Posted: Thursday 9 February 2012
How special is property?
By Hugh Angus
I have a horrible memory of my first involvement with a pre-pack administration at the start of 2003. Two months after my team moved to Morton Fraser we completed a deal, no money moved through our hands, issued our fee (about £10,000 as I remember) and the client then went into pre-pack administration. We had to write off our fee for the transaction which secured a few hundred thousand pounds of value for the company, as it ranked behind the accountants’ fees of a few hundred thousand pounds or so. I have a lot of sympathy with landlords suffering from tenants doing pre-packs just before the rent is due, particularly when there is a suspicion that the directors were either flirting with trading insolvently or were incapable of running a business profitably.
Is the Government right to keep the law as it is and not implement the changes to the insolvency regime that it has been talking about for the last 18 months? What is the right balance between a company and its creditors? Is property more special than professionals’ fees or employees’ jobs so it deserves special protection?
Looking at economies around the world I am afraid that in general we need to be giving more priority to keeping businesses going than to helping creditors, because it encourages businesses to recognise losses and start up again. We need to be following the example of the USA which protects creditors less, and is now showing growth in employment. There will be exceptions, such as our banks which were too big to fail, but any exception must be justified. Giving notice to creditors that there is a problem with a company will often bring a company down. Is property special enough for an exception to be made?
Property has been special for retailers as the planning system has kept supply less than demand but I don’t think it is right now, at least not on the High Street. Retail is going through a structural change and if a landlord is not willing to reduce its price there are others that will. There are some exceptions of course where the landlord can achieve good terms.
In other sectors property is mainly a cost, like telecoms. I remember acting for a purchaser of a specialised plant business from a receiver where my client did not want to take on the lease because of the poor condition of the property and an onerous repairing obligation. The client withdrew from negotiations on the Friday, found office and warehouse premises over the weekend and bought the business on the Tuesday lunchtime, less the property, by which time I had concluded on the two leases. The properties were not perfect, the client paid a full rent (that particular local market was quite tight) but they did the job. I don’t think we can argue more, if we ever could, that the property is special enough for it to be given a more protective category of creditor.
Landlords have to protect themselves as best they can and take as much security as the market allows – rent deposits, stepped rents to allow deposits to be built up, guarantees, and security over other property etc. If the quality of income goes down the rent has to go up in the longer term even if we do not see that in the current market. Most importantly a landlord has to know the tenant well, both when selected and as part of the ongoing relationship. The character of the tenant is important not just the business model.
Some people are learning what is learnt in every recession (to mix metaphors horribly) that views taken when the market is going up can come back and bite you. I started off with my first experience of a pre-pack. That company went down because of a leak in one of its most expensive retail operations causing trading difficulties, just as a competitor opened up nearby. It had no enforceable claim against the contractor as it decided not to insist on a collateral warranty when it took the lease because it wanted in and trading as quickly as possible. The landlord that refused to procure the collateral warranty lost money too. Detail is not just important for lawyers.
