Eversheds Sutherland (International) LLP

Real Story Behind Real Estate

Question

I've seen lots of big developments being built in my home town. What's the commercial context and how do real estate lawyers get involved?

Answer

The commercial real estate world is an exciting place to be at the moment. Economic stability, low interest rates and a real appetite for regeneration has led to high-profile development schemes up and down the United Kingdom, changing the character of many of our cities and improving amenities for those who live there.

As the largest team of real estate lawyers in the country, Eversheds has been at the forefront of many of these developments. The Bullring in Birmingham, Bluewater in Kent and the forthcoming redevelopment of Bristol city centre are all examples where our real estate lawyers have played crucial roles. But how do these schemes come about?

Putting it up …

Most developments will start with a developer identifying a market opportunity for land to be used for a particular purpose, for example, a shopping centre, office space or residential units. In the most high-profile schemes, this opportunity may be identified in conjunction with public bodies, for example, a regional development agency or the city council. However, commercial considerations will always be paramount, the overriding question being whether the development will be profitable for the developer and the other parties that get involved.

In order to proceed, the developer will usually need to acquire the land, working alongside his/her legal team. To reduce risk, the developer may require that planning permission is obtained first – he/she will not want to be burdened with land that it cannot develop! The developer will also seek to mobilise the expertise needed to build the actual development – architects, structural engineers, contractors and other consultants to name a few. Contracts will need to be drawn up and specialist commercial development lawyers will play a key role here.

Moving in …

Assuming the development is built according to plan, the developer will want to recruit occupiers who will pay rent in return for using space in the development. These occupiers could be large retailers, companies seeking office space, or private individuals seeking residential apartments. Unlike private individuals, commercial operators will be quite happy to pay rent under a lease, rather than buy their premises outright. This gives them the benefits of additional flexibility, a reduced initial outlay and the ability to deduct the rent paid from their profits for tax purposes. Some of these tenants may be recruited early on to give the development credibility and to reassure the developer it will be a success. Again, real estate lawyers will be involved in negotiating with and on behalf of the occupiers to ensure they sign up to the development on the right terms for all concerned.

Selling out …

Once the development is largely complete, the developer will be keen to move onto the next opportunity. By selling the development to a third party, the developer should be able to make a profit once he/she has accounted for the costs of setting up, managing and marketing the scheme. The third party will often be a property investment fund, which buys property in order to enjoy the benefit of any growth in its value and rental income from its tenants. The fund will hope that when the costs of buying the property and managing it are stripped out, it will be left with a healthy profit to return to its investors. Meanwhile, the developer is free to invest its profit margin into the next project, and the whole cycle will start again!

As you can see, real estate is simply another asset that various businesses use in order to make money. The challenge for the real estate lawyer is to understand the law and the commercial context in order to provide the best advice for his/her client.

Jon Gill is a trainee solicitor in Eversheds' real estate team. He is also the author of Business Law for the Entrepreneur, published by Arima Publishing.

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