AGENDA ITEM 20

BOROUGH OF POOLE

REPORT TO CABINET

17 JULY 2007

REQUEST FOR APPROVAL TO THE GRANTING OF AN UNDERLEASE ON PART OF THE DOLPHINS QUAY DEVELOPMENT

PART OF PUBLISHED FORWARD PLAN:Yes

STATUS – SERVICE DECISION

1.PURPOSE & POLICY CONTEXT

1.1.To receive a request for approval to the granting of an underlease on part of the Dolphin Quays Development.
2.DECISION REQUIRED

2.1.To consider and approve a request from CEREP Poole Limited Partnership for consent to grant an underlease to the Wolverhampton and Dudley Breweries PLC (trading as Pitcher and Piano) on Unit 24 which is on the first floor and part of Units D15 and D16 which are located on the ground floor at the Dolphin Quays development. The underlease is to be granted by CEREP Poole Limited Partnership at a peppercorn rent on payment of a premium. It is also proposed that a further underlease will be granted in respect of the open area on the first floor adjoining Unit D24 on the same terms and conditions but excluding the payment of a premium.

3.BACKGROUND

3.1.The Dolphin Quays site was originally leased to Orb Developments Limited on the following basis :-

(a)Head lease of the main site for a period of 130 years from 14 March 2000.

(b)Supplemental lease of the extension of the site along the Quay frontage from 14 December 2000.

(c)Supplemental lease dated 20 June 2005 in respect of the pile cap incursions in the ground and the bridge and balcony overhangs. Both supplemental leases are co-terminus with the head lease.

3.2.Orb Developments Limited went in to receivership in June 2003 and Messrs Price Waterhouse were appointed as Receivers. After extensive marketing the Receivers finally completed an assignment of the development on 14 July 2005 to Skelton Poole Limited guaranteed by the Skelton Group Limited.

3.3.In May 2006 the leases were subsequently assigned to CEREP Poole Limited Partnership, however, all the terms and conditions of the leases remained guaranteed by Skelton Group Limited.

4.CURRENT REQUEST

4.1.The Borough has now received a request from the solicitors acting on behalf of CEREP Poole Limited Partnership for consent to grant an underlease of Unit D24 (first floor) and part of Units D15 and D16 (ground floor) to The Wolverhampton & Dudley Breweries PLC (trading as Pitcher and Piano). The lease to be for a term equal to the unexpired term of the Headlease less three days at a peppercorn rent on payment of a premium. It is also proposed that a further underlease will be granted on the same terms and conditions (excluding the payment of a premium) for the open area on the first floor adjoining Unit D24.

4.2.In addition the proposals also require the Borough’s consent to the necessary alterations for the proposed use. Any such consent in that respect would of course be subject to all the statutory approvals being obtained by the tenant.

4.3.The headlease states “not to underlet the whole or any part of the Demised Premises for a term of more than 25 years without the consent of the landlord (which will not be unreasonably withheld or delayed…)” . Therefore, whilst commercial leases of less than 25 years do not require the Borough’s consent it is needed in this instance.

4.4.In considering this matter it was necessary to look at the whether the Borough’s interest was being affected or likely to be affected by the granting of the underlease on the terms outlined at 4.1 above. This included the rent received by the Council for the site now and in the future. The current rent received by the Borough is £68,000 per annum and the headlease makes provision that at review in March 2010 the Borough’s rent is based on 9% of the commercial rental value of the space. Therefore, it was necessary to consider if that could be affected by the granting of such a lease.

4.5.Also whilst there is no direct contractual relationship with an underlessee in the event that the headlessee’s rent is not paid a landlord could serve notice on a subtenant to require the sublease rent to be paid to it until the tenant’s arrears had been paid.

4.6.Clearly in this instance as there would be no rent payable under the terms of the underlease the implications needed to be considered in greater detail.

4.7.Therefore, Leading Counsel’s opinion was obtained on this matter. Counsel recommended that as the proposed rent was a peppercorn that the Borough obtain specialist valuation advice to determine if there was any diminution in the value of the Council’s reversion. Counsel’s view was that had there been a substantial diminution in value the Borough would have reasonable grounds to consider withholding its consent in this case.

4.8.Based on Counsel’s advice GVA Grimley were instructed to provide the specialist valuation advice required in this respect. In considering this matter the GVA Grimley also looked at the financial strength of the Borough’s headlessee, the existing guarantor and that of the proposed subtenant (Appendix 2).

4.9.GVA Grimley’s investigations concluded that these companies were all of sufficient standing. The Borough’s lessee currently has positive net assets and the accounts of the guarantor show it to be a sizeable company.

4.10.GVA Grimley also made enquiries about the other lettings within the Dolphin Quays development. This revealed that the proposed underlease to the Wolverhampton and Dudley Breweries Plc is the only letting that is proposed on the basis of a long lease at a premium. The other commercial lettings were being granted on terms of between 15 and 25 years at full market rents. Therefore, it was considered that this would enable the Borough’s rent to be easily sustained.

4.11.It was also confirmed that as the rent to be paid at review was based on the rental value of the space and not the passing rent that this element would not be specifically affected by the granting of the underlease.

4.12.In conclusion GVA Grimley confirmed that there was no diminution in value of the Council’s interest if this underletting was to proceed. The Borough would also have redress to the guarantor in the event of any default by the Borough’s tenant. Therefore, they did not consider that the Borough had any grounds to withhold its consent.

5. LEGAL ISSUES.

5.1The Council as landlord must act reasonably in determining whether to grant or withhold consent to the request for the granting of the underlease.

5.2Should consent to the underlease be unreasonably withheld or delayed the Tenant would be entitled to go to the Court to seek both a declaration over the reasonableness of the Council’s actions and if successful, appropriate damages.

5.3The site is still subject to a Section 106 payment requirement in relation to the commercial space occupancy. However, this proposal will not affect this element.

5.4It has been suggested from time to time that the first floor circulation spaces in the building are to be kept open to the public at all times. Research has been carried out but this is not a requirement of either the s106 Obligation or the Planning Consent itself. Attention has been drawn to the Officer’s Report to Planning Committee when the development was being considered initially but from this it would be hard to draw a firm conclusion that this particular area was to remain in the public domain. The Report notes that access may be restricted on the quayside frontage due to commercial uses. In any event, it is unlikely that these considerations are binding on the Council in its role as Landlord.

BACKGROUND PAPERS

Resources & Overview Scrutiny Committee Report 4 Jan 05

Cabinet Report2 Nov 04

Cabinet Report27 Jan 04

Cabinet Report 5 April 05

Cabinet Report30 May 06

John Paton

Head of Property Services

Tim Martin

Head of Legal & Democratic Services

NAME AND TEL NO OF OFFICER CONTACT

Kevin Judd – tel no. 261295

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