Copyright: David Lawson - Property Week Nov2001
But prepare to be shocked. Lawyers have quietly become an essential factor in getting increasingly complex property deals off the ground, and that often means working hard to say yes. The shark analogy overlooks one vital fact: this beast is supremely efficient. ‘We don’t say no for the sake of it,’ insists one senior lawyer. ‘Our job is to make things work – but to be strong enough to tell clients when they won’t work.’
He was relieved to hear a similar story from an engineer a couple of years ago, who complained about the same treatment from architects. Both agreed they spent endless hours making things work but were left with the blame when they could not. Sharks also have a fatal weakness, however. If they stop moving they drown, and lawyers have been swimming furiously for much of the last decade. They face the same challenges as the rest of the property industry: more intricate deals, an IT revolution, waves of new legislation, pressure to work across international boundaries and now the looming shadow of recession.
‘At one time you would see a complex proposal and wherever it came to issues like tax, it would just say “refer to lawyers”,’ says David Wright, head of property at Nabarro Nathanson. ‘Now we are brought in earlier to give more thought to structuring.’ He would not go as far as another top lawyer, who equated his role nowadays more as a merchant banker, pro-actively working up deals to suite clients. But the changing structure of the market has brought out the importance of skills which overlap the professions.
‘Several factors came together over the last five years which have revolutionised the lawyer’s role,’ says Bob Kidby, head of property at Lovell White. Outsourcing swept to significance , bringing a whole set of new challenges. For instance, his firm had to work out how to package the £2bn PRIME deal involving hundreds of leases without going to every tenant to negotiate an assignment. It came up with a ‘virtual assignment’ – a contract of indemnity and management which left the legal position the same. This shows how lawyers have become creative and innovative in the face of seemingly intractable problems, says Kidby.
The adage that you see merchant bankers at the beginning of a deal, agents at the end and lawyers all through is more true than ever. It is crucial with outsourcing to create a legal structure which ensures a secure financial instrument but is still flexible enough for corporate needs,’ says Simon Cookson head of real estate at Ashurst Morris Crisp,.
He dismisses the idea that this is a step change for lawyers, however. ‘We have always needed to acquire skills to drive into new markets,’ he says, pointing out that this is a corollary of a decision by the firm three or four years ago to ‘find where exciting new business is coming from’. Getting in at the ground floor has paid off, as AMC is involved with BT in one of the biggest ever outsourcing deals.
Further challenges have come from the growth of limited partnerships and securitisation. Sophisticated financial expertise has always been available but in relatively few specialised or large firms. ‘Now these skills are much more widespread,’ says Graham White head of property at Slaughter and May, which was involved in an early example, the Bluewater partnership.
Lawyers are no different to surveying groups in adjusting to new client demands. Nabarro Nathanson, which includes the Birmingham Alliance among its limited partnership deals, brought accountants into the firm and set up a dedicated property finance group.
Much of the new finance coming from abroad – and flowing out again as property becomes a more globalised industry. UK lawyers were among the first professionals to recognize international demands and colonised mainland Europe long before US giants could get their foot in the door. ‘Because we are ahead of other countries, we have been able to export our concepts,’ says Kidby.
Like surveyors, lawyers have taken different routes. Some, like Lovells, chose mergers with overseas firms while others such as Nabarro Nathanson rely on ‘best friends’ – partnerships with local market leaders. Ashurst’s has been expanding across Europe for a decade, which enabled it to handle requirements such as a recent one by Global Switch for premises deals across half a dozen countries. The critical factor is to ensure the same level of service can be guaranteed across all offices, says Cookson. Another is not to dilute the firm’s reputation, added Kidby.
But where has this left the rest of the industry outside the ‘magic circle’ of central London names. Moves to more sophisticated dealing and specialised skills might be expected to leave them in the cold.
A big gap exists between the giants and the rest, says Michael Chambers in the profession’s bible, Chambers Guide to the Legal Profession. ‘Top City firms are in a league of their own,’ he says. They have the best lawyers, the highest salaries, the biggest clients and an unchallengeable international presence which have created an ‘unbridgeable’ gap.
But this appears to apply much more at the corporate level. ‘Lesser’ names often have as many property specialists as the bluebloods – and a respectable track record of top deals. One reason is that provincial partnerships like Eversheds and Dibb Lupton [now DLA] went national in the Nineties, using the recession to take cheap offices and redundant solicitors – and in some cases lower fees - to create a London base feeding a network of offices. Others have grown through merger. They even followed the big names overseas, setting up offices or relationships with local firms overseas.
Addleshaw Booth, for instance, which combined strong local bases in Manchester and Leeds circles, roared into the Chambers Guide chart this year, taking seventh place in a national ranking by listed company clients. Birmingham-based Pinsent Curtis almost made the top 10 even before adding the extra attractions of a merger with City experts Biddle earlier this year.
‘We are bigger than you might think, with 31 partners and 93 other solicitors,’ says John Pike, head of commercial property at Addleshaw Booth. This kind of scale is critical, as it assures clients there is a range of skills and depth of experience to handle anything. The firm has dealt with the massive Meadowhall Centre from the outset and picked up Sainsbury, Standard Life and BT as national clients in the last few years.
It is now working on a limited partnership deal for Standard Life, which has bought into a £108m redevelopment with Castlemore and Eagle Star. And it is in Bournemouth rather than the firm’s traditional stamping ground, showing how regional firms can swim in the same national pool as the really big names.
Pitmans has only a single office in Reading. ‘It keeps down overheads,’ says Managing partner Christopher Avery. Yet the practice has string of blue-chip clients like MEPC and likes to think that any big client looking at the Thames Valley will knock first on its door.
The firm even has international links, acting for US firms buying in the Thames Valley and handling a UK and US float for its Danish partners. The secret of beating big names for complex deals such as refinancing housebuilders has been to match their expertise. ‘I’m not so sure many smaller firms can do that,’ says Avery.
He managed it by recognising that not all high-quality lawyers want to be in London. ‘When they get into their 30s and have children, some would prefer to move out,’ he said. Most of the 15 partners have been poached from the City over the last 10 years.
Common issues unite £1m-a year City partners and the newest qualifier in a provincial office, however. Lease reforms bubble away in the background as big tenants call for more flexible terms and the government reserves the right to intervene if the latest voluntary code of control breaks down.
But Graham White at Slaughter and May points out that this may be more heat than light. ‘Landlords are not generally asking their lawyers to produce different formats of lease which are shorter and less onerous,’ he says. They seem to have been able to resist pressure from tenants for radically shorter terms and upward and downwards reviews even when they were forced to give long rent-free periods as inducements.
New technology is another underlying concern, breeding fear and excitement in equal measure about issues such as online dealing and advice. This is about to step out of theory into practice as the Land Registration Bill gains approval from Parliament. Within two years, electronic conveyancing will be both feasible and legal, according to Neil Sagoo, a senior property solicitor at Norton Rose who has made a study of this long-promised revolution.
Most of the big firms are already gearing up for the changes through retraining but there are still many uncertainties. White says problems such as stamp duty collection in a documentless system will have to be solved, as will security of data.
No-one yet knows what software will be required or who will pay for it, says Sagoo, pointing out that this will be the first time in the world a complete online system has been tried. The need to acquire yet more new skills is the one certainty.
It could be a ‘daunting exercise’, admits Sagoo, but not the threat many fear. Smaller firms are understandably nervous since the loss of the conveyancing monopoly a decade ago drove many out of business. Yet they could see an early benefit, as simpler transactions which are bread and butter to the smaller practitioner will go online first, with more complex deals left towards the end of the five or six-year transition.
Of more immediate worry is the looming recession. The latest survey of business confidence by Wheeler Associates for The Lawyer shows only 35% of legal firms expect turnover to grow in the next six months compared with 66% in the previous quarter. Average fee growth will drop from 7% to 3%.
This may overstate City fears, as the big London firms make up the bulk of the sample. It also covers all legal work rather than just property, which has been holding up so far. ‘Everyone appears to be still working,’ says Lovell’s Kidby. ‘Perhaps it is because we are at the end of the food chain.’
But the future remains uncertain. Lawyers, like the rest of the property industry, have been hit by a double-whammy, because as equities have subsided, investors face selling property to maintain the ratio of bricks and mortar to shares in their portfolios. ‘One of the key issues everyone faces is where the buyers will come from,’ says Ashurst’s Cookson.
But he appears unafraid of clouds gathering on what has been such a sunny horizon. The first solicitors were business advisors and only retreated into narrower roles because of the risks involved, he says. In future they will move back into that central role.
In the last decade the profession has been through traumas over losing work to US giants, takeovers by accountants, replacement by the computer, restructuring and recession. But it is still buoyant enough to stimulate jealous humour from fellow professionals. Few would bet that the world’s second-oldest profession won’t survive whatever lies ahead.