Scotsman Legal Review: Real Estate

Foreign capital boosts the commercial property sector.

The acquisition of Standard Life's Edinburgh headquarters was the largest investment deal in Scotland last year. Picture: Neil Hanna
The acquisition of Standard Life's Edinburgh headquarters was the largest investment deal in Scotland last year. Picture: Neil Hanna

With the economy showing signs of improvement in the last calendar year, occupier markets have seen something of a boost. Combined with an increased international appetite to invest in Scotland, and with banks more willing to lend on existing investments and developments, lawyers in the commercial property sector have reported a steady year, tarnished only slightly by the political uncertainty surrounding the vote on membership of the European Union.

Brodies was involved in the acquisition of Standard Life’s Edinburgh headquarters for a private investor, which was the largest investment deal in Scotland last year, second only, in recent years, to the Scottish Widows headquarters which the firm acquired for the same client the previous year.

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“That was a sign of foreign appetite to invest in Scotland,” says Nick Scott, head of real estate at Brodies.

“We were also involved in the biggest investment deal in Glasgow last year which was Atlantic Quay and again that was foreign capital.

“That busy period carried on until February/March this year when the investment market started to become a bit quieter while people waited to see what the outcome of Brexit would be.”

According to Scott, the UK’s decision to leave the EU did not have a noticeable impact on occupiers’ appetite.

“Cirrus Logic took a big pre-let space at Quartermile [in Edinburgh], in which we were involved, and other occupiers continued to commit to new space,” he says.

“After the vote, the institutional market slowed down. There was about a four-week pause when everybody sat on their hands. But after that we had a sudden increase in investment transactions, many off market, as investors started to assess what Brexit meant for them.”

The occupational markets have carried on regardless with retailers continuing to take units.

“The ‘opportunity’ end of the investment market views Brexit as a buying opportunity and that is where we have seen really quite a lot of activity,” says Scott.

Douglas Lamb, partner at MacRoberts, says the firm has witnessed a similar pattern.

“I think it’s probably true to say that we were utterly full on at this time last year and things fell away in the spring time with Brexit on the horizon,” says Lamb.

“The summer can be slow and it has maybe been a bit slower for a bit longer but I think people have actually woken up to the fact that if they are going to wait and see what the outcome of Brexit will be, they are going to be waiting a long time.”

Notable projects for MacRoberts have included work on Scottish Power’s new headquarters in Glasgow, which had £113 million of funding from M&G Investments, the Marischal Square development in Aberdeen and the BAM building on Queen Street, Glasgow, which is now fully let.

In the Central Belt, Lamb says the market has fluctuated: “I think in Edinburgh things have improved quite a lot and in Glasgow, where things were doing slightly better, it’s now the other way round.

“The suggestion is that people are still waiting to decide on whether they are going to move or not because of the political situation.”

Changes of note over the last 12 months include the new energy performance regulations (the Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016), which came into force on 1 September and the changes to empty property relief, which came into force in April, resulting in a material issue for landlords in retail and town centres.

“With the energy performance regulations situation we have got to wait and see how that pans out,” says Lamb.

“I think it’s probably not as onerous in Scotland as it is in England but I think it’s part of the gradual ramping up of the drive to improve energy performance.”

He says the changes to business rates relief has had a big effect on rental levels, with landlords happy to bring in tenants simply to pay the rates.

“Whether it’s going to have a longer-term impact where people just demolish properties, we will have to wait and see,” adds Lamb.

David Thomson of leading Scottish stable Axiom Advocates says commercial property litigation reveals many of the same characteristics of the general situation in the economy, with a number of long-term contracts coming to an end which were entered into in happier times for the economy.

Dilapidations is one area he highlights as generating significant work for advocates.

“There are a lot of dilapidations claims coming to fruition at the moment,” says Thomson.

“That, I think is the main type of work that one sees in the commercial court at the moment.

“The interesting thing about these sorts of cases is that if you are looking at the general development of law in relation to contractual interpretation, the type of cases in Scotland at the moment that are driving that forward tend to be commercial property disputes, in particular dilapidations claims.”

In the same vein, disputes over whether landlords can compel tenants to make payments for repairs when they have no intention of carrying them out – either because the incoming tenant’s works render them unnecessary or because they intend to demolish the building – have been something of a hot topic in recent months.

Cases such as Grove Investments v Cape Building Products (2014) and @Sipp Pension Trustees v Insight Travel Services (2015) have brought the matter to the fore, with several others currently before the Commercial Court.

“Specifically, the issue that has emerged in the Scottish cases is whether such a provision applies only if the landlord actually intends to do the work or whether, even if there is no intention to do the work, the landlord can still compel a tenant to pay a sum of money,” explains Thomson.

Although guidance is provided by the Inner House of the Supreme Court, every contract depends upon its own particular language, meaning there is still considerable scope for argument about how to construe and interpret the language in a particular case.

“The property litigation field experiences trends and certain types of cases arise from time to time,” says Thomson.

“For example, at the turn of the century the big focus was ‘keep open’ clauses. Now, dilapidations claims are again at the forefront of the development of the law in this area.”

Briefing: Energy performance, by Scott Ritchie

Buildings account for around 45 per cent of greenhouse gas emissions in the UK, and are a key element in the Scottish and UK governments’ emissions reduction targets.

Both have produced regulations that mean commercial property owners must take steps to improve poor energy performance of their property.

South of the border, the prospect of stiff penalties for non-compliance should concern owners and investors when the regulations take effect in less than two years.

With a short window in which to carry out energy-efficiency improvements on poorly performing buildings, there is a risk that inaction now may result in a devaluation of their balance sheet if it proves impossible to let properties without increasing the rating.

A lighter touch is being adopted in Scotland, at least for the time being, but action is still required.

We advise landlords to review their portfolios to protect long-term asset value.

They should check existing occupational leases: they may not require tenants to comply with landlord’s statutory obligations, or might limit the landlord’s right to enter premises to carry out works.

They should check the existing Energy Performance Certificate rating and recommendations, they may be easy to achieve and reasonably priced.

They should also monitor energy consumption as this will inform steps required to reduce it.

Scott Ritchie is a partner in real estate at Shepherd and Wedderburn.

Briefing: Construction, by Neil Kelly

In early 2016 there were signs the Scottish construction industry had finally shaken off the recession.

It was turning its attention to improving methods of procurement, so-called “smash and grab” adjudications in payment disputes, project bank accounts and lots of other things.

Now it is also wrestling with the UK’s momentous decision to leave the European Union.

There are conflicting reports about the extent of the current impact of the Brexit vote.

Some suggest it is delaying decisions on progressing major construction projects while others suggest construction has not been significantly affected.

Many believe, however, that they need to think ahead notwithstanding any current uncertainty that may continue until the negotiated terms of withdrawal become clearer.

For example, free movement of persons, as well as goods and services, among EU member states has been seen as particularly valuable in the construction industry.

The post-Brexit landscape will certainly see different, possibly more complex, rules here. Everyone in the industry will need to understand and apply them.

Life outside the EU will present the construction sector with opportunities as well as challenges.

The legal landscape will change. Best start planning now.

Neil Kelly is partner and head of construction at MacRoberts.

The Scotsman’s annual legal review looks at some of the most active areas of legal practice in Scotland. Informed by comprehensive data published by Chambers and Partners and Legal 500, the articles give exclusive insight into the work of more than 11,000 practising solicitors and over 460 practising advocates.