Corporate Services team based in Piccadilly and acts for a wide range of occupiers from small regional companies with just a couple of properties to pan-European companies with multiple sites. 0207 344 4601robert.stokely@edwardsymmons.com