There Go the Quangos!

This post was also written by Philip Olmer.

There have been numerous press reports about the Coalition Government’s intention to axe many of the quangos created by former Labour administrations as part of the Government’s effort to reduce the country’s deficit. Recent articles have speculated that up to 200 of these quangos will be axed – from British Waterways and the Infrastructure Planning Commission to the Audit Commission (see the Daily Telegraph and the BBC articles). Much has been made of the effect of potential job losses such cuts would entail, particularly in more deprived areas of Britain, but there has been no mention of the other significant component of shutting these operations – that is, the cost of disposing of the properties occupied by those quangos and the likely effect on the landlords of these properties in terms of loss of rental income, other property costs and the effect on reversionary values.

Until the Government is able either to dispose of the relevant space or reach agreement with the various landlords for the surrender of the leases, it is clear that ongoing property costs will continue to be borne, ultimately, by the Government. However, where the Government does manage to dispose of its interest Landlords who thought that they owned a building “Let to the Government” as a long term bond may be faced with potentially serious damage to the value of their reversionary interest.

For those ‘new’ leases entered into after 1 January 1996 the newer regime for privity of contract will apply, in that the Government’s liability will continue until assignment – thereafter they will remain on the hook until the next assignment, under an Authorised Guarantee Agreement for the incoming tenant.

For ‘old’ leases entered into before 1996, the Government will have unlimited liability to make good breaches of the lease under the normal privity of contract rules, until the end of the lease.

Many quango leases will have been taken in the name of the Secretary of State and many others contain an automatic right for the Government to assign the leases to a “Crown Body” without consent. Crown Body includes, amongst other things, the quangos which are now in the course of being wound up – landlords may therefore find themselves with a new Government occupier or tenant. On the other hand, where the tenant is the quango and the lease is not assigned, the current tenant may no longer exist.

So where does that leave landlords? It probably leaves them in the same position as if they were dealing with an insolvent tenant because there will be no ongoing guarantee from the outgoing tenant once the lease is assigned. Where landlords gave ‘generous’ terms to a tenant because that tenant was the Government they may regret this. Many leases granted to the Government contain a concession allowing the Government and Crown Body not to pay interest on late rent. Even before the quangos go we may see the exploitation of the quangos’ rights and landlords may need to get more pro-active in their management of these assets.

For quangos whose function is being transferred to another body – for example, a local authority, we anticipate that the Statutory Instrument will normally provide that the assets and liabilities of the quango will be transferred to that new body automatically and the property will remain tenanted.

We are advising our clients who own properties let to Government or quango tenants to consider a thorough legal health check to review and formulate a strategy in relation to these issues. We are also looking to the Government to provide some clarity on these issues.

If you require further advice please get in touch with your usual contact at Reed Smith or the authors.