by Simon Hardwick
As the final blocks are put into place at the Canary Wharf tower, many of us in the property business must be wondering whether this landmark, which is quickly becoming part of the familiar London landscape, is the swan-song of the property boom of the 1980s. Olympia & York’s development in Docklands has grabbed the headlines not only because Canary Wharf represented the optimism of the 1980s but also because of the developer’s attitude to its new tenants. To persuade the Daily Telegraph, which only recently moved to its prestige Docklands address at South Quay Plaza, to relocate to Canary Wharf is some feat; especially at a time when the market resembles the gloomy years of the mid-1970s.
It has been said that Olympia & York took on the lease at South Quay Plaza, and this could have had something to do with the Telegraph moving so readily! This case is not unique: rent-free periods and peppercorn rents have become a familiar part of the developers’ approach to their new tenants. The state of the property market means that developers are having to rely more and more on “giveaways” and marketing techniques unheard of until very recently.
It therefore seems strange that, as yet, few developers or professionals have looked at ways of simplifying their documentation to reflect the changes in the market. One question which is still seldom asked is: “Are my documents holding me back?”
The 1980s boom, and resulting sellers’ market, were clearly reflected in the legal documents for property transactions. Leases became longer and longer. Ever more onerous obligations were sought to be imposed on tenants and buyers alike. Landlords tried to make tenants liable for inherent defects to building structures — as well as for normal repairs. Rent reviews were undertaken on highly artificial assumptions about, for example, the permitted use of the premises and the length of the remaining term of the lease, but disregarding many elements of commercial reality. All these terms — and many others like them — were fashioned to create the so-called “institutional lease” to satisfy the demands, both real and perceived, of City institutions.
Similarly, developers’ sale contracts permitted changes in layout, specification and finish without allowing the aggrieved purchaser any redress. Any “get-out” clauses to be found in such contracts assumed that prices would continue to rise and that only sellers would ever wish to take advantage of them. Buyers were often viewed as being fortunate to be allowed an opportunity to participate in the bonanza produced by the explosion in values.
All too often the documents took no account of the tenant’s or purchaser’s needs. For example, collateral warranties from builders, architects and engineers — to give the buyer of a new building some redress for economic loss caused by defects — were seldom volunteered. Almost invariably, even this important protection for a purchaser had to be the subject of protracted negotiaion. Difficulty was even sometimes encountered where an inexperienced developer had failed at the outset of his development to impose an obligation on his builder and professional team to give warranties to the eventual purchaser of the completed scheme.
New balance of power
The shift of power away from the seller towards the buyer or tenant is only too obvious to everyone involved in the market. The general economic recession, coupled with the glut of property overhanging the market in many areas, looks certain to retain the new order for the foreseeable future. Now the buyer is king!
So, how is all this reflected in the legal documents for the sale and letting of properties?
In short, not much! In many quarters it seems that the paperwork has scarcely evolved at all to reflect the new balance of power. Landlords — or rather, their solicitors — still produce lengthy, one-sided documents. The perceptible changes in sale contracts have been the elimination of “get-out” clauses, but little more. The need for collateral warranties is now generally recognised, but they are still seldom volunteered.
The many deficiencies are often exacerbated by the complex and obscure language frequently used by lawyers in drafting their documents. Nowhere is this more apparent than in the wording of commercial leases. These documents impose a complex and detailed set of arrangements between the parties, which often last for many years. It is therefore unfortunate that, all too often, little thought or care is given to making them “user-friendly”. They are written in a language — “legalese” — which the ordinary user will find it difficult to understand without the services of a lawyer.
Badly prepared, one-sided documents are not only unnecessary but can also be positively harmful to the interests of a would-be landlord. At best, there will be protracted negotiations to alter the paperwork into a form which the other party will accept. The process of amendment can take weeks — with the resulting loss of income and the risk that the buyer or tenant will change their mind, find a more suitable property or be offered more attractive inducements by another desperate landowner. At worst, the potential purchaser or tenant faced with an unreasonably one-sided document will simply take their business elsewhere. In the current climate this is a risk no developer can afford.
There are also generally unrecognised, hidden costs created by lengthy documents written in indecipherable legal jargon. First, there is the risk that a mistake will be made and will go undetected until it is too late to put right. This is much more likely to occur if the landlord and the tenant (or buyer and seller) are unable to understand the document themselves and to check that it satisfies their requirements. Second, additional cost is likely to be caused in the process of checking, amending and reamending an unnecessarily lengthy and complicated document.
In the past, at least in the grant of leases, these costs have traditionally been passed on to the incoming tenant; landlords were therefore perhaps unaware of the position, or not so concerned about the cost as they would have been if they were footing the bill. Now, however, the reluctance of tenants to pay landlords’ legal costs means that unnecessary expense in this area cannot be ignored.
A fair balance?
It is suggested that the time has come when this traditional attitude should change. The approach which anyone involved in the sale or letting of properties now ought to take is to ask themselves whether their documents create a fair balance. It is said that the test of a successful negotiation is whether the parties have both achieved most of what they wanted: similarly, the yardstick for a well-drawn document should be whether it satisfies both parties’ principal needs.
Everyone involved in the sale or letting of the property should ask themselves whether their paperwork is likely to help secure a speedy deal — or could it be holding them back?
Getting it right!
How can this best be done?
As with so many other things, the answer is by proper preparation: asking the right questions at the right time and then putting the answers into practice. A checklist is frequently a valuable aid.
Stage 1.
Look at your needs. Identify what you have to get out of any deal — and prepare a summary of those requirements. This will avoid the major issues getting mixed up with the minor ones. It will also help you, and your advisers, to concentrate on what really matters.
Stage 2.
What will the other party want? Put yourself in their shoes and try to understand what will be their main concerns. Does the package which you are offering satisfy these? Do any of their likely concerns conflict with your needs? If so, how can the conflict be resolved? If the two sides’ objectives are completely incompatible, it is best to find this out as soon as you can. If you can give them what they want without sacrificing your own conditions, do so.
Stage 3.
Instruct your lawyer to begin preparing the draft contract or lease straight away; don’t leave it until all the terms have been agreed and the deadline for exchange is only a week away! Using solicitors at this early stage should not cost you any more and should save money in the long run by speeding up the deal. Give the lawyer copies of the lists you have prepared of your main requirements and those you expect from a buyer/tenant. Make it clear that you expect to be able to understand the paperwork and that you therefore want it written in plain English.
Even though a deal has not been struck at this stage, this information should enable your solicitor to draft documents containing almost everything which will be required. The inclusion of important information such as the identity of the other party, the price, rent etc, and any special terms can normally be added later without much change being necessary to the basic paperwork.
Stage 4.
Check the documents yourself! Can you understand them? Are they written clearly and in plain English? If you cannot understand the paperwork with a little help from the draftsman — or if the language is verbose and complicated — send it back and ask the lawyer to try again! The first time you do this, the reaction will probably be one of shock, mixed with disbelief — after all, what do you know about preparing legal agreements? However, stand your ground. You should need to do this only once to get your message across. The solicitor should be ready to understand that you consider your interests better served by concluding a quick deal based on a fair balance rather than having a protracted-wrangle over a one-sided set of documents.
Stage 5.
Agree terms with your purchaser/tenant and move rapidly and painlessly to a quick exchange!
Of course, things will not often work out this smoothly: there are likely to be problems and delays. This is all part of operating in a buyers’ market. But take some comfort — what you can be sure about is that your documents are not holding you back.
