Touching the voids

The prospect of a downturn is bringing the South East’s property investors – and their lawyers – a fresh set of challenges, says Stephen Hedley

Touching the voidsThe South East has, over the past 10 years, been one of the UK’s most successful regions, consistently outperforming the rest of the UK in terms of economic activity and employment rates. The South East economy has typically grown at a rate of 0.9 per cent per annum – faster than the rest of the UK. But the South East is not immune from the pressures on the global economy that are affecting the UK as a whole.

The South East has at least nine cities and major towns which, including their surrounding areas, create major economic centres. Home to more than 280,000 VAT-registered businesses, it is second only to London on this measure. Coupled with the second-highest business density rate in the UK, the risk of downturn may have an impact on a large number of businesses.

This has led many property investors to look at innovative ways of creating new rental income, as well as having to work harder to fill their voids. This changing marketplace also affects lawyers and the way in which they work.

So how are landlords accommodating the changes? The retail sector has seen a need for innovation as consumer spending and confidence dips, leading to a significant increase in commercialisation within retail schemes. Previously unused mall space is now home to retail merchandising units, exhibitions, fashion shows and other forms of entertainment. This creative use of space has helped add vitality to retail schemes, helping them create a new identity and differentiate themselves from others.

This innovative rethinking of the use of vacant space and the marrying of shopping alongside other forms of entertainment has an impact on lawyers. The shift away from pure property transactions to quasi-property/commercial agreements means property and commercial lawyers are now working side by side more than ever.

As well as the need to create new income streams, there is pressure on filling vacant space. The South East is home to two of the UK’s four ‘growth areas’ launched in the Government’s Sustainable Communities Plan 2003. These regeneration areas are Ashford and the Thames Gateway. The latter is the largest regeneration project of its kind in Europe. This large-scale development, coupled with the economic slowdown and the new regulations governing non-domestic rating relief, means that the need to fill empty units is acute.

The situation has led to a shift in the bargaining position of landlords and tenants, particularly where the tenant has a strong brand. Shorter, more flexible terms and turnover rents are some key trends, and once heads of terms are agreed the deal needs to be concluded swiftly.

Lawyers have to recognise this shift in bargaining positions and understand the commercial drivers for the deal. A pragmatic, commercial approach to negotiation is needed, with documents written in plain English.

In this tougher market landlords are also keen to demonstrate that their properties offer value for money. Transparent service charges, an increasing focus on tenant satisfaction and corporate social responsibility are key trends. These all help differentiate one landlord from another and lawyers must play their part too. After all, the first real experience a tenant has of its landlord is via the legal due diligence process and the lease negotiations.

Lawyers need to recognise the changes being forced on but also embraced by their clients and look at how they can improve the way in which they deliver legal services. Just as clients need to show value for money to their customers, offer something different and stand out from the crowd, lawyers need to accommodate the changing needs of their customers and participate in that process in order to ensure that their customers continue to meet their objectives in the most favourable way, irrespective of the marketplace.

Stephen Hedley is a partner at Cripps Harries Hall