Warehousing has rarely attracted so much press interest but our imminent exit from the EU on, as yet, unknown terms means that stockpiling – and thus warehouse capacity – has shot to the top of many businesses’ agendas. Stockpiling is used by companies to protect against potential supply issues; with the terms of the UK’s withdrawal from the EU still not agreed, shortages pose a real problem to a whole raft of business operations. As a result, the demand for suitable warehousing has increased substantially, particularly since Christmas.
Warehousing reaching full capacity
The UK is considered an under-warehoused country. According to the UK Warehousing Association, Brexit has thrown this shortage into sharp relief with 75% of their members reporting that they are running at full capacity which means that, in prime spots, premiums are being paid for available warehouse space. Of course, because no one knows what Brexit will look like, prospective tenants do not know for how long they will need the additional space, whereas landlords, looking for longer term commitment, may be limited in how flexible they are able to be. Although Brexit might prompt future changes to the way in which warehouse space is let or leased, at the moment both landlords and tenants need to be aware of current legislation if they are to avoid inadvertently tying themselves into an agreement that does not meet their long term objectives.
Lease or licence: what are you trying to achieve?
Circumstances will dictate whether a lease or licence is preferable. This distinction has a significant impact on the rights and remedies available to both parties and also whether stamp duty land tax is potentially payable by the tenant. Factors that can help to distinguish which agreement is more appropriate include: duration of the occupation, the level of flexibility needed, the physical security and confidentiality required, and any services provided. Potentially a trap for the unwary, a lease under the Landlord and Tenant Act 1954 provides tenants occupying premises for business purposes with certain statutory rights, including renewal when the term expires. However, the issue of security of tenure may never arise if, for instance, the tenant is simply looking for a short term letting of less than six months, at the end of which the landlord and tenant simply part company. Although the Brexit effect is increasing demand for short-term storage space, landlords must avoid the temptation of rushing into an agreement to secure the income: an arrangement conferring security of tenure may not be the best solution in the long term, particularly in respect of part of a warehouse building.
Understand the arrangement you are making
The alternative to a lease is a licence which can work well for short-term arrangements. Logistics contracts relating to distribution centres would usually refer to a licence but again there are distinct differences between the two which need to be considered based on the facts of each case. If a licence is intended, warehouse owners should be very careful not to behave as if there is a lease in place as the courts are conscious of arrangements that purport to be licences but are in fact leases in everything but name. Therefore, landlords must understand the arrangements into which they are intending to enter and must keep their contractual arrangements under review. Broadly there are three key questions which will help to differentiate between a lease and a licence:
- is it for a fixed term?
- does it grant exclusive possession to the occupier?
- is rent payable?
All three points need to be satisfied for a lease to exist. When space is let it is usually easy to determine whether there is a fixed term and if rent is being paid. Licences tend to fail on the question of exclusive possession. The following questions can help determine the latter:
- Does the customer need a dedicated area of storage space within a larger warehouse facility which is theirs alone to use, or perhaps a lockable storage container on secure site? If so, is the room or container a dedicated area capable of their exclusive use and will the customer be the only individual with access?
- Is the customer looking to occupy a cubic area of shelf space within a warehouse which could perhaps move around the warehouse and is not in a fixed area? Are multiple customers storing their goods in the same facility?
A customer occupying an area exclusively (i.e. no one else has access to that space) is indicative of a lease so the landlord ought to consider whether to take steps to exclude security of tenure as required. However, if a customer is sharing space with others it is more likely that a licence will exist so the landlord may not need to exclude security of tenure as the customer must vacate the space unless they agree a new licence. The right agreement will depend entirely on the circumstances and how the space is managed. Given the pressure under which the warehousing and storage market is currently operating, it is essential for both providers and users of warehouse space to understand the type of agreement they are entering and the rights such an agreement confers on them.
Many warehouse operators are seeing the possibility of a no-deal Brexit as a major opportunity to benefit from the likely resulting disruption, forecast to last for a significant period. If we do exit without a deal, customers will need certainty that they can access storage space on a flexible basis to cope with the supply fluctuations likely to occur in the aftermath. In that case, landlords and tenants will need to be very alert to their legal arrangements to avoid entering an agreement that does not flex with their operations.