Managing property costs: Lease is the word

In the current climate where cash is king, firms need to be doing everything they can to find new ways of ­generating income from their bricks and mortar.

Clifford Chance recently signed a deal to sublet three-and-a-half floors totalling 93,000sq ft at its Canary Wharf offices to KPMG, with expected rental income of £4m during the 2009-10 financial year.

In a separate cost-cutting measure, the firm is also getting rid of 130 fee-earners through a mixture of ­voluntary and compulsory redundancies. It is normally reckoned that each fee-earner needs about 160sq ft of space, so the cuts would in ­theory free up a further 20,800sq ft. While it is likely that the freed-up space would be spread out across the building, in total it would add up to around one floor of the magic circle firm’s ample office space.

Surely it would be sensible for firms such as Clifford Chance that are undergoing large scale redundancies to sublet the surplus space redundancy programmes generate? Managing partner David Childs agrees, but points out that it is early days in his firm’s restructuring to be looking at anything like that.

“Yes, we would consider subletting space in London and other offices – it’s good housekeeping,” he says. “We need to complete the restructuring of the firm before we even consider that. It’s a good option for us. In some cases the rent generated by subletting is more than the amount the firm pays.”

With floors going for around £40 per sq ft, Clifford Chance’s building is attractive from a financial point of view. But Canary Wharf is a bit off the (legal) beaten track (see map, ­opposite) given that most firms are in the City, its fringes and the West End.

Local knowledge

But there is a marked difference between the London locations of the largest-grossing UK firms and their US counterparts. US firms are ­usually located in the core of the City in some of the capital’s landmark buildings, despite headline rents being around £50 per sq ft at present.

Kirkland & Ellis and Hunton & Williams, for example, are in the Gherkin ;building. ;Pillsbury Winthrop Shaw & Pittman, Orrick Herrington & Sutcliffe, and Debevoise & Plimpton are all in Tower 42.

In contrast, the magic circle and Slaughter and May are all situated on the fringe of the City, in areas such as the Barbican, Spitalfields and Fleet Street, or Canary Wharf in Clifford Chance’s case, where rents per sq ft are as much as £10-£15 less.

Bradley Baker, head of central London tenant representation at property agent Knight Frank, says this difference in approach comes from the fact that UK firms use their local nous to negotiate better deals.

“UK firms are seeking value more than US firms,” he believes. “It’s a case that if you know a city well it’s easier to find good value. For firms that are trying to establish themselves, a safe option is to go for known locations. UK firms in New York will do the same.”

Property in midtown – the area around Holborn and Chancery Lane – may be less eye-catching, but firms that are based there say they prefer it because of its proximity to their clients. Property-focused Nabarro is in that area and is close to developers and agents in the West End. Olswang can serve its media practice ­easily from the same area. The area has also historically been viewed as value for money, although that is now ­changing (see graph, below).

Olswang, which is making up to 8 per cent of its fee-earners redundant, is tight-lipped when quizzed on how it is managing its space during the downturn. “Office space isn’t an issue for Olswang, so not much to say on that one,” an external spokesperson comments in an email to The Lawyer.

But location is also about brand – or brand aspiration. Pinsent Masons is spread across three buildings. It has one in Clerkenwell – more of a media than a legal district – one in the Citypoint tower at Moorgate and last year it picked up a 12,000sq ft floor from Linklaters at Bunhill Row.

At around 80,000sq ft, the Clerkenwell office is Pinsents’ largest space by far. But managing partner David Ryan is adamant that the smaller Citypoint office, in the heart of the City, is, in fact, the firm’s true headquarters. Ryan’s determination cannot be separated from his ­ambitions to refashion Pinsents as a global entity.

“We think it’s very important to have a City headquarters. We have one now and we’d like to continue to have one,” he says, referring to where the firm decides to move to when its Clerkenwell lease comes to an end in 2015.

For the past few years, Pinsents’ need to take on new space has been met by subletting here and there. The Citypoint office has been acquired over time from Simmons & ­Simmons.

A Simmons partner says his firm has been “quite efficient” with its use of space – a euphemism for encouraging people to work from home amid inadequate conditions, according to one disgruntled former employee.

“Simmons did a huge thing on home-working in the autumn. It got IT working at home two to three days of the week in the hope it would save jobs, but it didn’t,” the former employee says. “The home-working caused no end of furore. Lawyers have nice flats with rooms they can use as offices, but IT staff don’t ­necessarily have that kind of space.”

A current Simmons partner does not think that the prospect of 86 redundancies at the firm will result in further space being sublet, as it will be of minimal rental value.

“A lot of those concerned are ­secretaries and they sit in the ­corridors,” the partner explains.

That is because Simmons operates a cellular structure to its office organisation. But Eversheds, which ­recently made 73 lawyers redundant together with an unspecified number of support staff, does not have this particular problem. The firm was one of the first to go open plan when it moved into its One Wood Street headquarters last summer.

“Flexible space has been a distinct advantage – it’s helped in what can be quite gloomy times,” says London office managing partner Cornelius Medvei. “We’ve just had a shuffle around. It’s the first one since we moved in. We try to move staff around where we lost one or two ­people to fill gaps and stop people feeling down.”

But subletting is “not a meaningful option for us”, Medvei comments, as Eversheds will need the space back sooner rather than later.

“You need to commit to long-term leases – about five years or so – and we think that in the next 18 months to two years we’ll be coming out of this,” he adds.

Knight Frank’s Baker agrees that subletting is not always the solution. “To sublet space you’ve got to compete with what landlords are offering,” he says.

“If a tenant is realistic about subletting, it immediately requires capital expenditure and has to offer a three-to-five-year term. If the market comes back and they wants the space they will have to take up offices elsewhere. The leases couldn’t be coterminous and before you know it the firm has embarked on a village concept.”

Flexibility required

Lovells knows the downside of not having a single site – the firm is spread across three buildings. ­Admittedly, it has been comparatively lucky in that all three are within a stone’s throw of each other along Holborn Viaduct on the boundary between midtown and the City.

“In a perfect world we’d all be in one building,” admits London ­managing partner Ruth Grant. “The main disadvantage is that occasionally people have to go out with umbrellas when they move from building to building.”

Lovells has put 94 members of staff into redundancy consultation, but Grant says the firm will not rejig the working space once staff are let go because the redundancies have taken place across several departments.

Lovells has sublet surplus space elsewhere in the world, for example in Frankfurt, according to senior partner John Young, but the issue has to be managed quite carefully.

“The danger is that we may need it in the future and it needs to be security sealed from the rest of the office,” he explains.

So if subletting space is not always an attractive option, what about ­trying to recoup money on surplus equipment or fixtures unused by those made redundant? When ­Cadwalader Wickersham & Taft laid off 96 lawyers in the US last July, it offered associates the opportunity to buy their laptops at half price. But this may have been done more as part of a generous severance package than to make some money.

Denton Wilde Sapte chief executive Howard Morris certainly does not have flogging computers to those his firm is making redundant on his agenda. “It hardly seems worth ­selling it. What’s it worth on the books?” he asks. “No one, as far as I know, has asked for it as part of their redundancy packages. Computers are so cheap now. We keep it in stock and send some of it to charitable organisations in Africa.”

It is not just computers that are cheap for those on a western salary, but office space itself. There tends to be an 87 per cent correlation between the rise and fall of the FTSE100 and prime City rents (see graph, ­opposite). And with the FTSE having fallen from about 6,500 in mid-2007 to around 3,500 now, City rents have correspondingly plummeted.

As a result of limited interest there might be little incentive for Allen & Overy, Clifford Chance, Linklaters or any of the firms that are making triple figure job cuts to put space on the market.

“The sensible law firm will be focusing on the first rent review rather than headline rent because the market has turned and the length of rent-free periods has increased,” argues Baker. “You can negotiate rent caps, maximums, and collars, minimums, at the first rent review. If you’re looking to move look at how you use space, how much you need it and the way you occupy it. People want to have options to expand and contract. The biggest problem for anybody is commitment.”

Click the image above to view larger version and key