Firms are working no win, no fee to take part in the sale-and-leaseback boom. By Joanne O’Connor

Something funny is happening in the world of real estate, and for UK lawyers in the sector the once reliable property landscape has changed almost beyond recognition.

Real estate securitisation and sale-and-leaseback transactions are revolutionising the market, with US banks being the driving force behind the changes. Commercial mortgage-backed securitisation has long been the primary model for property finance in the US, so it is no surprise that US banks are showing the UK a trick or two on the development of new products and techniques.

Property rich companies in the UK are increasingly using securitisation as a relatively cheap way to unlock capital from their property portfolios. Punch Taverns, Spirit and Unique have all securitised their property interests, but banks and law firms are accepting mandates for motorway service areas, ferry services and nursing homes. Banks are trawling through their books of property contacts to persuade them to do a securitisation or a sale-and-leaseback. The property companies then beauty parade the banks, ensuring that securitisation and sale-and-leaseback deals are highly cost-competitive and that law firms are forced to run naked on fees in many cases to help their banking client win the instruction.

It should come as no surprise, then, that the firms most active in property securitisation for the banks – which are chiefly ABN Amro, Citigroup, Credit Suisse First Boston (CSFB), Deutsche Bank, Lehman Brothers, Morgan Stanley and Royal Bank of Scotland (RBS) – are also those most able to absorb potential losses should their client lose out in a tender. Allen & Overy (A&O), Clifford Chance and Freshfields Bruckhaus Der-inger are the dominant players in an area that demands real estate expertise and a serious finance capability, as well as a willingness to take on 100 per cent no win, no fee deals.

The archetypal real estate securitisation remains last year’s Land Securities Trillium (LST) deal. Clifford Chance, led by securitisation partner Peter Taylor, secured the major role advising Citigroup, while Slaughter and May bedded down a relatively new relationship by advising LST. The deal is the largest to date this side of the Atlantic and is expected to set a precedent for real estate securitisations.

Whereas at one time property companies were limited to borrowing by corporate covenants or secured debt, property rich businesses are now busy trying to realise their assets, with retailers and pub companies leading the charge in whole business securitisations and sale-and-leaseback transactions. Retailers such as Boots and Debenhams are examining ways of raising capital from their extensive property portfolios, following in Marks & Spencer’s footsteps. And private equity houses such as Cinven, CVC and Permira looking to acquire a property rich target are increasingly looking to leverage by way of an internal sale-and-leaseback. The structure means that prospective buyers can borrow up to 85 per cent on the value of the business.

SJ Berwin led on the sale-and-leaseback of 135 Travelodge hotels, acquired by Tom Hunter’s Prestbury Hotels vehicle, which is leasing them back to Permira-owned Travelodge for periods of between 25 and 35 years.

For project finance lawyers, pitching for jobs and running naked on fees until the client attains preferred bidder status is par for the course. But for many real estate lawyers, the advent of beauty parades is a frightening prospect. One commented: “It’s a strange situation for real estate lawyers in that they’re pitching for work and having to pick their horse.” SJ Berwin for one has indicated its nervousness. The result is that many smaller firms are shying away from the area because of its inherent risks and many mid-sized real estate firms will fail to win the most risky and lucrative roles on real estate securitisations and sale-and-leaseback deals.

But even on what were once straightforward real estate deals, new tax structures are ensuring that the world of property is more complex than ever. Last year, when Clifford Chance advised on the £60m acquisition of three West End properties by O&H Group in a joint venture with GE Real Estate, the deal involved five Jersey unit trusts, which enables an owner to sell their interest in a trust without incurring stamp duty or capital gains tax.

Elsewhere in the real estate world, it seems that not a day goes by when a real estate fund isn’t being unveiled. Standard Life Investments is reportedly establishing two offshore funds with a combined size of £3.6bn. It is understood the funds will contain most of its UK shopping centres, including its 59 per cent stake in Brent Cross Shopping Centre, and a quarter of its retail parks. And last year SJ Berwin secured a head-turning funds instruction after advising on the creation of the new Bramdean fund, headed by City ‘superwoman’ Nicola Horlick. Even the US firms are getting in on the game, with the notoriously cautious Sullivan & Cromwell and Simpson Thacher & Bartlett both promoting London partners into the real estate funds arena.

But the big question is: where will all the money go? A lack of sellers has made it hard for real estate investors to find a home for their money.