Ensuring the smooth running of an industrial estate

So far in this series, we have thought about the appointment of a promoter/developer; obtaining a flexible outline planning permission and section 106 agreement; and strategies for delivering common infrastructure and the development itself, disposals, and reserved matters applications. Our landowner now needs to implement the decisions made. This final article addresses estate management issues that will be important to prospective occupiers and purchasers. How does the estate service charge operate, what controls might be contained in the legal documents, and how can the plot be sold to someone else? Estate service charge The estate service charge arrangements will usually be included in any long leases or occupational leases of plots granted by the landowner, but there is a choice to be made on the sale of freehold plots. Provisions could be included in each freehold transfer, or a separate deed negotiated with the first purchaser, setting out how the estate service charge will operate, with which each subsequent plot purchaser then covenants (for the benefit of all the other plot owners) to comply. Both these approaches have merits. Keeping the covenants in the transfer itself allows flexibility in each negotiation if needed, while having a single estate-wide deed ensures consistency across the estate, with only one governing document. Both methods should allow a management company to slot into the arrangements when appropriate. Rentcharges Another option, seen on older estates but now less popular, is a rentcharge. Rentcharges used to give the person to whom the payment was due the right to levy distress for non-payment, which was abolished in 2007 – but that person can still enter into possession of the land and grant a lease of it under section 121 of the Law of Property Act 1925.  This can be done even when the arrears are relatively low, which the courts have acknowledged can be out of proportion to the debt owed (see Roberts v Lawton [2016] UKUT 395 (TCC); [2016] PLSCS 245). Some banks are therefore reluctant to lend against properties that are subject to a rentcharge, so landowners should think carefully before setting one up in case it inadvertently makes the estate uninvestable.  A rentcharge created properly, with constrained enforcement remedies, can still be worth considering; the right to receive payments is freely alienable, making it flexible when it comes to moving common areas from the landowner to a management company (and beyond). Any managing agents appointed to operate the service charge will have helpful views on all this. Early discussions with them can inform the structuring decision, as well as the list of services to be provided and heads of charge. See also: Devising a logistics game plan and How to get started in industrial development Management company On most logistics/industrial estates, a management company owns the common areas and operates the service charge (via managing agents). Others will anticipate a management company being set up in the future. Every management company needs to be fit for purpose. A company can be limited by shares or by guarantee. An estate management company could be either, but companies limited by guarantee tend to be more common on new estates, as there is no need to transfer a share on sale; instead, the articles of association can provide for membership to transfer automatically. The landowner should control the management company until the common areas are transferred to it, which should happen when the final developable plot on the estate is sold. The landowner will therefore usually be the first member and appoint the initial directors and company secretary. As plots are sold, purchasers will expect to become members and appoint their own directors. A “golden share” gives the landowner control of the board and general meetings, through the votes to pass or block any resolution, and directors appointed by purchasers might not take office until handover occurs. Purchasers will therefore want to ensure that the landowner has appropriate obligations to hand over the common areas and relinquish its golden share, but they cannot control when the final plot is sold.  The landowner should be incentivised not to delay handover as it will, until then, retain the common areas and be responsible for operating the estate service charge itself. Purchase documents Both landowner and purchaser will want appropriate covenants in the purchase document. They will each require a market-standard estate service charge, including robust obligations to provide the necessary services and a clear payment mechanism, but their interests diverge from here.  The purchaser will want to maximise its freedom to use and deal with its plot, including future redevelopment and changes of use. The landowner may, or may not, be willing to allow this, depending on things like its legacy aspirations and whether it has other nearby premises to safeguard. External appearance The landowner may require obligations governing the “look and feel” of the estate generally, including repair, decoration, external storage and parking, and the maintenance of external areas. While internal repair and decoration are less likely to be of concern, shabby, poorly maintained plots could prejudice later plot sales. Even in the longer term the landowner may want to ensure that standards are maintained, especially if it wishes to develop or sell other land nearby. The landowner may also want the right, where there is a breach, to enter the plot, carry out any necessary works and recharge the costs of doing so to the plot owner as a debt. This could be especially important for a prominent plot, eg one by the main entrance to the estate or that is highly visible, but could be controversial with some purchasers. What happens when a long lease ends is important, too; should the plot be cleared, with services capped off, or can the last building be left standing on it (and, if so, should it be left in repair)? Use The landowner may wish to prohibit uses that are inconsistent with the estate, such as residential or retail, while purchasers will want to change use without consent. The compromise here is often to prevent changes of use within an initial period.  Redevelopment may also be prohibited in that period, to make sure the estate does not change character too quickly, and some landowners will seek an overage on changes of use or redevelopment, especially where the initial purchase price has been calculated on the basis of a specific use. Rights The purchaser will need all the rights necessary (for itself and legitimate occupiers) to access and use the plot (and to redevelop it). This could only be the right to use estate roads and to connect into and use service media, but more specific rights might also be required. Any rights being granted should be properly qualified – for instance, the right to use estate roads should generally not include the right to park on them, which can obstruct HGV movements. Planning The planning position needs careful thought. Generally, the purchaser should take responsibility for everything relating to their plot, but some planning obligations or conditions might better remain with the initial landowner, especially payments under a section 106 agreement or obligations relating to the delivery of the wider estate. Forfeiture We considered in the second part of this series the benefits of including a forfeiture clause in a long lease, but purchasers should ensure there are mortgagee protection clauses and resist any forfeiture right linked to insolvency, which banks may not accept.  Sales Both freeholds and long leases should be capable of sale by the purchaser, although this might be restricted before practical completion of the first development. The purchaser needs to understand what has to be done when it sells, which should be kept as simple as possible for all concerned. Membership of any management company should pass to the buyer. If there are shares they must be transferred, but the articles of a company limited by guarantee should provide a more automatic process.  Either way, the company must be notified of the sale so its books can be updated. Any directors appointed by the seller will need to resign and be replaced by the buyer’s representatives. The buyer may also need to give direct covenants. Under a long lease structure, that might only be to a management company that is not the landlord, but positive covenants in a freehold transfer will not be enforceable against a purchaser unless it covenants itself to perform them.  Restrictions on title commonly ensure that this is not overlooked, by preventing a sale from being registered at the Land Registry without confirmation that the requisite covenants have been given. A collaborative effort Whatever arrangements are made across the estate, they need to be workable and investable. Balance must be found between landowner control and purchaser flexibility to meet the landowner’s requirements without prejudicing value on sales. As these articles have shown, landowners have a lot to consider when setting up a logistics/industrial estate. They will need the right team, project management and advice to: achieve their long-term aspirations; maximise profitability; and deliver the intended scheme efficiently. Few landowners will be able to manage everything themselves, which shows that projects like this really are a team effort.  Simon Keen is a partner in the commercial property team at Birketts LLP Image © Shutterstock