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3 December 2013
Shimmering in a sea of stone, steel and glass, London's City and Docklands offer a company on the move no end of choice for a new headquarters. The property boom, kept tight with a steady drip of new prelet properties rather than an unseemly speculative rush, has seen a healthy crane count over the last couple of years. Law firms have been riding the crest of the wave too, both in terms of advising occupiers and developers on lettings and construction and taking advantage of the bubble to relocate themselves.
Lawyers acting on property development or investment work for owners or landlords are well known enough in their own right. But who acts on the other side, for the blue-chip occupiers requiring splendid trophy HQs? And why?
The top lettings lawyers are a small bunch. At most there are only four firms which deal regularly in this sort of work - Ashurst Morris Crisp, Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters & Alliance, with probably only 10 or so individuals in those firms who can lay claim to high-profile lettings as their territory.
So how does a firm build and then retain such a lettings practice? It has to have a strong corporate base to begin with, as this provides its equally strong property practice with a pool of potential clients. Reputations in both, of course, act as flag-wavers to pull the clients in. "It's access to corporate clients, either through the firm's client base, or by being introduced to them," says Gary Watson at Hammond Suddards Edge, who began to carve out his own reputation as an HQ specialist at Lovells more than 10 years ago when he placed Texaco into Canary Wharf.
Trophy lettings are important to a property practice. HQ work carries with it much prestige and is a primary reason as to why law firms like acting for such clients - it gets their name in the newspapers. "You do act for prestigious names, as the large users of space tend to be the investment banks," says Linklaters partner Julian Innes-Taylor. "It's prestigious work, and the high-profile nature of that work is important to us."
Cross-selling is important, too. Freshfields partner Geoff Le Pard says: "You get exposure to people you wouldn't normally, and this can all lead to other work, because they'll have seen you in action and know that you can do the job."
It also leads to other types of property work - these firms are not confined purely to lettings, they have highly-regarded development and investment practices of their own. "This is good work, and often brings disposal work with it," says Ashursts partner Adrian Dear. "There are spin-offs and it all helps to develop the relationship. And the best gamekeepers are ex-poachers."
It might be prestigious work, but it is not necessarily difficult or particularly complicated on the legal side. However, it is important to get it right. "The top bods get involved with their new HQs, and there's great pressure on the property manager," says Dear. Le Pard agrees: "The spec, the timing, the legalsä everything has to be right. The move is crucial to the company and they expect the lawyers to give it maximum priority. You get involved in high-level decision-making because the top bods take a personal interest in their new HQ, not just because they're checking that the numbers add up, but because of the aesthetics."
And once a firm or an individual has got it right, repeat instructions tend to flow in freely. "Large HQ deals tend to be the type of work where potential clients will think of you because you've done the most recent," says Clifford Chance partner Robert MacGregor.
Recommendations are equally important, and examples include Watson from Hammonds, who was recommended to State Street Bank, and Ashursts, which was recommended by Linklaters to Simmons & Simmons for its move.
Acting for occupiers, especially blue-chip ones, is different from acting for your typical developer or investor. Not only is there more of a personal interest, which increases the pressure to get the deal right, but other skills are needed. "It requires you to alter your mind-set, because there's a need for flexibility," says MacGregor. "The developer is focused on cashflow, retention and maximisation, but the occupier has a different perspective. Things will change, such as the amount of space, the use, the covenant and the ability to contract out. It's a very different model." InnesTaylor agrees. "Project management skills are very important, which is where experience on previous schemes comes in," he says.
As a result, a more intense level of teamwork is required and achieved. "Because it's their own project, there's often a team assembled specifically for the job," says David Beales from Slaughter and May. "It doesn't just go through the lending or estates department, and it will often be chaired by a member of the board who will want to know exactly what's going on." Michael Ashley-Brown, group legal counsel at the Canary Wharf Group, says: "My top 10 lawyers include those who are able to become members of the commercial team of the tenant. They're commercial solicitors who are more special than just very good solicitors."
This means that lawyers have to be diplomats as well. Ashursts partner Martin Wright says: "You have to enter the machinations of a large organisation, and you don't want to rush in there with size-11 boots."
Fittingly, and as one would expect, the work is generally carried out by each practice's more senior partners. "The client doesn't want a 25-year-old assistant telling a 45-year-old chief executive what's what," says Dear. "On a head office move, the chief executive wants to hear it from their equivalent."
Impressions are everything. Those on the other side of the deal will have gained a good idea about what makes their opponents tick. "To do a good job for occupiers you have to understand what a sophisticated occupier of an HQ building is likely to need to input into the construction process," says Ashley-Brown. "The art of acting for the tenant is to keep ahead of the curve so that what they want is factored into the documents. The right advisers are the ones who make sure that the building does meet [the tenant's] requirements."
And broad experience in all fields appears to be what the occupiers themselves require from their lawyers. Carla Picardi, project director at Swiss Re, which instructed Linklaters on the Erotic Gherkin building, says: "The depth and breadth of experience in a variety of areas [is what is needed], so that there's a cohesive response from someone in planning, real estate law and construction who can all pull together a large, complex development. It's the comprehensive nature of [Linklaters] that makes it exciting."
Speed of response is also important. "We'd made alterations which, together with the warranties, had to be documented in time for the assignment," says manager of BT Property in London Graeme Hunter, who used retained property law firm Ashursts on the letting of 30 Berkeley Square, the proposed HQ of the to-be merged BT and MCI, a deal which subsequently fell through. "So it was not run-of-the-mill conveyancing. Also, originally we had two or three other occupiers chasing the same building, so we had to get in there first."
However, any idyllic picture could soon be shattered, according to the latest figures on central London office space from CB Hillier Parker were released. The figures reveal that the City could run out of available office space in less than three months if take-up continues at its current pace. "Demand for office space is nearly double the amount available," says CB Hillier Parker senior analyst Catherine Rees. "Of the total amount of space, there are only 62 newly-built units available in the whole of central London, which is an astonishingly low figure."
According to Rees, the availability rate at 2.7 per cent of the total stock is at its lowest level for 13 years, with just 514,400 square metres (5.5 million square feet) on the market.
Logically, law firms should be worried that if the space dries up, their prized and prestigious - although not necessarily hugely profitable - practices will wither away on the vine. However, space rarely does dry up completely, which means that what could happen, more worryingly, is the opposite - a glut of speculative development and oversupply, the very mention of which sends shivers down the spine. Should a recession rear its ugly head, then the lettings bubble will burst, pre-lets will die away, corporates will tighten their belts and trophy HQs will become unfashionable once more.
Lettings lawyers should be biting their nails, but they remain hopeful. "Things should settle," predicts Innes-Taylor. For prestige's sake, one would certainly hope so.