The challenges developers face and how we can help
Our client was a property development company, who for the purpose of this case study we’ll refer to as XYZ Co Limited.
The directors identified a good investment and development opportunity on the outskirts of the town – a fully occupied 7 unit commercial business centre, owned by “Frog Holdings Limited”.
The managing director and principal shareholder of Frog Holdings Limited had acquired the land in the late 1950’s, and built five units shortly after acquisition. Two larger units were constructed in 2005. The development was adjacent to a brown field site.
X YZ Co Limited saw an opportunity to develop a Business Park dedicated to hi-tech industries, and for substantial returns to be made. This project involved buying the existing seven unit site, acquiring the brown field site to construct a further 8 units, making the total 15, but with scope to increase to 20;
Thereafter the plan involved:
- demolishing three of the older units to replace them with new ones and refurbishing the other two units.
- Building 8 units on the new site and combining both into one Business Park
The legal advice and services provided through the Whitehead Monckton Property Investor and Developers team related to:
Acquisition of the existing Business Park and the brown field site
A number of different issues needed to be addressed:
Firstly, the Brownfield site was owned by a third party completely unconnected to Frog Holdings Limited. Fortunately, previous discussions had taken place between the respective owners about a possible purchase and agreement reached in principle that if Frog found a buyer for its site then the Brownfield owner would listen to offers. XYZ Co. entered into negotiations and in return for a non-refundable deposit, agreed a deal based on a contract conditional on obtaining planning for the Brownfield site and the contemporaneous acquisition of the Frog site.
The Frog site proceeded on the basis of a straight, unconditional purchase of the freehold interest subject to and with the benefit of the existing tenancies.
Secondly, our title investigations and property due diligence revealed a small parcel of land immediately abutting the two sites which was unregistered but which had always been incorporated within the land owned by Frog Holdings Limited. It was necessary for a comprehensive Statutory Declaration to be prepared by the owner of Frog Holdings detailing their uncontested occupation of the land which enabled that parcel to be registered with possessory title.
In addition, the owner of Frog Holdings agreed to meet the cost of a defective title indemnity policy which would pay a sum equivalent to the value of the site in the event that a claim were made by a third party asserting ownership in the future.
In addition, our desktop study (and the replies to our pre contract enquiries) revealed potential contamination of the Brownfield site arising from a previous use as a storage and distribution depot. So it was necessary to incorporate additional provisions into the contract permitting XYZ to carry out preliminary tests to a small area. These were undertaken by a specialist environmental company. The results revealed no significant problems and so the transaction was able to proceed.
Further, the title to the Brownfield site revealed covenants contained in two conveyances, one dated in 1910 and the other in 1946. These contained covenants not to erect any new buildings without the consent of the then vendor (in the case of the 1910 conveyance) and a covenant not to use the land otherwise than for storage and distribution in the 1946 conveyance. Initial investigations showed that it would be difficult, if not impossible, to trace the parties with the benefit of those covenants and so again, we negotiated a restrictive covenant indemnity policy covering breaches of both covenants for a relatively modest premium.
Finally, it was necessary for us to review and comment upon the occupational leases of the existing business park. In one of the units, the tenant was holding over under an expired business tenancy and the rent had not been renewed since the last rent review five years prior to the expiry of the term. XYZ’s agent advised that the market rent was probably in excess of the rent being paid and it was therefore necessary for us to advise upon the termination of this tenancy with an offer to renew at a rent which reflected the market rent.
XYZ Co. approached their existing bank for funds to assist in the acquisition of the two sites and future development costs. Their funders, a high street lender, agreed to provide funding in two tranches, the first tranche to assist with the acquisition of the site and the second, a separate loan to fund the future development. As we had acted as the bank’s independent solicitors in relation to other funding projects, they were instructed us to represent the bank as well as XYZ Co. thereby negating the need for a third party firm of solicitors to be appointed.
The bank required the same detailed due diligence investigation to be carried out as we had undertaken for XYZ Co, together with all of the searches and investigations and were prepared to proceed with the funding for the acquisition provided the necessary indemnity policies referred to above were obtained. Their valuation confirmed the purchase price for the site and their valuer was content with the terms of the occupational leases.
The bank’s security requirements included a debenture over the assets of XYZ Co. as well as a separate first legal charge over the freehold title to the site owned by Frog Holdings Limited and the adjoining Brownfield site.
Obtaining all appropriate planning permissions and other approvals
There were a number of distinctly separate aspects to the planning issues at the site:
- Initially it was not clear whether conditions attached to the planning permission for the larger units in 2005 had been complied with and we carried out the necessary investigation to be able to clarify the position.
- The development site included a number of trees for which Tree Preservation Orders had been granted in addition the brown field site was adjacent to a listed building.
- We introduced X, Y, Z Company Limited to a planning consultant who worked up the planning application to take into account working round the trees producing a scheme that was acceptable in proximity to the listed building and included mitigation such as additional bird boxes incorporated in the roof of the design to deal with the ecology issues arising from the ecological survey required for the planning application.
- We also advised on the Section 278 Agreement dealing with the new access to the site and the agreements in relation to the additional water supply that was also required.
- The application was made to construct 13 new units and as the permission would be implemented by the delivery of the first 8 units this allowed the client to complete the final 5 units at a later date without the need to make a subsequent planning application.
- The local authority required a Section 106 Agreement to be entered into providing an area of open space at the site and a number of contributions including ensuring the maintenance of that open space.
The negotiations with the Council provided that these were delivered at the latest possible stage of the development to minimise the frontloading of the viability of the scheme.
The demolition of the 3 older units was also therefore able to take place at a later date so that in practice it allowed the tenants from the 3 older units to be moved straight into the new units securing no break in the income stream with the 3 replacement units subsequently being let off plan.
This was the best outcome for both landlord and tenant.
We were able to advise on and identify a number of practical issues which fed into the planning process and our experience of dealing with similar schemes allowed us to have considerable input into maximising the returns on this scheme as well as delivering it in the most cost-efficient way.
Terminating five existing tenancies, recovering rent arrears and negotiating dilapidations claims
We dealt with the termination of the five existing tenancies in conjunction with the dilapidations claims and recovery of rent arrears. Three of the tenancies had substantial arrears of rent; we reviewed the leases and found that each contained a forfeiture clause. We advised XYZ Ltd that it could forfeit the leases due to the unpaid rent and informed XYZ Ltd of the two ways to forfeit:
- To sue the tenant companies for possession; or
- Physical re-entry of the premises; i.e. instructing a certificated bailiff to enter the premises to change the locks and recover possession.
We further advised XYZ Ltd of the risks involved with forfeiture, particularly that the tenant may claim relief from forfeiture within 6 months of XYZ Ltd exercising its right to forfeit. We extensively discussed the rent arrears with XYZ Ltd to ensure that there was no dispute over the sums outstanding and that XYZ Ltd had not waived its right to forfeit by demanding rent from any of the three tenants.
The remaining two tenancies were approaching the end of their leases. XYZ Ltd informed us that these two units were in disrepair, in some areas substantially. We advised XYZ Ltd to instruct a surveyor to prepare a schedule of dilapidations for the two units and provide valuations for both units in their actual and repaired states. We informed XYZ Ltd that the dilapidations claims must be pursued under the Court’s pre action rules known as ‘the Dilapidations Protocol’. We advised XYZ Ltd to ensure that the schedule was to be served on the tenants within a reasonable time; i.e. a maximum of 56 days from the termination of the tenancy. We further made XYZ Ltd aware of the statutory cap on the sums recoverable for the disrepair.
All of these tasks were co-ordinated through the Whitehead Monckton Property Investor and Developers team, headed by Vicky Stoodley Planning partner.
If you would like to discuss any development opportunities and how we can assist you please contact Vicky Stoodley.