UK: Entering The English Market – Four Key Considerations For New Retail Entrants

Entering the English real estate market presents a number of legal and practical obstacles that overseas brands may not have come across in their home jurisdictions.

In many jurisdictions, and in particular civil law jurisdictions, tenants are provided with a number of statutory protections that simply do not exist in the English market.

The non-binding nature of heads of terms, no right to actually use the proposed premises for their permitted use, no right to remain in occupation at the end of the initial term and complications around fitting out their new premises all present potential issues for those on the hunt for their brand's next space.

This article outlines four key considerations brands should take into account to ensure a smooth entry into the English market.

Fit out

Making any space fit your brand is key and the way in which you approach fit out will determine whether you experience delays and issues with contractors or not. Entering into a properly drafted contract for your fit out works is one way you can put yourself in a strong position and avoid potential fit out pitfalls.

A contract sets out the responsibilities of the parties and their obligations, so it is clear as to what work needs to be done and to what standard, who is doing it, when they are doing it by, and for how much. Without a contract, it will be your word against the fit-out contractor's in the event that things don't go according to plan, or worse, a dispute arises between you.

Ensuring that there is a contract in place for your fit out is not enough, you need to be sure that the contract addresses all of the relevant issues that may arise including any specific issues or considerations that are unique to your brand or the space you're looking to occupy.

Here are just a few of the extra considerations you may want to look into:

(1) Insurance – top of the list!, Insurance arrangements for fit-out works can be complex and vary from site to site, so engage with your landlord's agent, your broker and fit-out contractor as early as possible to ensure that the appropriate cover is in place and that the contract is tailored to reflect this.

(2) Third Party Agreements – the lease, licence to alter and/or funding agreement may impose obligations on you as to what works can be done, how they are to be carried out and what additional protections third party stakeholders may require (if any). These obligations should be 'passed down' to the fit-out contractor so that their actions or defaults do not put you in breach.

(3) Scope of the works, quality and design – as your fit-out may well include unique features and systems and/or expensive materials make sure the scope, quality and design are agreed and clearly documented as part of the contract at the outset. Consider whether you want a 'turnkey' approach to design (i.e. the contractor has single point responsibility) or whether you want more control over the detailed design yourself? Wherever design responsibility sits, it is vital to record this clearly in the contract so that if a design defect appears later it is clear who is liable.

(4) Payment – give careful thought to the timing and basis of payments, especially if specialist materials need to be paid for 'up front'. Do you need some form of security, such as a bond, put in place?

(5) Practical completion – consider what must be completed to enable you to move in and trade effectively, and what (if anything) can be finished off later. Often contractors return post-handover to fix any minor defects or 'snags'. However, is this feasible for your space or will it potentially cause undue disruption to your business? If zero defects are a 'must have', the contract will need to be amended to reflect this as this is not what the standard forms of contract provide.

(6) Collateral warranties – your landlord and/or bank may require you to obtain warranties from the fit-out contractor and any specialist sub-contractors.

If risk and responsibility have been allocated appropriately between you and your fit-out contractor, and the key contract terms clearly set this out, expectations can be managed, potential disagreements avoided and a successful outcome achieved.

The importance of planning

For the purposes of retail and luxury brands seeking to enter the English market, one of the most important aspects of planning law that they need to focus on is whether the space they wish to lease has the correct use for their operation.

Unfortunately even if a lease states that a particular premises can only be used for a specific use (such as retail) that does not mean that the premises in question actually has the correct planning permission for such use nor does the landlord usually warrant that it has such a planning permission.

As such it is imperative that your professional advisors review the planning permission and provide confirmation that all is in order. The problems that you can face if you fall short of the planning rules and regulations can be quite severe. Where one uses a property for anything other than its permitted use the Local Authority has discretion under Part VII of the TCPA 1990 to take enforcement action.

The Local Authority has a number of methods at its disposal for enforcing planning control, including an enforcement notice, which can have implications beyond just demanding you no longer use the property in such a way. The case of Bowring confirmed that an enforcement notice relating to an unauthorised change of use could include a requirement to remove works which were an integral part of the unauthorised use but which had been installed and used prior to the change of use. The reach of enforcement notices extends to operational development carried out 'as part and parcel of, or as an integral part of' the use complained of.

Ultimately, you can be forced to stop using the premises in the way you intended and have to pay to put it right (whilst continuing to pay rent to the landlord). Consequently, ensuring that the property is designated correctly is vital.

Heads of Terms vs Agreements for Lease

It's possible to spend a great deal of time looking for the perfect space for your brand, designing the fit out and negotiating the terms of your occupation. However, until you enter into a legally binding agreement you are at risk of the transaction falling through and not being able to occupy the property despite having spent time and money on planning for your occupation of the property.

An agreement for lease can be used to protect you and your brand's interests by binding you and the landlord to enter into a lease at a certain point of time. As heads of terms in the English market are generally non-binding an agreement for lease provides you with a level of certainty that relying on heads of terms does not.

Not only does an agreement for lease provide certainty and protects you from the Landlord pulling out at the last moment or changing the terms of the lease, it can also be used to ensure that conditions which need to be met before you're willing to enter into a lease are met.

Some conditions that might be included are:

(1) The landlord obtaining superior landlord's consent;

(2) The landlord securing vacant possession of the property;

(3) The tenant obtaining planning permission; and

(4) The landlord carrying out repairs or re-decoration following a period of non-use or occupation.

Were you not to enter into an agreement for lease, there is no guarantee that the landlord will have carried out the conditions that you needed them to in order to get the most from the property.

The benefits of entering into an agreement for lease are plenty; it is the most effective way to protect your interests and certainly something a brand entering the UK market should consider.

Security of Tenure

The Landlord and Tenant Act 1954 gives businesses 'Security of Tenure' which means that commercial tenants have a right to renew their lease and have the ability to remain in occupation at the property at the end of the term of the lease on the same terms as that lease. Where the 1954 Act applies, the landlord can only compel the tenant to vacate the property where certain circumstances exist or where certain procedures are followed.

Whether the terms of the 1954 Act apply to your lease is down to negotiation. More often that not, landlords and tenants will 'contract out' of the 1954 Act provisions meaning that when the term of the lease comes to an end the tenant will have to vacate the property and does not have a right to renew the lease at the then market ret. Consequently, it is important to know whether your lease has been contracted out of the 1954 Act.

Knowing when you have to vacate your leased property and whether you have the leeway to remain in occupation after the end of a lease can assist in properly planning your business' approach to managing its property portfolio.

Conclusion

The UK real estate market can be tricky to navigate alone and, as we have seen, approaching it in the wrong way can lead to real problems.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.