Property Industry Update January 2010
Intending to sell land to a housebuilder?
The housebuilding industry has been strangled recently by a lack of finance. There are few industries which rely so heavily on bank funding – from housebuilders who need to fund site acquisition, to househunters looking for mortgages.
But there are signs the market is improving. Mortgage availability is increasing, so housing stock is shifting, bringing the focus back to land acquisitions.
With the debt tap for land acquisitions still not fully back on, housebuilders have to look at innovative ways to secure land supply rather than throwing money around.
So if you own land which you’re thinking of selling to a housebuilder, what can expect now?
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Don’t expect a great deal of cash up front. Housebuilders can no longer pay big sums upfront and wait years for a return. The gap between expenditure and income is narrowing due to both Bank appetite for risk disappearing and for sound cashflow reasons.
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Housebuilders now expect landowners to share risk – sharing risk on planning, abnormals and selling prices. Many deals are now being structured as “pay as you go” with landowners getting their return through a fixed amount or % of the selling price when houses sell. The initial capex is reduced and cashflows are smoothed over the development life.
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Secondary locations now command lower values. Prime locations are still in demand; secondary locations are too, but only at the right price.
The future is clearly about sharing risk and partnering to deliver value for both parties.
If you have a site, get sound advice and do a realistic deal with a reputable housebuilder. You cannot rely on an ever increasing market to save the day.
And it’s also about patience… Barry McKeown, a Partner in Semple Fraser’s Property Team, comments that:
“If you are in for the long term then you will still be rewarded, and may make more over the piece, as many commentators expect some price spikes as the market picks up again… just don’t expect a fat cheque on day one.”
Turning turnover rents to your advantage
Most landlords haven’t traditionally been fans of turnover rents.
They can produce erratic rental flow, cause valuation difficulties and force landlords to play a greater management role.
However, recently some landlords have found themselves turning to turnover rent leases because:
1. They can help fill space
In 2009, void units were a problem for landlords – and having vacant space is one of the biggest problems a landlord can have.
Voids don’t produce income. They don’t contribute to service expenditure. Shoppers don’t like them.
Changes to empty rates relief also mean bigger bills for landlords.
Many retailers feel turnover rents are fairer and give them more security – and they may be the key to unlocking a letting.
2. Some surveyors say turnover rents can disguise falls in rental value
They argue it’s more difficult to use turnover information against a landlord when it comes to rent review.
3. Landlords can gain access to useful retailer trading information
Tenant trading data can give landlords a crucial “heads up” on failing tenant health, and insight into the overall wellbeing of an asset. A prescient landlord can take action (for example, an advertising/PR campaign or centre improvements) to try to head off a downward sales trajectory.
4. Landlords who invest in centre improvements sometimes see a quicker return via turnover rents than via traditional leases with five yearly rent review cycles.
However landlords have to be careful when using negotiating turnover leases. Here are our top six tips:
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“Pure” turnover rent leases can leave landlords exposed. Most landlords prefer a base rent guaranteed somewhere between 70% and 90% of open market rental value (though landlords should take appropriate valuation advice, as each case is different).
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It’s best to have tight, agreed timescales for provision of turnover information by the tenant – perhaps with the rent reverting to open market rental value while any late turnover info remains outstanding.
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Alienation provisions should be restrictive – a landlord won’t want its income from turnover rent to be dependent on an unknown tenant or under-tenant.
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Landlord-only break options can allow a landlord to bring in an alternative tenant if a retailer’s turnover freefalls.
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Good keep open obligations and sensible non-compete clauses can help maximise turnover.
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Lastly, consumers are fast becoming experts at trying out goods in-store, only to then buy online. Landlords may consider including all, or a proportion, of a tenant’s total internet/phone/postal sales when calculating turnover rent for a unit.
Tax Increment Financing: the way forward?
One long term consequence of the property market downturn – which will be felt far beyond any short or medium term recovery – is likely to be the negative impact on the funding of major public and private infrastructure projects in the UK.
Not only will the tightening of local and central Government budgets have an impact on projects which would traditionally have been publicly funded. The downturn has also affected the extent to which the private sector can fund such expenditure (often in advance of development returns), through either committed expenditure or (more usually) agreeing planning gain with local authorities.
These “Section 106” planning obligations (known as “Section 75” obligations in Scotland) often involved major capital expenditure for developers in on-site and off-site infrastructure improvements. Examples include new road systems, public transport contributions, extended and upgraded sewerage systems, upgrades to existing water supplies, extension and reinforcement of other “public” utilities such as gas and electricity.
Although the cost of these planning gain obligations has tended to run into many, many millions of pounds on major projects; developers could pay – the growth in capital values allowed them to maintain profit levels whilst paying for what are effectively public works.
But the credit crunch and recession have changed all that. If major regeneration projects and developments across the country are not to be stalled or mothballed altogether, then alternatives need to be considered to the relatively recent focus on private money funding public infrastructure works.
One possible alternative is Tax Increment Financing, or TIF.
TIF is a public financing method which has been used for development and community improvement projects in many countries, including the United States, where TIF has become a common financing mechanism for local government.
Essentially, the TIF model uses potential increases in taxes in an area, through for example, business rates, property taxes (such as Stamp Duty Land Tax) and residential rates (such as Council Tax) to be channelled into the repayment of bonds issued to fund the initial capital expenditure. The bond repayment period is tied to the likely tax increment that the development will generate.
Although the subject of discussion in many property forums since the start of the downturn, there may be signs that this approach is finding favour in the UK, with The City of Edinburgh Council confirming (Homes for Scotland Associates Lunch 1 October 2009) that they are considering TIF as a means of bringing forward further development at the City’s waterfront. This would be a bold move by the City and would put them at the forefront in bringing this model to fruition in the UK.
It remains to be see whether the model will see wider adoption. TIF is often criticised for swallowing tax increases that would otherwise have gone towards the costs of additional or improved public services – which in turn then have to be funded from other sources.
For that reason alone, it’s less suited to funding for wholly residential development, because in the main any tax increases from such a development come from increased Council Tax revenue which bears a direct correlation to increased costs for supplying local authority services to the occupiers of such a development.
However, where a development contains a significant commercial element which will deliver a far more lucrative business rates increase to the local authority, TIF may very well be the answer to many developers' and urban regeneration companies' prayers.
In a fix about fixtures and fittings?
The issue of fixtures and fittings has long been a bone of contention between landlords and tenants.
But do you know how to work out what is a fixture, and what is a fitting? If you’re a tenant, just because you’ve brought an item onto your premises, doesn’t automatically mean you can take it with you when you leave...
The general law
When working out if an item is a fixture or a fitting, the Courts will look at the degree to which the item is “annexed” to the land – with consideration being given to whether the item rests on its own weight and whether removal would damage the land/premises or the item itself.
If an item can’t be removed without serious damage or destruction, then the case for it being a fixture is strong.
Tenants should be alert to this. An item a tenant brings onto its premises may, over time, become so affixed that removal may damage the premises or the item – meaning the item may no longer be considered the tenant’s property.
If there’s doubt about the degree of annexation, the Courts will look at the intention of the person installing the item. The two tests generally applied are:
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Was the intention to simply enjoy the item itself or to temporarily improve the premises?
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Was the intention to improve the land permanently?
Are there any exceptions to the general law?
There are some types of fixtures that are usually considered to be the tenant’s property:
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A trade fixture;
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Ornamental and domestic features for decoration and convenience or for the purposes of trade; and
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Agricultural fixtures (these do not fall within the exception of trade fixtures, and are regulated by statute).
However, even then, a lease may expressly prohibit a tenant from removing these fixtures.
How are tenant’s trade fixtures treated when a landlord forfeits or irritates a lease?
Forfeiture (in England and Wales) – When a landlord recovers possession of premises by forfeiting a lease, the tenant can’t re-enter to remove fixtures, unless there is an express contractual provision to the contrary. Any fixtures revert to the landlord on forfeiture.
Irritancy (in Scotland) – The right to remove trade fixtures may be exercised by the tenant within a short period of its termination - so there is some scope for a tenant to remove trade fixtures when a lease is irritated, unless there’s an express contractual provision to the contrary.
What if a tenant goes into liquidation or administration?
The same rules apply – and the administrator or liquidator is generally entitled to treat the tenant’s trade fixtures as an asset of the tenant company.
Again, this would depend on if there is any provision in the lease saying otherwise – and, in Scotland, this is subject to the landlord’s (now limited) right of hypothec.
So what can tenants do?
If you’re a tenant thinking about installing a valuable trade fixture, check what your lease says about your right to remove it later – and if appropriate agreement should ideally be reached with your landlord, up-front, that the item won’t become part of the property itself, and that you can remove it at the end of your lease.
Semple Fraser unveils new plot sales system as housebuilding market gains momentum
Semple Fraser have unveiled a new Plot Sales System, as the residential property market remains optimistic about a positive change in buyer sentiment in 2010.
In the wake of housebuilders reporting increased footfall and sales across their developments in the final quarter of 2009, the new Plot Sales System looks to simplify the conveyancing process for new build sales and reduce delays between reservation, contract conclusion and purchase completion, to the benefit of house buyers and builders.
The innovative system, which was developed by Semple Fraser's in-house IT team working with the firm's Residential Development Group, will be offered to the firm’s housebuilder clients.
As well as streamlining the sales process by efficiently converting reservations to concluded sales, the system offers a real-time, web based user interface giving an overview of process and encouraging collaboration amongst the on-site reservations team, head office sales personnel and the legal team.
As sales are the life blood which drives the industry forward this is likely to be welcomed by those keen to see the sector drive forward as the recovery takes hold.
Semple Fraser’s plot sales tool follows the appointment last year of Barry McKeown as Partner in the firm’s top ranked Real Estate Group. In addition to working at a number of Scotland’s top law firms for the past 12 years, Barry more recently focused his expertise working in-house as Land Director for housebuilder and property developer, Manorlane Limited.
Barry McKeown comments:
“Being developed in-house and bespoke means the system does exactly what housebuilder clients need it do and can be easily adjusted to integrate with or supplement the housebuilder's existing sales and reporting systems. My time spent in a client role has given me a far greater understanding of the housebuilding business and I believe our plot sales system will be extremely beneficial to housebuilders.”
Head of Real Estate, Elspeth Carson , adds:
“Housebuilding is crucial to the UK’s economy. To see recovery in such an important sector is exciting. By developing our new system in support of the sector’s sales process we hope to assist the sector convert the resurgence of occupier interest to cash.”
For further information on the Plot Sales System please contact Barry McKeown.
The matters covered in this ebulletin are intended as a general overview and discussion of the subjects dealt with. They are not intended, and should not be used, as a substitute for taking legal advice in any specific situation. Semple Fraser LLP will accept no responsibility for any actions taken or not taken on the basis of this publication.
for further information please contact: roland smyth