17 September 2011
The concept of “stakeholder” was first used by the Californian Stanford Research Institute in 1963 to refer to "those groups without whose support the organization would cease to exist." By that definition, landlords have always been stakeholders in many tenant businesses.
Landlords are well advised to take time to assess the level of their stakeholding in their tenants' businesses. Larger landlords will need to join the dots across any internal regional or market sector divisions. Different teams may be dealing with a tenant's retail, warehouse and office premises. It may not be readily apparent that different companies are part of the same corporate group. This is an important element of the analysis as financial problems are rarely limited to one entity within a group.
The analysis of a landlord's exposure to a tenant group should not be limited to rental income but needs to include its contributions to service charge, insurance premiums and rates as well as the cost of dilapidation works. Recognition should also be given to whether the group includes any key tenants in retail locations. These in-house practices should assist landlords in managing their exposure to particular tenant groups or sectors. They will identify which tenants deserve particular attention, in terms of analysing their financial performance both historic and projected, and engaging those tenants in a constant dialogue.
Once this internal analysis is complete, and attempts have been made to establish ongoing dialogues with key tenants, a landlord may wish to go further and engage with other landlords exposed to any struggling tenant in which it holds a significant stake. When engaging with other landlords it is important to avoid competition law pitfalls. Following the withdrawal in April this year of competition law immunity for land-related agreements, landlords considering forming a creditor group cannot afford to ignore competition law risks.
A landlord creditor group is potentially an arrangement among competitors - businesses competing to provide commercial property leases. It might seem a novel concept that any two or more landlords might be treated as competitors, but this will be the case if they offer the same type and size of retail outlet for lease in the same catchment area, or each is a provider of leasehold premises on a national basis. The same principles apply to landlords as to any other businesses. The fact that the landlords concerned are in the same creditor group is a pointer to their status as competitors, although this is not a substitute for careful analysis in individual circumstances.
Competition authorities tend to view any type of grouping of competitors with some suspicion and treat breaches of competition law that occur in this context harshly. A consortium of competitors that, for example, led to its members exchanging commercially sensitive information, or aligning their prices, or dividing up markets or target lessees among themselves, would make each individual member liable to substantial fines and vulnerable to court proceedings for compensation for losses arising from these breaches of competition law and reputational damage.
A landlord creditor group should avoid these risks where its focus is the debtor tenant's solvency and it is carefully structured. A group that is intended genuinely to support, if possible, a tenant in difficulty and to preserve the members' position in any formal insolvency procedure would not in itself be seen as distorting competition.
However, competition law arguments may be used as leverage by a tenant's administrators. For example, the forfeiture of leases by several group members might be challenged as a collective boycott of the tenant, in breach of competition law. To avoid these risks, a group's constitution and rules should be thought through in advance, and communications among members controlled during the group's lifetime.
General rules to apply are: 1) the tenant should genuinely be in some financial difficulty before the group is formed; 2) form a group in relation to a specific tenant corporate family only; 3) ensure membership is open; and 4) analyse whether the members of the intended group are competitors - if the members could potentially compete, this is enough for competition law to apply.
If the members are not competitors, the group is unlikely to create significant competition law risks. If the members are potentially competitors, consider: (a) setting out ground rules for discussions, particularly regarding the information which can be discussed; (b) including an independent monitor to ensure discussions do not stray into commercially sensitive areas; (c) channelling other communications through a central source; and (d) checking in advance the implications of any collective decision.
Although competition law creates risks for landlord creditor groups, these risks can be managed by advance planning and analysis and should not discourage pro-active co-operation between landlords.
 Stockholders and Stakeholders: A new perspective on Corporate Governance. By: Freeman, R. Edward; Reed, David L. California Management Review, Spring83, Vol. 25 Issue 3, p88-106