Thinking Legally & Logistically
Welcome to our first edition of Thinking Legally and Logistically. At Trowers, we have an industrial and logistics (I&L) sector focus group consisting of a niche, cross-office team of experts who specialise predominantly in the I&L sector.
Trowers’ commercial investment team is one of the leading advisers to investment funds, developers, occupiers and funders in this sector and, with that, we bring a wealth of experience and talent.
In each of our quarterly editions of Thinking Legally & Logistically, we will be discussing key sector themes such as: hot topics that have come across our desks this quarter; how the industry is weathering the macroeconomic uncertainty; the extent to which sheds and beds and multi storey sites are the future; the effect of AI and automation, and any other key legal or ESG trends.
We hope you enjoy our first issue and should you have any questions, please don't hesitate to get in touch with the team.
Industrial and logistics: Where are we now?
There is no question that investment volumes have fallen in 2023. We started the year with many of us asking whether the bubble had finally burst for the I&L sector. However the fundamentals of this sector remain strong, as rents and demand continue to hold up well. Low vacancy rates, demand for space (particularly for developable land) and the changing business needs of occupiers all continue to drive warehouse demand. During this ‘lull’ period, we are, perhaps unsurprisingly, seeing a much heavier focus on asset management (sweating the asset). This is one area where a collaborative partnership between asset managers and your lawyers is key. With that in mind, we have set out below a number of top tips that you may like to consider.
Top I&L Asset Management Tips!
Renewable energy installations
There has been a noticeable surge over the last 5 years in terms of the installation of renewable energy sources, the most popular - unsurprisingly given roof area space on industrial assets - being solar photovoltaic panels (PV).
A number of recently negotiated commercial leases that we have worked on have included the following provisions which you may wish to consider:
- Allowing specific rights for the landlord to access the property to install PV panels; allowing the tenant the right to use the electricity generated (sometimes at a discounted rate to reflect the actual cost of provision); and, depending on usage, the ability for the landlord to require a PV rent to be paid by the tenant for the use of the electricity. Our real estate and energy teams have created bespoke wording dealing with the rentalisation of this element which we can add into your leases as and when required.
- Ensuring that the PV panels form part of the tenant's demise (thus putting the responsibility for repair and maintenance onto the tenant).
- The ability for the landlord to sell any excess energy generated back to National Grid.
- Most crucially, ensuring that any rights for any party to install PV panels on the roof do not invalidate any collateral warranties or guarantees which may be available for the roof, particularly on new developments. We have wording catering for this.
ESG: Dealing with the post 1 April 2023 ‘E’
The Law: There is already a plethora of commentary around the post 1 April 2023 Minimum Energy Efficiency Standards (MEES) changes. Below are some considerations, based on what we are seeing others do.
On many new acquisitions, we are seeing clients obtain enhanced EPC assessments, or for draft EPCs to be prepared, allowing for the cost of any energy efficiency works to then be factored into the wider pricing / rent calculation. Tactically, it is important to consider the merit in registering those informal EPC ratings (or not, as the case may be) and we have been considering the strategy in this regard with many of our clients, particularly on new acquisitions.
Keep an eye: Going forward the expiry dates of EPC certificates should be flagged in both your general asset management and checked early on acquisition due diligence. It is intended that requirements will become more stringent, with a minimum EPC rating of 'C' by 2027, rising to a 'B' or higher by 2030.
Estate service charge provisions
A warehouse unit on an industrial estate will usually be subject to estate management charges in connection with the wider estate. Those costs should be passed down to your occupational tenant in the lease, but with rising inflation and a cost of living crisis, these provisions are being more and more heavily negotiated. Here are certain elements that are more recently being discussed:
- Tenants seeking to exclude or limit the more volatile costs from the service charge, for example, labour, electricity and oil costs. Ensure that HoTs clearly specify that there shall be no caps or exclusions.
- Consider which index to adopt for uplifts. RPI, CPI and CPIH are all calculated differently. If annual indexation / compounding is required, specify that at HoT stage.
- If necessary, specify expressly the ability for the landlord to recoup costs for carrying out energy efficiency upgrades to the property and wider estate.
- Consider whether service charge caps should be personal to the named original tenant.
- Electric vehicle charging points are becoming increasingly common. We have considered in some detail with our I&L clients how costs incurred in the installation and maintenance of such charging points are managed, together with how day-to-day charging costs may be recovered in full from tenants.
MEES / EPC, cost recovery
The following elements are tending to be more heavily negotiated and you should keep an eye on them:
- On renewal, check whether an existing lease allows recovery for all costs associated with energy efficiency works, regardless of whether they are intended to maintain or improve the current EPC rating. In new leases, we have drafted bespoke wording to allow for full cost recovery in the event that energy efficiency works are required in order to comply with statute. Given current legislation, we are seeing this as a key area of tenant resistance and so have creatively drafted several options in this context.
- Rent review: You should consider with a rent review surveyor whether the asset’s EPC rating is to be expressly included or excluded on open market reviews. We have drafted specific assumptions on this basis particularly on EPC A+ units.
- Rights: Check the extent of rights reserved to the landlord in order to access the unit to carry out any energy efficiency works without difficulty during the term of the lease (and on what conditions, i.e. prior notice? Does it need to be outside of trading hours?).
- End of term: Check that the drafting allows you to obtain the necessary access and information to commission a new EPC rating within the final 18 months of the lease term. This will enable you to prepare effectively for reletting or asset disposal
What our I&L Sector Group have been doing
To ensure that our I&L clients continue to receive an excellent service, we have, this quarter, centralised many internal processes so that clients benefit from a streamlined, sector-specific approach:
- Creation of an Industrial and Logistics specialist precedent lease which deals with the various sector quirks and requirements.
- Bespoke client quarterly bulletins: For our key I&L clients, we prepare client-specific bulletins summarising any lessons learnt on transactions for that client in the preceding quarter. Those bulletins reflect upon the quirks of a particular transaction, any prickly tenant negotiation points and each quarter we propose bespoke processes which will create efficiencies for the client.
- Event attendance: We have been busy at various industry events, including the Property Week I&L Conference; Bisnow's UK & Logistics Transformation; and the IPF Midlands' Shed Market Outlook.
- Thought leadership: Keep an eye on our social media channels for a series of thought leadership pieces which shall provide comment on all major topics in the I&L sector.
- Podcast: Watch this space for our first mini series in which we will be interviewing investors; developers; and occupiers on key legal trends in the I&L Sector.