LEASEHOLD LIABILITY OUTSOURCING
QUESTIONS AND ANSWERS

IN THREE SIMPLE SENTENCES, HOW DOES IT WORK?

You transfer your leasehold liabilities and all associated obligations, using a power of attorney governed by a master and management agreement, to Surplus Property Solutions (SPS).

On a quarterly basis you transfer a reverse premium, based on an agreed liability cost per property.

SPS manages the leasehold liabilities from completion as if they were our own and you don’t have to worry about them any more.

WHY SHOULD I CONSIDER OUTSOURCING MY LEASEHOLD LIABILITIES?

  • To put your problem in the hands of a specialist with an outstanding track record
  • To get rid of your leasehold liabilities far more rapidly than otherwise possible
  • To remove management responsibility for your portfolio allowing you and the property team to focus 100% on your core business
  • To provide you with financial certainty
  • To reduce headcount and/or managing agent costs – SAVING MONEY
  • To reduce your balance sheet provision to a nominal sum – SAVING MONEY
  • To gain the business and political benefit of solving an intractable and potentially historic problem

WHAT ARE THE CONS OF TRANSFERRING MY LEASEHOLD LIABILITIES?

  • Getting the liability data in order to transfer to SPS may require a time commitment and some costs may be incurred on legal and surveying fees
  • If you are under-provided then you may need to make an additional provision

WHICH COMPANIES HAVE OUTSOURCED THEIR LIABILITIES?

Over the past 8 years a good number of major UK companies have completed leasehold liability transfers. These include Rentokil, Santander, Morrisons, Carillion, RBS Equity Finance, Virgin Media, EMAP and Wolseley.

WE ARE GIVING YOU A LOT OF MONEY AND YOU ARE A SMALL COMPANY – WHAT PROTECTION DO WE GET?

  • The reverse premium is paid through staggered quarterly payments, providing you with financial security
  • We do not get rewarded until YOUR goals are achieved
  • All of our key people have blue chip corporate backgrounds and understand reputational risk. We will protect your reputation – please speak with any of our current or past counterparts to understand how sensitive we are to this
  • At no additional risk or cost to your business, you get the best in the liability business working for you
  • Although we are small we have a great pedigree with blue-chip senior management experience and a very robust balance sheet – and finally, our own reputation is our greatest currency

WHY IS SPS THE BEST PARTNER FOR MY LEASEHOLD LIABILITIES?

  • A strong track record: over the past 9 years we have completed 5 property liability transactions comprising over 220 properties with a gross liability of over £230 million. Three of these portfolios are fully worked out
  • We are the most experienced liability outsourcing partner with a demonstrable ability to work out both simple short stub surrenders and more complex multi-dimensional liabilities
  • Many landlords are known to us and we can gain speedy traction
  • We have extraordinary bandwidth and can take on both large and small portfolios
  • If we don’t make a success for you we don’t get paid
  • FOCUS, FOCUS and FOCUS – getting rid of leasehold liabilities is all we do!

WHO IS SPS?

  • SPS was founded in 2006 for the sole purpose of undertaking leasehold liability outsourcing
  • SPS has a core team of 8 consisting of 3 administrators, 2 general surveyors, 1 building surveyor, 2 principals plus a scalable set of top advisors
  • For dilapidations we have a construction team with more than 20 professionals and decades of commercial experience
  • We have shareholder funds of more than £8m and over 100 property assets are owned and managed by the SPS group
  • SPS has offices in London and Glasgow

HOW DOES SPS MAKE MONEY?

SPS is remunerated by getting rid of all of your leasehold liabilities for less than the reverse premium amount. We only make money once you no longer have any risk associated with the leasehold liability portfolio – what we term as “off-risk”. Specifically, this is when the remaining reverse premium is greater than the remaining liability and this usually occurs within the first three years.

Anything left over is our profit. We take the long view and are totally aligned with your objective – we put everything in the game.

HOW DO I SAVE MONEY?

In two ways: by getting rid of your liabilities below provision and the outsourcing allows you to rationalise and optimise your property management costs.

WHEN DO I PART WITH THE REVERSE PREMIUM?

Although the reverse premium is agreed at the outset of the transaction, it is only paid over to SPS on a quarterly, semi-annual or annual basis, depending on what is most appropriate for your organisation. Additionally, amounts can be pulled forward from the reverse premiums to pay for surrenders.

WHAT LEGALS AND DILIGENCE ARE REQUIRED, AND WHO PAYS FOR IT?

Assuming we receive clear and complete information on each leasehold liability, we then perform due diligence on the documents and the properties at our own cost.

Normally a master and management agreement are put in place. Over the past eight years these documents have become broadly standardised. Limited legal work will be required to customise the agreements.

WHAT’S THE ACCOUNTING TREATMENT?

The accounting treatment will follow the transaction structure. Under the Management Agreement the corporate’s provision will be locked in at the transaction price. If there are monies in excess of the transaction price in the provision, then the corporate has the option of releasing the surplus.

If a guarantee is put in place from SPS to the corporate, then the provision, net of the deal price, can be released.

DO I REALLY TRANSFER THE LIABILITY TO YOU? PROVE IT!

Although we can’t replace you on the lease (the landlord would have to agree and in our experience landlords are rarely co-operative) we take over all the responsibilities associated with the liabilities and replace you in every other way. This includes all interactions with the landlord, paying and receiving rents, dealing with and paying the rating authorities and utility companies, managing lettings and sub-tenants, physical maintenance and dilapidations and security. We also have the right to litigate if necessary, in agreement with you

WILL THE LIABILITY EVER COME BACK TO MY COMPANY?

We can provide an insurance policy that will, in most cases, guarantee that the liability never comes back. Most of our counterparties don’t take this insurance because it is significantly cheaper to rely upon our abilities, as demonstrated by our track record.

In the very worst case, where the reverse premium runs out before the last liabilities are entirely extinguished, you will still have had the very best professionals working for you for free. And you will have achieved a level of success that would have been impossible to achieve with non-specialists.

WHY AREN’T MORE COMPANIES DOING THIS? WHAT ARE THEY SCARED OF?

A good number of major companies in all sectors have outsourced their liabilities. These include Rentokil, Santander, Morrisons, Carillion, RBS Equity Finance, Virgin Media, EMAP and Wolseley.

However, the principle obstacles cited by companies who decide not to do this type of transaction are:

We don’t have a big enough provision.
Counterpoint: With the lease accounting changes that will be mandated over the next 24 months, there is no doubt that now is the time to make sure that you do have a big enough provision for your leasehold liabilities. But it also the best time to remove the problem altogether, so that you are not affected.

We are happy the way it is (aka. momentum and fear of the unknown).
Counterpoint: With this kind of attitude it’s just a matter of time before you need to find a new job.

It’s not really a problem for us.
Counterpoint: If you have leasehold liabilities then you have almost certainly had them for a while, and if you have had them for a while they are a problem – you are managing them, paying rent and possibly rates, and have uncertainty on dilapidations and any subtenant covenant. For most businesses this situation would be defined as a problem, or certainly an opportunity to do better.

Why can a specialist leasehold liability outsourcing company, SPS, do better than we can?
Counterpoint: See all of our website. The bottom line is we are specialists. This is all we do and we can do it better than anyone else. And we focus, focus, and focus. Corporate Real Estate teams are primarily focused on delivering added value to the core business. Surplus property is not part of the core business and the skill sets and approach are different.

What our counterparties and clients say:

"This transaction is the fourth major leasehold liability transfer in the past 18 months and demonstrates how the market is continuing to mature. We are now seeing unprecedented levels of activity and expect further portfolios from both public and private sector occupiers to come to the market during the course of this year." Kevin Vickers, Partner, Cushman & Wakefield

"The sale of Rentokil's surplus leasehold liabilities was an innovative transaction. Passing cash and some £35 million of long term liabilities over to a 3rd party was heavy with risk, and in these circumstances we were acutely aware that success could only be judged over the medium term. The project is all about delivering hard won surrenders, sub-lettings and dilapidation claims. The testament to the skills of SPS is that 90% of the liabilities have already been extinguished." Robert Bailey, In-sourced Property Director, Rentokil.

rentokil

"Above all SPS provide insight and understanding to the somewhat arcane world of leasehold liabilities and other property related issues as well as offering solutions that have enabled us to transfer risk on a cost effective basis. I would strongly recommend their services to anyone trying to deal with the complicated or difficult liabilities." James Scott, Managing Director, RBS Equity Finance.

rbs

"This deal enables our Estates team to focus on our sizeable store portfolio where we are continually striving to deliver a great retail experience for our customers. We can now do this in the knowledge that the experts at SPS are aligned with our interest of driving redundant property costs out of our business." Charles McKendrick, Head of Asset Management, Morrisons Plc

morrisons

"This deal with SPS has, in a single transaction, enabled us to refocus our resources on our operational estate. We found SPS had exactly the right approach and experience to do the deal." Andrew Thexton-Pee, Senior Estates Surveyor, Carillion Plc

carillion

"Reported (surplus) property provisions total £4 billion, which represents almost 9% of the total provision reported by (the top 200 companies in the FTSE Index). For those reporting a property provision this equates to 0.5% of turnover..." GVA Grimley, “The Impact of Property on UK Business”, Spring 2008