The Sunday Times columnist Luke Johnson is bright. His columns are always stimulating. Yet in an article on 27 May 2018, he was quoted as saying: “Landlords deserve absolutely no sympathy. They are mostly ruthless when it comes to rent reviews, dilapidations claims and service charges. Why on earth should tenants not use every legal means – as landlords do as a matter of course – to improve their commercial position?”
Also, Hugh Osmond, the entrepreneur, was quoted as saying that landlords only need one person in an area, to whom they’ve paid a £500,000 contribution for fitting-out costs, to agree a higher rent and they can then “raise the rent for the whole parade”.
So when it comes to asset management, how do landlords behave? It’s a timely and a timeless question. A decade ago, insolvency practitioners would castigate landlords over upwards-only rent reviews and long-term leases. Landlords then replied as landlords do today: no-one forces tenants to sign leases and tenants are not threatened if they want to talk about changes to lease terms. It’s a cyclical thing.
In 2009, the Financial Times reported that: “Some of Britain’s biggest landlords have agreed a plan to cut costs by up to 20% and pass these savings on to retailers in the latest move to ease the beleaguered high street’s burden from property costs. The British Property Federation said some of its biggest landlord members had agreed a 10-point plan to become more efficient in the provision of miscellaneous services and to pass these savings on to retailers in the form of lower charges.”
One tenant said: “Where costs can be reduced, it is going to be beneficial to both the retailers and the landlords.” Thanks for that, Arcadia’s Sir Philip Green.
So let’s take a look at some situations that have gone wrong and see if there is any pattern. But first, let’s at least acknowledge that landlords need a range of skills with which to deal with tenants across diverse portfolios. Recently, I asked a landlord client how he managed tenants whose first language was not English. “The first language?” he replied. “Most of my tenants don’t speak English.”
Questionable behaviour?
In property, as in every business, there are opportunities for the unscrupulous. I was consulted by a tenant who was aggrieved by the outcome of a rent review. The landlord had relied on a comparable transaction that seemed, from the tenant’s point of view, to be too good to be true. Very possibly, it was. Perhaps the landlord and the tenant of the comparable property had agreed something along the lines that Osmond suggested in the Sunday Times. However, it’s not what you know, it’s what you can prove in court. The tenant in question did not have proof and none could be obtained.
But there are checks and balances on those who consider themselves accountable. I was consulted by a landlord about a rent review of a retail unit in a shopping centre. In the same centre, there was a comparable transaction – a letting to X – that appeared to be a robust piece of evidence in our favour. The tenant’s contention was that the rent X had agreed to pay had been boosted by the payment of a fitting-out contribution to X on a letting between my client and X at another location altogether – at the other end of the country.
If this allegation was true, it might have been even more devious than Osmond’s example of paying a contribution to another tenant in the same locality. I was instructed to review the client’s records and write a report. But my team found the document that proved that the tenant’s concerns were well founded. Money had, indeed, been paid to X as a capital contribution to fitting out a unit at another centre owned by my client, in consideration of X agreeing a higher rent than it otherwise might have done for the comparable space.
What was the outcome? The trigger for the investigation was enquiries made by the tenant of the landlord in the course of the rent review arbitration process. It was the tenant’s case that the comparable evidence was contaminated by a fit-out contribution. On that occasion, not only did the tenant have cause for concern, but it could, using the process of disclosure in the arbitration, have proved that the comparable was contaminated.
But why indulge in these subterfuges, when a clause making a transaction “confidential” can be used to mask a deal? A confidentiality clause is not a guarantee against a transaction becoming disclosable in a rent review arbitration. However, where a transaction is seemingly protected by a confidentiality clause, anyone seeking to obtain details of the transaction will expect to encounter resistance.
That resistance can be overcome if the arbitrator gives permission for the issue of a witness summons to compel the parties to the “confidential” comparable to disclose the terms of the transaction. The current practice is that the arbitrator should scrutinise an application for permission to issue a witness summons to ensure that the transaction in question is likely to be of assistance.
An over-fussy application of this test will lead to a rejection of the request for a witness summons. This means that the party seeking to obtain the “confidential” transaction will be thwarted. The risk is that evidence that might have assisted the arbitrator will not be produced.
Where does the line fall?
What these examples illustrate is the distinction between sharp practice and the conduct of parties in using legal means to (in Luke Johnson’s words) “improve their commercial position”. How do you tell them apart? Is there concealment of a material fact (whether there was a capital contribution interlinked with a rental deal) or is there an open endeavour, for example, to persuade a tribunal as to a legal point?
Is the following case an example of sharp practice or a landlord seeking to improve its commercial position? A landlord leased a lock-up shop to a tenant on a lease with five-yearly upwards-only rent reviews. By the second review date, both the first and the second rent reviews were outstanding. On the particular wording of the rent review clause, the landlord argued that the rent payable was to be determined by reference to the open market rental value when the third party surveyor actually made his determination.
There had been serious delay. The hapless tenant argued that the valuation date was the commencement of each review period. The tenant was “hapless” because, in a time of rising rents, the financial effect on the tenant of a backdated increase to current market values over a period of seven years back to the first review date would have been crippling.
It took a creative Court of Appeal, reversing a deputy High Court judge, to interpret the lease in favour of the tenant (Glofield Properties Ltd v Morley and another (no 2) [1989] EGCS 62). Hands up if you blame the landlord for running that case. As it happens, I do. It should have been obvious to the landlord that the court would seek to exonerate the tenant; even though the deputy judge declined to do so.
That is not to say that the landlord was guilty of sharp practice. It was not. But the attempt to improve its rights under the lease, to the point where the tenant would break under the weight of rental obligation, was unattractive to the point of unreality.
The best way forward
Asset management is about value and relationships. The pressures on landlords to create value are not becoming less intense. It requires the ability to think laterally and to see opportunities both for the landlord and its tenants.
The developers who win awards are the ones who invest in their relationships with their tenants. These organisations would say that they set out to improve their commercial position. But it’s not what you do, it’s the way that you do it. Improving the landlord’s commercial position by improving the tenant’s is the way of these successful businesses. They would be appalled at the suggestion that they are “ruthless” or that the supply side in their industry is “mostly ruthless”.
In a professional world where a day in court can be spent analysing a clause in a lease, the following view may be challenged. But the evidence I see and hear is overwhelmingly to this effect. While not every landlord deserves sympathy, most landlords are simply seeking to ensure that their product fairly reflects its value in the market.
Roger Cohen is a real estate sector partner at Bryan Cave Leighton Paisner LLP
